Central Ideas

Question 1

Land, labour, capital

Describe the central tenet of economics.

Answer 1

Resources such as land, labour, and capital are scarce but wants are unlimited

Question 2

The next best

Describe opportunity costs

Answer 2

The benefits of the next best alternative forgone

The benefits lost by picking one option instead of another

Question 3

Remember the shape of the curve

Draw a production possibility curve between X and Y. Demonstrate where
A - Production is making full use of all available resources
B - Production is not using all available resources
C - Production is beyond technological capability

Answer 3

• Curve must be non-linear
• As X increases, Y must decrease
• Point A must be on the curve
• Point B must be under the curve
• Point C must be above the curve

Question 4

Describe why the relationship between production of two goods on a production possibility curve is non-linear.

Answer 4

If production of a particular good dominates, the skills and technology becomes more specialised towards that good. Therefore, it becomes more expensive to produce alternative goods.

Additionally, as more of one good is produced, less efficient resources have to be used in order to produce the next unit, which would have been better suited to produce the other good.

Question 5

Draw a production possibility frontier between guns and butter and use it to demonstrate ** increasing opportunity costs**.

Answer 5

As you increase production of guns, more units of butter have to be sacrificed to make production possible.
The opportunity cost of each unit of guns, is the lost potential production of butter.
The opportunity cost of the 5th unit of guns is 1 unit of butter; the 6th unit of guns is 2 units of butter and the 7th unit of guns is 3 units of butter.
Therefore, for each additional unit of guns, the opportunity cost is increasing.

Question 6

Draw what happens to the possibility production curve if technological capabilities improve.

Answer 6

The line shifts outwards (black to red)

Question 7

When might the production possibility frontier be linear?

Answer 7

When both goods require similar resources (e.g. potatoes and carrots)

Question 8

What are the two objectives of microeconomics? Define them.

Answer 8

Efficiency - When each good is produced at a minimum cost and maximum benefit is returned from resources.
Equity - When distribution of resources is considered just

Question 9

What are the two types of efficiency? Define them.

Answer 9

Productive efficiency - When production of each good is at its minimum cost.
Allocative efficiency - When the production and sale of goods is optimal. Nobody can increase their utility, without decreasing someone else’s.

Question 10

Why does health economics get its own field?

Answer 10

1. An individual’s health cannot be exchanged.
2. The market is highly uncertain
3. Consumers cannot test products before purchase
4. Producers (healthcare professionals) often know more about how to increase the consumer’s (patient’s) utility than the patient does.

Question 11

Describe the Bismarck model of health system.

Answer 11

• Individuals pay for compulsory health insurance through employee and employer contributions.
• Insurance premiums are not determined by risk.
• Healthcare is independent of the government and patients can choose their providers.
• Individuals out-of-work and in rural areas may struggle to access healthcare as there is no centralised financing.

Question 12

Describe the Beveridge model of health system.

Answer 12

• The health system is funded through taxation and run by the government.
• Healthcare in these countries is a key political issue
• There tends to be little choice in providers which can stifle innovation as their is no competition.

Question 13

Describe the National Insurance model of health system.

*

Answer 13

• The health system is funded through taxation to the government
• The government does not own or run the health system and instead, the funds raised through taxation are used to pay public and private organisations to run the system.
• This creates a buyer’s market, where firms must alter their services to meet the needs of the government to remain competititve.

Question 14

Describe the out-of-pocket model of health system.

Answer 14

• Funding is completely decentralised with limited government interventions.
• Citizens are expected to fund their own healthcare through private insurance or out-of-pocket payments.