1. Chapter 2: The Fundamental
Economic Problems
Andrew Gillespie

2. Learning Objectives
By the end of this chapter you should understand
✓ the meaning of scarcity and choice;
✓ the key economic problems in society;
✓ the difference between a free market, a planned
economy, and a mixed economy;
✓ the key advantages and disadvantages of each type of
economy;
✓ the meaning of the production possibility frontier and
productive efficiency

3. Short Answer Questions
1. What is meant by scarcity and choice in economics?
2. What are the three fundamental economic questions?
3. What is shown by a production possibility frontier (PPF)?
4. What might cause an outward shift of the PPF?
5. What is meant by opportunity cost?
6. What is meant by productive efficiency?
7. How are resources allocated in the free market?
8. What is the output gap?
9. What is meant by a mixed economy?
10. What problems might occur in a planned economy?

4. Essay Questions
1. Is ‘what to produce’ the fundamental
economic problem?
2. Discuss the importance of opportunity
cost in economics.
3. Is the free market the best solution to the
fundamental economic questions?

5. Production possibility frontier
Product A
Product B

6. Production possibility frontier
Product A
50
10
20 32
Product B

7. Product A
X Z
W
Y
Product B

8. Product A
Product B

9. Economic growth
May be caused by an increase in the quantity
and/or quality of resources such as:
• an increase in technology enabling capital
equipment to be more productive
• a better educated or better trained workforce,
or a better approach to managing people
• an increase in the land available; perhaps
because new technology allows more land to
be reclaimed or to be used more productively.

10. Product A
Product B

12. Types of economy
Market forces Private and Public Sector State allocates
resources
FREE MIXED ECONOMY PLANNED/
MARKET COMMAND
ECONOMY