The nature of the basic economic problem: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
Hospital services are provided by the government and paid for through taxation. People cannot always get the treatment they require because of long waiting lists. Of what is this an example?
Answer: D.
The correct answer is D: scarcity.
Waiting lists exist because the quantity of treatment people want exceeds the quantity the health service can supply. The resources are finite, a limited number of doctors, operating theatres and beds, while the demand for healthcare is effectively unlimited, particularly when the service is free at the point of use so nothing restrains how much people ask for. The waiting list is the rationing device that replaces price: instead of the market allocating treatment to those willing to pay, the system allocates it by clinical priority and time waited.
Why the other options are wrong:
Waiting lists exist because the quantity of treatment people want exceeds the quantity the health service can supply. The resources are finite, a limited number of doctors, operating theatres and beds, while the demand for healthcare is effectively unlimited, particularly when the service is free at the point of use so nothing restrains how much people ask for. The waiting list is the rationing device that replaces price: instead of the market allocating treatment to those willing to pay, the system allocates it by clinical priority and time waited.
Why the other options are wrong:
- A, external cost, means a cost falling on third parties not involved in a transaction. Waiting for treatment is a cost borne by the patient who wants it, not by an uninvolved bystander.
- B, the market system, is precisely what is not operating here. Prices are not allocating the service; the government is providing it free and rationing by queue.
- C, perfectly inelastic supply, would mean the quantity of healthcare supplied does not respond to price at all. Supply is certainly limited in the short run, but the option describes an extreme technical property, and the fundamental issue is the gap between wants and resources rather than the shape of a supply curve.
Question 2
What is the basic problem facing all economies?
Answer: D.
The correct answer is D: how to use scarce resources.
The basic economic problem is scarcity: unlimited wants set against limited resources, and the problem this creates for every economy is how to allocate those resources. It resolves into three questions: what to produce, how to produce it, and for whom. Every country faces this regardless of how rich it is; wealthy economies simply choose between more expensive alternatives.
Why the other options are wrong:
The basic economic problem is scarcity: unlimited wants set against limited resources, and the problem this creates for every economy is how to allocate those resources. It resolves into three questions: what to produce, how to produce it, and for whom. Every country faces this regardless of how rich it is; wealthy economies simply choose between more expensive alternatives.
Why the other options are wrong:
- A, achieving a stable balance of payments, is a macroeconomic objective. It matters, but it is a policy goal rather than the fundamental problem, and it applies only to economies that trade.
- B, maximising tax revenue, is not an aim any sensible government pursues for its own sake. Taxation is a means of funding spending and redistributing income, not an end.
- C, reaching full employment, is another macroeconomic objective. Unemployment means resources are lying idle, which is a genuine problem, but scarcity would persist even at full employment, because the fully employed resources are still finite.
Question 3
What is an advantage of competitive markets?
Answer: B.
The correct answer is B: competition encourages the efficient use of resources.
In a competitive market firms must keep costs down or lose sales to rivals who charge less, which pushes them towards productive efficiency, producing at the lowest possible cost. They must also produce what consumers actually want, or those consumers buy elsewhere, which pushes towards allocative efficiency. Competition also drives innovation, since a firm that finds a better or cheaper method gains an advantage. This pressure is the central case for competitive markets.
Why the other options are wrong:
In a competitive market firms must keep costs down or lose sales to rivals who charge less, which pushes them towards productive efficiency, producing at the lowest possible cost. They must also produce what consumers actually want, or those consumers buy elsewhere, which pushes towards allocative efficiency. Competition also drives innovation, since a firm that finds a better or cheaper method gains an advantage. This pressure is the central case for competitive markets.
Why the other options are wrong:
- A says competition causes inequalities of wealth. This is true, successful firms and their owners prosper while others fail, but it is a disadvantage, not an advantage, and the question asks for a benefit.
- C says scarcity is eliminated. No market system can eliminate scarcity. Competition helps use limited resources better; it does not make wants and resources match.
- D says the right quantity of merit goods is guaranteed. Competitive markets systematically under-provide merit goods, because consumers underestimate their benefits and positive externalities are not priced. This is a recognised market failure, and it is why governments subsidise or provide education and healthcare.
Question 4
GDP per capita in Switzerland is high.
What is the reason why Swiss citizens still face the basic economic problem?
Answer: D.
The basic economic problem is that unlimited wants meet limited resources, so choices must be made, and that is true at every level of income, which is why a rich country still faces it. Inequality, inflation and high expectations are all real issues, but none of them is what the economic problem means. Scarcity is relative to wants, not to any absolute standard of wealth.
Question 5
What is the cause of scarcity in an economy?
Answer: D.
Scarcity exists because wants are unlimited while the resources to satisfy them are limited, so unlimited WANTS is the cause. Note that unlimited resources would abolish scarcity rather than cause it, which makes it the neat opposite. High employment and high investment describe how well an economy is using its resources, not the fundamental reason it must choose.
What this practice covers
These questions are drawn from past Cambridge IGCSE papers and filtered to the nature of the basic economic problem. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on the nature of the basic economic problem, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Saying scarcity means "not having enough money". It means limited resources compared with unlimited wants.
- Confusing scarcity (permanent, everywhere) with a shortage (temporary, one market).
- Calling something a free good just because nobody paid for it.
- Saying rich countries do not face scarcity; they do.
- Forgetting that choice always creates an opportunity cost.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: The nature of the basic economic problem revision notes.