Basic Economic Problem · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 6% of your exam marks.
Four factors and their rewards appear occasionally; usually 2 to 4 marks when tested, not on every paper.
The total productive capacity of an economy depends on how much of each factor exists (quantity) and how good that factor is (quality). Either can rise or fall over time. A rise in quantity or quality is economic growth of productive potential; a fall is the opposite.
Causes of changes in factors:
| Influence | Typical effect |
|---|---|
| Technological advances | Improve the quality of capital (faster machines, more accurate tools) and sometimes the quality of labour (better training tools) |
| Changes in costs of inputs | Higher fuel costs make some capital uneconomic to run, reducing usable output |
| Productivity improvements | Moving from labour-intensive to automated production raises output per worker |
| Education and training | Raise the quality of labour, often the most important long-term lever |
| Government regulation | Easing regulations can release more land or capital into use (e.g. permitting new mineral extraction); tightening regulations can withdraw factors from use |
| Demographic change | A rising birth rate or net inward migration raises the quantity of labour; an ageing population reduces it |
| Competition policy | Breaking up monopolies releases factors into use by new entrants, raising total output |
These influences also drive shifts in the production possibility curve (covered in topic 3). A rise in any factor's quantity or quality shifts the PPC outward; a fall shifts it inward.