Cambridge International as and a level Economics Ebook

[4]
c
With reference to 
Figure 5.4
, how might diff erences 
between the inflation targets and actual inflation 
rates in Chile and Brazil in 2008 be explained? 
[4]
d
How might having a target for inflation aff ect the 
causes of inflation? 
[4]
e
Discuss the possible problems of constructing 
an accurate consumer price index. 
[6]
Source
:
 
Cambridge International AS and A Level Economics 9708 
Paper 21 Q1 May/June 2012. 
How successful five countries were in controlling 
inflation in 2008 is shown in 
Figure 5.4
.
Figure 5.4 
Target and actual inflation rates in five 
countries, 2008
Actual inflation rate
Target inflation band
upper limit
inflation target
lower limit
Inflation rate (%)
12
10
Brazil
Romania
Colombia
Chile
Turkey
8
6
4
2
0
128
Cambridge International AS Level Economics

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Chapter 6:
Basic economic ideas and 
resource allocation 
A Level
Learning objectives
On completion of this chapter you should know:
■
what economists mean by an eff icient resource allocation 
and why this is an important microeconomic concept
■
what is meant by economic eff iciency 
■
what is meant by productive and allocative eff iciency, 
Pareto optimality and dynamic eff iciency
■
reasons for market failure
■
what is meant by positive and negative externalities and 
why they lead to an ineff icient allocation of resources
■
what are private costs, external costs and social costs; 
private benefits, external benefits and social benefits
■ 
how cost–benefit analysis can be used as an aid to 
decision making.
129

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the additional benefit derived from the consumption of 
one more unit of a particular good. The marginal cost 
of production is a measure of the opportunity cost of 
the resources used to produce this unit (see 
Chapter 7)
. 
So, where the price equals the marginal cost, consumers 
are prepared to pay what it costs to produce it. It is 
only where this is so that resources are eff iciently 
allocated.
When both these parts of economic effi
ciency co-exist 
then it is determined that the best possible use is being 
made of scarce resources. Th
is, therefore, constitutes a 
situation of effi
cient resource allocation. Th
is ideal has