Cambridge International Examinations

Cambridge Ordinary Level

ECONOMICS 2281
Paper
Marks:100 2 hours
No Additional Materials are required.
* 3 3 6 0 4 3 7 7 3 1 *

READ THESE INSTRUCTIONS FIRST

An Answer Booklet is provided inside this Question Paper. You should follow the instructions on the front cover
Of the Answer Booklet. If you need additional answer paper ask the invigilator for a Continuation Booklet.
Section A
Answer Question 1.
Section B
Answer any three questions.

The number of marks is given in brackets [ ] at the end of each question or part question.
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Multiple Choices

1 Why does scarcity exist?

A Each year workers tend to produce less than previously.

B Machines wear out with time.
C There are not sufficient resources to produce all the products people want.
D There is a limit to people’s wants.

2 Why will scarcity continue to be a problem in the future?

A Price will rise.

B Quantity of resources will decline.
C Wants will continue to increase.
D World population will fall.

3 Which type of factor of production is road?

A Capital
B Enterprise.
C Labor
D Land

4 A country produces 3000 new capital goods in a week. 500 of these replace worn out capital
goods. What is the investment made?

A 500
B 2500
C 3000
D 3500

5 Which factor of production is the most mobile?.

A. Capital

B. Enterprise

C. Labor

D. Land
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6 What is meant by opportunity cost?

A The best alternative forgone.

B The cost of the item selected.
C The cost of exploring business opportunities
D The labor used in producing the product

7 Which of the following is a free good?

A Inoculation provided without charge by the state

B Prizes of food items given away by a supermarket

C Recycled paper

D wind coming in from the sea

8 What are three questions faced by all economies.

A What to produce, when to produce it and who receives it.

B What to produce, how to produce it and who receives it.

C Where to produce, how to produce and when to produce

D Where to produce, when to produce and how to produce

9 How are resources allocated in market economy?

A By directives
B By the price mechanism
C By directives or the price mechanism
D By directives and the price mechanism

10 What is an advantage of market economy?

A An absence of poverty
B Consumer sovereignty
C Firms having considerable market power
D Full employment
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11 What encourages firms to produce what consumers demand?.

A To chance to earn a right profit

B To chance to experience high unit costs of production
C The desire to attract new firms into industry.
D The desire to keep revenue as low as possible

12 In a market system, what encourages firms to keep their costs low?

A Competition.
B Government regulations
C Subsidies
D Taxation.

13 In which case is market failure occurring?

A Consumers determining what is produced

B Firms producing above the lowest possible cost
C Price falling as a result of decrease in demand
D Price rising as a result of an increase in costs of production

14 A merit good is one which.

A Has an absence of external benefits

B Has higher private benefits than consumer realise.
C Impose costs on those who are not involved in its production directly
D Is both non-excludable and non-rival

15 Which type of goods would be over-production if left to market forces?

A Basic necessities
B Capital goods.
C Demerit Goods.
D Public Goods.
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16 What does a PES of 0.8 indicate?

A Supply is elastic.
B Supply is perfectly elastic.
C Supply is perfectly inelastic.
D Supply is inelastic.

17 When circumstance would supply of a product be elastic?

A It is costly to produce
B It takes time to produce
C It can be stored
D It uses resources which are in short supply

18 Demand for a product is inelastic. What effect will a fall in price have?

A Demand will not change

B Demand will change by a greater percentage.

C Total revenue will fall

19 What characteristic is likely to make the demand for a product elastic?

A. It is necessity

B. It is habit forming

C. It is relatively cheap

D. It has a close substitutes

20 The price of a product rises from $60 to $90. This causes demand to contract from 800 to 600.
What type of price elasticity of demand does this product have over this price range.

A Perfectly inelastic.
B inelastic
C unity
D Elastic
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Section A

Answer this question.

1 The Royal Mail

The following is adapted from a leaflet the UK Royal Mail sent to its customers in 2005.

We are investing in the postal service so that it is consistent and reliable and remains one of the
best in Europe. You can trust the Royal Mail with your post, 99.9% of all mail gets delivered
safely and quickly to the right address at all. At least 92.5 % of the first class letters arrive by
lunch time the next working day. (in France barely 80% of the first class mail is delivered on
time). We are determined to manage this better and are investing in technology and training.

Our prices are rising by less than inflation and are amongst the lowest in Europe. In April the
price of first class post will go up from $0.28 to $0.30 which compares well with the price of $0.26
ten years ago. In Italy first class could cost you $1.12 in Germany up to $1.

There will now be a only one delivery a day. Previously, when mail was sorted by hand, it was
impossible to sort and deliver it all at once. Now, more mail is sorted automatically and overnight.
A single delivery helps us to keep our costs down. We need to make profits so that we can invest
in better equipment, better technology and better offices, and also pay our staff more for doing a
responsible job.

(a) Explain what is meant by factors of productions. [4]

(b) How has the Royal Mail’s use of these factors of production changed? [2]

(c) Discuss how the rise in price from $0.28 to $0.30 might affect demand for substitute methods of
communication. [4]

(d) Define the followings:

(i) Capital [2]

(ii) Investment [2]

(e) Is there enough evidence in the article to support the Royal Mail’s statement that it is one of
the best in Europe? [6]

(f) Explain the extension in demand with diagrams. [5]

(g) Explain the contraction in demand with diagrams. [5]

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Section B

Answer all the questions in this section.

2 One feature of many mixed economies is that governments may intervene by giving subsidies to
some producers.

(a) What is meant by subsidy? [3]

(b) Identify the three questions faced by every type of economic system. [3]

(c) Discuss why virtually every country today has a mixed economy. [8]

(d) Advantages and disadvantages of market economy [6]

3 As the 2006 world cup approached, sales of Brazilian football shirts increased not only in Brazil
but also in a number of other countries. Two weeks before the competition started, shops in
London and Sao Paulo reported that demand for shirts was outstripping supply.

(a) On a demand and supply diagram, illustrate the market for Brazilian football shirts in Sao
Paulo two weeks before the 2006 world cup. [5]

(b) What would you have expected to happen to the price of Brazilian football shirts in Sao Paulo
in this situation? Explain your answer. [5]

(c) Explain the extension in supply with diagrams. [5]

(d) Explain contraction in supply with diagrams. [5]

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