Answers to Workshop 1

Introducing Economics

1. Which of the following are macroeconomic topics/issues and which are microeconomic ones?
(a) The level of consumer spending.....................................................................................Macro
(b) Subsidies paid to farmers ...............................................................................................Micro
(c) The level of UK exports.................................................................................................Macro
(d) The price of DVDs.........................................................................................................Micro
(e) The rate of unemployment ............................................................................................Macro
(f) The average wage rate paid to textile workers ...............................................................Micro
(g) The total amount spent by UK consumers on clothing and footwear ..............................Micro
(h) The amount saved last year by UK households .............................................................Macro

2. Economists assume that economic decisions are made rationally. In the case of consumers, rational
decision making means:
(a) That consumers will not buy goods which increase their satisfaction by only a small amount.
False
(b) That consumers will attempt to maximise their individual satisfaction for the income they
earn.
True
(c) That consumers buy the sorts of goods that the average person buys...............................False
(d) That consumers seek to get the best value for money from the goods they buy................True

3. Make a list of three things you did yesterday. What was the opportunity cost of each? Have a
look at your neighbours’ lists and see if you agree with their estimates of the opportunity costs.

In each case you should think of the next best thing you could have done with your time or
money, because it is that which you effectively ‘gave up’ to do the thing you chose to do. So, by
choosing to go to the cinema, for example, the opportunity cost is what you could have done
with the money you spent on the ticket and transport, and with the time spent at the cinema.
4. A country is capable of producing the following combinations of goods and services per period of
time, assuming that it makes full use of its resources of land, labour and capital.

Goods (units) 100 80 60 40 20 0

Services (units) 0 50 90 120 140 150

(a) Draw the production possibility curve for this country on the following diagram.

120 The curve shows all the possible

combinations of two goods that a
100 country can produce within a given
time period. If a country was fully
80
using its resources, then it would
Goods

60 produce somewhere on the curve.

If there was unemployment or
40 under-utilisation of one or more
factors of production, the country
20
would be producing inside the
0 curve. The country could not
0 20 40 60 80 100 120 140 160 produce beyond the curve.
Services
..........................................................
.....................................................(b)
Is it possible for this country to produce the following combinations of goods and services?
(i) 80 units of goods and 50 units of services..............................................Yes (on the curve)
(ii) 70 units of goods and 90 units of services.......................................No (outside the curve)
(iii) 40 units of goods and 100 units of services......................................Yes (inside the curve)

(c) What is the opportunity cost (in terms of services) of producing 20 extra units of goods when
this country is initially producing:
(i) 60 units of goods.....................................................................40 units of services (90–50)
(ii) 20 units of goods.................................................................20 units of services (140–120)

Here, the opportunity cost of producing more goods is the reduction in the production of
services that this entails. In the case of (i), producing an extra 20 units of goods would
mean that production was now at 80 units. From the table, and the curve, you can see
that this will allow a maximum of 50 units of services to be produced. Thus production
of services has fallen from a maximum of 90 to a maximum of 50 units: a fall of 40
units. Thus 40 units of services is the opportunity cost. In the case of (ii), moving from
producing 20 units of goods to 40 units means moving from 140 units of services to 120
units: an opportunity cost of 20 units of services.

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5. (a) Referring back to question 4, assume now that technological progress allows a four-fold
increase in the output of goods and double the amount of services for any given amount of
resources. Assuming that the country’s total amount of resources stays the same, fill in the
new figures on the following table to show the new production possibilities.

Goods (units) 400 320 240 160 80 0

Services (units) 0 100 180 240 280 300

(b) Draw the new production possibility curve on the following diagram.

480

400

320
Goods

240

160

80

0
0 50 100 150 200 250 300 350 400
Services

(c) How has this technological progress affected the opportunity cost of a unit of goods. (Tick the
correct one of the following answers.)
A. Stays the same.
B. Doubles.
C. Halves. 
D. Increases four times.
E. Decreases four times.

If you can produce four times as many units of goods and twice as many units of services
with a given amount of resources, then, as production moves from services to goods, only
half as many units of services will need to be sacrificed for each extra unit of goods
(compared with the situation before the technological progress).

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6. In Country A, which has full employment of its resources, a large increase in the production of
goods and services provided by the public sector (such as health, education and new roads) would
only be possible if there were a reduction in the production of other goods and services, such as
consumer goods. In Country B, however, which is suffering from economic recession, it is argued
that an increase in public expenditure on such things as health, education and roads, would result
in the production of more consumer goods.

(a) Explain briefly why the effect of an increase in public expenditure on the production of
consumer goods would be different in the two countries.
In Country A, with resources fully employed, there could only be an increase in the
production of certain goods and services (in this case health, education, new roads, etc.)
by diverting resources away from the production of other goods. In Country B, however,
by using resources more fully, there could be an increase in production of all goods. In
fact, an increase in expenditure on public services, by increasing the incomes of those
employed in the public sector, could lead to more expenditure on consumer goods, and
this would stimulate firms to produce more of them to meet the extra demand.

(b) The following diagrams show the production possibility curves for the Countries A and B.
Mark the current production point on each diagram at a point consistent with the statement
above. Then mark a new position on each diagram that would result from an increase in
public expenditure.

Country A Country
B

(c) Explain your answer to (b).

In each case there is a movement from point a to point b. In the case of Country A, which
is already producing on the production possibility curve, there is a movement along the
curve, showing that the opportunity cost of producing more public-sector goods and
services is the amount of private-sector goods and services that have to be sacrificed. In
the case of Country B, production was inside the production possibility curve. By making
a fuller use of resources, more of both categories of goods and services can be produced:
point b is closer to the production possibility curve than is a.