ECONOMICS WORKBOOK MARKETS IN ACTION UNIT F581 …



WORKBOOK ANSWERS

Edexcel A-level Economics A

Theme 1 Introduction to markets and market failure

This document provides suggestions for some of the possible answers that might be given for the questions asked in the workbook. They are not exhaustive and other answers may be acceptable, but they are intended as a guide to give teachers and students feedback.

The student responses (green text) for the longer essay-style questions are intended to give some idea about how the exam questions might be answered. The examiner comments (blue text) have been added to give you some sense of what is rewarded in the exam and which areas can be developed. Again, these are not the only ways to answer such questions but they can be treated as one way of approaching questions of these types.

The abbreviation KAA stands for Knowledge, Analysis and Application.

Marking grids for 10, 12, 15 and 25 mark questions are included at the end of this document.

Topic 1

Nature of economics

Economics as a social science

1 2 marks for the definition below, or similar:

The study of society (1 mark) and the manner in which people behave/influence the world around us. (1 mark)

2 2 marks for any relevant definition, such as:

• A theoretical construct representing economic processes (1 mark) by a set of logical relationships between them. (1 mark)

• A simplified framework (1 mark) designed to illustrate more complex processes. (1 mark)

3 2 marks for any of the following points:

• In sciences, like chemistry, experiments are conducted on scientific particles that can be easily tested (1 mark) and react in the same way in the same experimental conditions. (1 mark)

• In social sciences, like economics, experiments often involve people/the behaviour of individuals (1 mark) and they may not react in the same way when tested/can react in more unpredictable ways. (1 mark)

4 Possible answers include:

• Ceteris paribus means all other things being equal. (1 mark)

• Application to extract (1 mark), e.g. CO2 shortage will, ceteris paribus, cause a drop in profits for Coca-Cola.

• Further explanation (up to 2 marks), e.g. so we are assuming that profits for Coca-Cola will decrease if there is a lack of CO2, assuming that no other factors influencing the businesses’ profits have changed (1 mark), such as rising revenue from emerging markets. (1 mark)

Positive and normative economic statements

5 Possible answers include:

• Objective statement. (1 mark)

• Based on fact. (1 mark)

• Can be tested as true or false. (1 mark)

• Involves a scientific approach. (1 mark)

6 Possible answers include:

• Subjective statement. (1 mark)

• Based on a value judgement. (1 mark)

• Cannot be tested as true or false. (1 mark)

• A non-scientific approach. (1 mark)

7 a

• Normative statement. (1 mark)

• Includes the phrase ‘should not’ (which implies a value judgement). (1 mark)

b

• Positive statement. (1 mark)

• Can test whether student applications went down by 1% (after tuition fees rose). (1 mark)

The economic problem

8 Possible answers include:

• There are unlimited wants (1 mark) but limited resources (1 mark), i.e. scarcity. (1 mark)

• Therefore decisions/choices need to be made (about resource allocation). (1 mark)

9 Possible answers include:

• Definition of renewable energy (1 mark), e.g. resources that will never be replaced once they are used.

• Example of renewable energy, such as wind/solar/tidal energy etc. (1 mark)

• Definition of non-renewable energy (1 mark), e.g. resources which can be used and replaced.

• Example of non-renewable energy, such as oil/coal/gold etc. (1 mark)

10 Possible answers include:

• Define opportunity cost (1 mark), i.e. value of the next best alternative forgone.

• Application to the extract (1 mark), e.g. 80% of all agriculture land is used to produce meat.

• Explanation of opportunity in context (1 mark), e.g. by using land to produce meat, there is less to produce vegetables.

Production possibility frontiers

11 The maximum output/combination of goods and services that can be produced (1 mark) with resources used efficiently. (1 mark)

12 a F (1 mark)

b E (1 mark)

c E (1 mark)

d B or A (1 mark)

13 a 200 million – 180 million = 20 million consumer goods (2 marks)

b 11 million – 6 million = 5 million capital goods (2 marks)

14

• Inward shift in the PPF (1 mark) as fewer consumer and capital goods can be produced. (1 mark)

• Explanation (up to 2 marks), e.g. destruction of farming plots/factories (1 mark) would reduce ability to produce goods and services (1 mark) OR loss of life from the floods would (1 mark) reduce quantity of labour in the economy. (1 mark)

15 Analysis (up to 5 marks). Possible answers include:

• Definition of opportunity cost (1 mark), e.g. the value of the next best alternative forgone.

o Explanation of opportunity cost, e.g. More capital goods mean fewer resources available to produce consumer goods (2 marks) OR reduction in current living standards but higher future growth/living standards/consumption. (2 marks)

• Diagram showing:

o Original PPF, correctly labelled. (1 mark)

o Illustration/labelling of opportunity cost, i.e. loss of consumer goods. (1 mark)

NB Maximum 3/5 marks if no diagram offered.

16 Analysis (6 marks). Possible answers include:

• Definition of production possibility frontier (1 mark), i.e. the maximum combination of goods and services that can be produced in a given time with available resources used efficiently.

• Identification that PPF shifting outwards is economic growth. (1 mark)

• Factors shifting China’s PPF outwards (up to 2 marks each):

o Increasing (working) population (1 mark), i.e. increase in quantity of labour. (1 mark)

o Improved education of the workforce (1 mark) i.e. increase in the quality of labour. (1 mark)

o Industrialisation (1 mark) i.e. workers more productively used in the city, such as through use of better machinery/tools. (1 mark)

o Increased capital goods/investment (1 mark), i.e. increase in quantity of capital/machines/factories/productivity. (1 mark)

o Improved technology/foreign management practices from FDI (1 mark), i.e. increase in efficiency/quality of capital/productivity. (1 mark)

• Relevant PPF diagram (up to 2 marks), showing:

o Original PPF, correctly labelled. (1 mark)

o Outward shift in PPF. (1 mark)

NB Maximum 4/6 marks if no diagram offered.

Evaluation (4 marks, up to 2 marks per point):

• The reduction in China’s working population, due to the one child policy, could constrain future growth.

• The pace of education is beginning to slow, possibly indicating that the gains from education may be less in future.

• Future growth depends on ability to innovate as China’s technology catches up the standards of leading economies.

• Long-term nature of causes of growth, e.g. many factors have caused growth in China for decades.

• Magnitude of growth, e.g. factors have caused massive growth but slowing down now.

• Significance and prioritisation of reasons (with justification).

Specialisation and the division of labour

17 a

• Identification of one function of money (1 mark), e.g. medium of exchange, store of value, measure of value, method of deferred payment.

• Explanation of one function of money. (1 mark)

o Medium of exchange allows traders to overcome double co-incidence of wants and facilitates trade.

o Store of value means consumers are able to spend money in future and it will maintain its purchasing power.

o Measure of value means consumers can compare the value of goods in terms of how much money items are worth.

o Method of deferred payment allows consumers to save/borrow, as consumers are able to use their money in different time periods.

b

• Identification of one benefit of using division of labour (1 mark), e.g. higher productivity, lower unit cost/price, higher profits.

• Explanation of this benefit (1 mark), e.g. workers becoming more productive due to the gains of specialisation/not moving between tasks/ability to use specialist equipment OR more efficient production method can reduce unit costs and allow lower prices OR greater output increases potential revenue and profit.

c

• Identification of one problem from specialisation (1 mark), e.g. higher risk, greater interdependence.

• Explanation of this problem (1 mark), e.g. lack of diversification into more industries means exports/GDP could fall dramatically if demand falls in this industry OR reliance on other businesses/countries for other products, such as consumer goods or raw materials for the industry they produce in.

18 Analysis (6 marks), possible answers include:

• Identification of two disadvantages of using division of labour in call centres (1 mark + 1 mark), such as:

o monotony of work/Issues with production

o higher staff turnover

o greater interdependence/risk.

• Explanation of two disadvantages of division of labour in the context of call centres (2 marks + 2 marks), such as:

o ‘Repetitive work’ at call centre can become boring for workers (1 mark) and therefore can lead to lower productivity/lower quality work. (1 mark)

o Staff turnover at call centres is 50% a year due to the nature of the work (1 mark), which will increase recruitment and training costs for the call centre. (1 mark)

o Call centre workers may specialise in certain areas/expertise (1 mark), the absence of these workers could prevent calls from customers being met. (1 mark)

Evaluation (2 marks), up to 2 marks for any relevant point explained:

• Division of labour could be beneficial for call centres, e.g. workers become more specialised over time could allow them to deal with callers better, boosting customer satisfaction or more quickly, increasing productivity.

• Long-term vs short-term issues, e.g. continual issues of staff turnover have been a long-term issue for UK call centres.

Free market, mixed and command economies

19 Where (scarce) resources are allocated (1 mark) totally by the government. (1 mark)

20 a Free market economy

b Free market economy

c Command economy

21 Any possible role (1 mark) with explanation (2 marks). Possible answers include:

• To solve market failure (1 mark), e.g. negative externalities (of pollution) (1 mark) by the imposition of a (petrol) tax (1 mark) OR public goods (1 mark) by providing defence/street lights. (1 mark)

• To promote equality (1 mark) e.g. by providing benefits (1 mark) to increase income of low-income households (1 mark) OR by lowering tax on the poor (1 mark) to increase income of low-income households. (1 mark)

22 Two benefits identified (1 mark + 1 mark) with explanation (1 mark + 1 mark):

• Increased competition/efficiency (1 mark), e.g. as firms will earn higher profits from lower costs/aid survival. (1 mark)

• Increased innovation (1 mark), e.g. as firms that innovate could earn more profits/more likely to survive. (1 mark)

• Greater choice for consumers (1 mark), e.g. as firms may offer more products to increase profits/survive. (1 mark)

• Greater incentives to work (1 mark), e.g. due to lower levels of taxation or fewer benefits from not working. (1 mark)

• Possible higher growth rates (1 mark), e.g. due to higher efficiency/innovation shifting the PPF. (1 mark)

Exam-style questions (multiple choice and short answer)

1 a D (1 mark)

All points on the PPF are economically efficient.

b KAA = 2 marks

Knowledge (1 mark):

• Identification that future living standards will improve/increase. (1 mark)

Application (1 mark):

• Linked explanation, that more capital goods can be produced at point B and therefore more consumer goods in future to improve living standards. (1 mark)

A movement from A to B will lead to an improvement in living standards in future. (1 mark) At point B there are more capital goods being produced and these can be used to produce more consumer goods in future, (1 mark) which means consumer living standards rise.

Here the student scores 2/2. They have identified that future living standards will rise and given an explanation in the context of the diagram to gain the application mark. On 2-mark questions it is best not to put definitions, unless they are asked for. The best technique is to make a point and explain it.

c KAA = 2 marks

Knowledge (1 mark):

• Identification of any reason for making assumptions (1 mark), e.g. simplification of reality, keep more variables constant.

Analysis (1 mark):

• Linked development of this reason, which could include an example. (1 mark)

One reason why assumptions are made in models is to simplify a more complex reality. (1 mark) For example, it can be useful to keep some variables constant to model the impact of only one variable at a time, such as by using ceteris paribus. (1 mark)

Here the student scores 2/2. They have identified the benefit of using assumptions and then gone on to explain this benefit, using an example. Again, for 2-mark questions it is best to follow this technique rather than defining key terms.

2 a C (1 mark)

Many microeconomics questions will be quantitative skills. Here you need to calculate a percentage.

b KAA = 2 marks

Application (2 marks):

= £149 billion/1.01 (1 mark) = £147.52 billion (1 mark)

NB Accept correct answer of £147.52 billion for 2 marks.

= £148 billion (2 marks)

Here the student shows no workings but still gets full marks. However, it is advised you show your workings on calculations in case you make a mathematical error. The student has rounded to the nearest billion, which is still correct, as the exam board will accept your own rounding.

c KAA = 2 marks

Knowledge (1 mark):

• Identification of one reason for facing opportunity cost (1 mark), e.g. scarcity of resources OR limited amount of tax revenue to spend OR limited tax revenue and unlimited wants/uses.

Analysis (1 mark):

• Linked development (1 mark), e.g. need to make choices in allocation of resources OR explanation of an opportunity cost for the government.

There is an opportunity for the government as they have a scarce amount of tax revenue to spend. (1 mark) Therefore, if the government spends on one area they will have less to spend on other areas. (1 mark)

The student scores 2/2 for identifying and explaining why the government faces an opportunity cost. It is important to read the question as this is asking why the opportunity cost exists and therefore needs to link to scarcity in some way.

3 a D (1 mark)

Tax redistributed to low income earners will increase their income and reduce income inequality. Dealing with inequality can be a key role of the state in mixed economies.

b KAA = 4 marks

Knowledge (2 marks):

• Understanding/definition of free market economy. (1 mark)

• Identification of one reason why free markets would fail (1 mark), e.g. exploitation of low-income workers, inequality, replacement of workers with machines.

Application (1 mark):

• Application to US economy, e.g. rising income inequality.

Analysis (1 mark):

• Linked development, with clear link to Marx (1 mark), e.g. uprising of lower classes.

A free market economy is one where scarce resources are allocated by the price mechanism (i.e. consumers and producers). (1 mark) Karl Marx believed that free market economies would lead to exploitation of those on low income. (1 mark) This inequality can be seen in economies like the USA where the top 1% of families earn 26.3 times the bottom 99%. (1 mark) Marx argued that this would lead to the uprising of those on lower incomes that could lead to capitalist economies failing. (1 mark)

The student scores full marks here. They have first defined the key term in the question and then explained Marx’s arguments about the failure of free market economies and put it in the context of the US. Even if the question did not ask about Marx you could bring in this knowledge to enhance your answer.

Unlike 2-mark questions, definitions can be a good way to secure knowledge marks but you can get full marks without any definitions if you answer all aspects of the question and show an understanding of the key concepts (here free market economies).

4 a KAA = 2 marks

Application (2 marks):

= $6,000/$14,000 x 100 (1 mark) = 42.8 (1 mark)

NB Full marks for correct answer, even without workings, and allow margin of error reading from the chart.

= $6,100/$14,100 x 100 = 43.6

Here the student scores full marks. The answer will be accepted by the examiner as there is some margin for error reading from the graph. Quantitative skills will make up a significant part of Paper 1 short answer questions.

b D (1 mark)

If businesses are not accepting Bitcoin then people cannot buy goods and services (i.e. it is not an effective medium of exchange).

c KAA = 2 marks

Knowledge (1 mark):

• Identification of why it is beneficial for money to act a store of value (1 mark), e.g. facilitates saving OR facilitates borrowing OR allows money to act as a method of deferred payment.

Analysis (1 mark):

• Linked development of this benefit, linked to money as a store of value. (1 mark)

Money being a store of value is beneficial as it allows consumers to save money. (1 mark) They can do this because if money holds its value over time, they can still purchase the same amount of goods in future using their saved money. (1 mark)

Here the student scores 2/2. They have identified a benefit and explained why money acting as a store of value can allow this benefit to happen. Again, no definition mark rewarded here, so best to identify and explain your answer to gain the marks.

Exam-style questions (data response)

5 a KAA = 5 marks

Knowledge (1 mark):

• Definition/understanding of a positive statement (1 mark), e.g. objective statement/based on facts/can be tested as true or false with available evidence.

• Definition/understanding normative statement (1 mark), e.g. contains a value judgement/cannot be tested as true or false with available evidence.

Application (1 mark):

Any example of a positive statement or normative statement:

• In October 2018, production by Tesla exceeded 80,000 vehicles as an example of a positive statement. (1 mark)

• ‘Best’ and ‘most fun’ petrol car as an example of a normative statement.

Analysis (3 marks):

Explanation of one difference, such as:

• Whether or not they contain a value judgement or not. (1 mark)

o Best or should indicates a value judgement. (1 mark)

o Whether or not 80,000 vehicles have been produced is objective. (1 mark)

• Whether or not they can be tested with available evidence. (1 mark)

o Cannot test which is best or most fun as it is subjective. (1 mark)

o Whether or not 80,000 vehicles have been produced can be tested using production logs at Tesla. (1 mark)

One difference between a positive statement and a normative statement is that a positive statement can be tested using available evidence whereas a normative statement cannot as it contains a value judgement. (1 mark + 1 mark)

A positive statement could be ‘in October 2018, production by Tesla exceeded 80,000 vehicles’ (1 mark), whereas a normative statement is that Tesla is ‘better and more fun than petrol cars’.

The first statement can be tested by looking at production logs at Tesla (1 mark) but whether Tesla are more fun than petrol cars is subjective and cannot be tested using data. (1 mark)

This student easily scores 5/5 even without a definition. They have the one mark for application needed on a 5-mark question, implicit knowledge of positive and normative statements, as well as a good chain of reasoning explaining the difference.

On Paper 1 the breakdown for 5-mark questions is slightly different to other papers, with 1 mark for knowledge, 1 for application and 3 for analysis.

b KAA = 6 marks

Knowledge (2 marks):

• Definition/understanding of a production possibility frontier. (1 mark)

• Original PPF diagram, fully labelled. (1 mark)

Application (2 marks):

• Tesla are ‘speeding up plans’ for the new factory in China. (1 mark)

• Production expected to start in ‘2020’ (1 mark) of cars, such as ‘Model 3’. (1 mark)

• Opening factory in China due to ‘escalating trade war between the US and China’ (1 mark) to avoid ‘25% import tariff’. (1 mark)

• Opening factory in China due to ‘booming’ demand in China (1 mark) and due to support from Chinese government. (1 mark)

Analysis (2 marks):

• Diagram showing an outward shift in the PPF. (1 mark)

• Explanation of why the PPF shifted outwards (1 mark) i.e. greater capacity/capital allows more consumer goods to be produced.

Evaluation = 2 marks (either one point developed or two points), such as:

• Short term vs long term, e.g. production not online until 2020 and there may be teething problems.

• Cost/opportunity cost of building factory, e.g. significant investment needed to increase the PPF of Tesla.

• Shift in PPF depends on…, e.g. on the efficiency of the factory/workforce/suppliers.

• Magnitude arguments, e.g. likely to cause a large increase in Tesla’s production capacity.

A production possibility frontier shows the maximum output that can be produced in a given time when efficiency is maximised. (1 mark) The decision to build a factory will cause an outward shift in the PPF as shown below:

[pic]

(2 marks)

This outward shift has been caused by an increase in capital investment by Tesla (i.e. the new factory) which will allow them to produce more cars, (1 mark) such as their ‘Model 3’ sports car (1 mark) and meet the ‘booming’ demand in China. (1 mark)

However, the building of the factory will take time so production won’t be started until 2020. Therefore, in the short term, there will be no impact on Tesla’s PPF. This is especially true as there may be teething problems in the factory such as they experienced in their other factory. (2 marks)

Here the student scores full marks for analysis. They have a clear diagram, gaining them two marks, and then they have provided an explanation in context. Even without the definition, the student would have gained an implicit knowledge mark for PPFs but making it clear for the examiner is helpful.

The student then secured both evaluation marks for one mark developed. The student has done well to apply it to the context, which is impressive.

c KAA = 6 marks

Possible answers include:

• Understanding/definition of specialisation.

• Application to Extract 2 and Figure 6, e.g. rise in demand for electric cars over time OR continued Chinese government support for the industry.

• Explanation of benefits of specialisation, such as:

o Increased output/efficiency due to specialisation.

o Improved international competitiveness and exports.

o Market growing, boosting revenue and profit.

o Can gain government support, such as subsidies.

Evaluation = 4 marks

Possible answers include:

• Greater interdependence, e.g. reliance on global supply chain.

• Higher risk, e.g. over-specialised in electric cars.

• It depends, e.g. on future demand for electric cars, OR export demand depends on relative competitiveness.

• Long term vs short term, e.g. long-term trend towards electric cars makes specialisation beneficial.

• Significance and prioritisation of arguments.

Specialisation is the process by which individuals, firms and economies concentrate on the production those goods and services in which they have an advantage. Here, Tesla are a business specialising in the production of electric cars.

By specialising in the production of electric cars, Tesla should benefit from higher revenue and profits as can be seen by the significant rise in demand shown in Figure 6. Therefore, by focusing on this market there should be a large rise in the number of customers that Tesla can attract by producing and selling electric cars. This is because over time consumers are becoming more environmentally friendly and switching from petrol cars to electric cars.

Not only this but by specialising in electric cars, in which Tesla has an advantage, they should be more efficient. Tesla can focus on improving the efficiency of its production process of just electric cars, such as by hiring specialists in electric car production and design. This greater efficiency will help Tesla reduce the unit cost of their Model X and Model 3 vehicles in order to compete in the global market place with lower prices. This should maximise the chances of Tesla taking advantage of the rising demand for cars in the global market.

However, the gains from specialisation are likely to be seen in the long term, rather than the short term. In the short term, Tesla may have not been maximising their efficiency as they might have production or supply chain issues, as mentioned in Extract 2. However, in the long term, Tesla’s factories should be able to maximise efficiency and take advantage of the substantial increase in demand for electric cars shown in Figure 6.

Moreover, specialisation comes with risks for Tesla as they will become highly dependent on demand for one product, electric cars. If there is a fall in demand for electric cars, such as consumers switching to driverless petrol cars, then there would be a significant drop in demand and profits for Tesla. Although this depends on how diversified the business is and how reliant they are on electric cars.

The student should secure top marks for analysis as they have clearly developed the benefits of specialisation for Tesla specifically. In some questions worth ten marks, only one analysis point would be needed but the student correctly identified that the question was looking for benefits (plural).

The best technique for evaluation on a 10-mark question is two evaluation points, in context and developed. The student has done this and scores 4/4 for evaluation.

Exam-style question (A level essay)

6 KAA = 16 marks

Possible answers include:

• Definition/understanding of division of labour

• Application to one industry.

• Diagrammatical analysis, e.g. demand and supply, costs/revenues diagram.

• Reasons why division of labour may be profitable, such as:

o higher productivity

o lower unit cost

o higher revenue and profits

o improved international competitiveness.

NB Must be application to an industry to gain Level 4.

Evaluation = 9 marks

Possible answers include:

• Issues of productivity and lower morale, e.g. affecting quality/sales and efficiency/output/costs.

• Higher staff turnover, e.g. increasing human resource costs.

• It depends, e.g. on extent to which division labour can apply to this industry OR on how effectively division of labour is used relative to competitors OR in some industries quality may be more important than cost/price.

• Long term vs short term, e.g. introducing division of labour could be disruptive short term but beneficial long term.

• Other factors, e.g. other factors will determine profitability of firms.

NB Allow reasons why division of labour may reduce profits as KAA and reasons why it could boost profits as evaluation.

Division of labour is the process whereby the production process is broken down into a sequence of stages with workers assigned to particular stages. This essay will look at whether it is beneficial for the hairdressing industry to use division of labour.

The first benefit of a hairdresser using division of labour is improved productivity. A hairdresser could split up the tasks at a salon, such as male and female stylists, someone washing hair and another cutting. Workers at the salon would specialise in these tasks and, with repetition, get faster at their task. This would speed up the number of haircuts a salon could do and in turn lower variable costs due to this improvement in productivity.

[pic]

As can be seen in the cost and revenue diagram, an improvement in productivity will decrease marginal cost (MC1 to MC2) and average cost (AC1 to AC2) leading to a higher supernormal profit (shown by the larger shaded area). This can be reinvested by the hairdresser into better advertising, recruitment of skilled staff and better equipment in order to compete in the competitive hairdressing market.

However, it is not certain that productivity will rise due to division of labour. In fact, there could be a fall in productivity due an increase in the monotony of work. For example, someone whose job is just to wash hair could get bored easily doing this day in day out for several weeks. Therefore, despite being better at the job, their work rate may drop due to lower morale and therefore marginal and average cost would rise and profits would fall. In the long term these staff members may leave, increasing staff turnover and increasing recruitment, selection and training costs, which also reduces profits.

A second benefit of using division of labour effectively could be an improvement in competitiveness. As can be seen from the diagram above, due to improved productivity the price of a haircut would fall from P1 to P2. This could therefore mean that the salon is able to not only compete with other hairdressers but could become a preferred option for people who cut their hair at home to save money. Not only this but their non-price competitiveness may also improve. This is because as workers become more of a specialist at their job, the quality of the haircuts should improve. This is especially true because staff are likely to be well trained as it is very cost effective to train them to do just one task at the salon. Therefore, the salon could gain market share and in future more market power in order to influence their price and improve their profit margin.

However, the use of division of labour and specialisation of workers could limit the market of the salon. For example, if the salon decides to specialise in just female haircuts then they are losing the potential profit from male customers. Therefore, no matter how competitive, they are limited in the number of customers they could sell to. In fact, specialisation conflicts with the personal service that hairdressers may rely on to compete. Having one person doing all the stages of the haircut, such as cutting, drying and dying, could provide a better overall service and customers may become loyal to a particular stylist. This means excessive use of division of labour could actually damage the customer experience and competitiveness.

Overall, compared to other industries, such as car manufacturing, there is probably less scope for division of labour in this industry. Many salons operate on a small scale and therefore may only be employing two or three people each day. This fundamentally reduces the scope for splitting up jobs into different parts as would be done in car manufacturing. Therefore, many salons may choose in fact not to use division of labour much at all and find it more beneficial for each hairdresser to cut one person’s hair and provide a personal service.

Here the student scores 16/16 for analysis, in level 4. Both points are well developed and in detail to sustain the level, using excellent context. The student has used a cost and revenue diagram to show good use of theory but could easily have used demand and supply to show similar effects, using Theme 1 knowledge.

Evaluation is detailed and in context. With a well-considered judgement at the end this scores 9/9 and 25/25 overall.

Topic 2

How markets work

Rational decision making

1 2 marks for definition, such as:

• Attempting to get the highest amount of welfare possible. (2 marks)

2 2 marks for definition, such as:

• Attempting to get the largest difference between total revenue and total cost. (2 marks)

• Setting marginal cost equal to marginal revenue. (2 marks)

3 Possible answers include:

• Even though the new bran flakes are cheaper and this should improve her welfare (1 mark) there may be other factors that make the new bran flakes less desirable (1 mark), such as lower quality. (1 mark)

4

• The new product is the best option. (1 mark)

• As the profit is higher by £3 million (1 mark) or £5 million is higher than £2 million. (1 mark)

Demand, supply and price determination

5 a Increased demand (1 mark) meaning higher house prices. (1 mark)

b Decreased supply (1 mark) meaning higher house prices. (1 mark)

6 Possible answers include:

• Demand for UK rental properties will rise. (1 mark)

• (Owner-occupied) housing and rental properties are substitutes (1 mark), therefore if house prices rise, more people will switch to rental properties. (1 mark)

7 Possible answers include:

• Diminishing marginal utility means the reduced satisfaction that consumers derive from the consumption of each additional unit of a good or a service. (1 mark)

• For example, a consumer will gain less satisfaction from the second bottle of water they consume compared to the first (1 mark) as initially is immensely satisfying if the consumer is thirsty but this is less true for the second bottle. (1 mark)

8 Full marks for the correct answer or marks given as below:

a = (£90 – £52)/£52 x 100 (1 mark) = 73% (1 mark)

b = (£81 – £50)/£50 x 100 (1 mark) = 62% (1 mark)

9 Possible answers include:

• Increased demand due to bio fuel/more need for bedding. (1 mark)

• Reduced supply due to poor weather. (1 mark)

• Diagram (3 marks) showing the following:

o Original demand and supply curves, showing equilibrium price. (1 mark)

o Correct shift in curves (1 mark) i.e. both increase in demand and decrease in supply.

o New equilibrium price. (1 mark)

NB Award 2/3 for a diagram correctly showing one shift and higher price.

10 Possible answers include:

• Explanation of impact on the market for sawdust (3 marks), such as:

o Increased demand for sawdust as farmers decide to switch to this from straw for bedding (1 mark) as straw and sawdust are substitutes. (1 mark)

o Any knock-on effects on the market (1 mark + 1 mark), e.g. higher price/higher quantity/higher consumer surplus/higher producer surplus, higher revenue/higher profits.

• Diagram (2 marks) showing:

o Original demand and supply curves, showing equilibrium price. (1 mark)

o Higher demand and new equilibrium shown. (1 mark)

Price mechanism

11 Where the free markets allocate resources (1 mark) through the interaction of demand and supply/the invisible hand of the market. (1 mark)

12 Possible answers include:

• A surplus/excess supply means that quantity supplied exceeds quantity demanded. (1 mark)

• The price mechanism will cause the price the commodity to fall. (1 mark) This will lead to an expansion in demand (1 mark) and a contraction in supply (1 mark), therefore eliminating the surplus.

NB Accept diagrammatical analysis showing the explanations above.

13 a Possible answers include:

• Definition of the price mechanism. (1 mark)

• Diagrammatical analysis showing higher demand (1 mark) and prices. (1 mark)

• Explanation of the functions of the price mechanism in the context of taxi journeys:

o Signalling (1 mark): a higher price for taxis after concerts will be a signal to Uber drivers (1 mark) from passengers that demand has risen. (1 mark)

o Incentives (1 mark): there is an incentive for existing drivers to provide more journeys/for more taxi drivers to enter the market (1 mark) when the price is higher in order to earn higher profits (1 mark), thus meeting the higher demand.

o Rationing (1 mark): only those passengers who are able to afford the price of an Uber journey can purchase them. (1 mark) Some passengers will wait for the price to drop as they are not willing to pay that price. (1 mark)

b Possible answers include

• Issues of income inequality (1 mark): higher prices of Uber journeys take up a large percentage of income of lower income passengers (1 mark), therefore those on lower incomes are less able to afford journeys. (1 mark)

• Moral/ethical issues (1 mark): higher prices after a terrorist attack seems immoral as they are charging higher prices to take people to safety (1 mark), but the price mechanism does not take this into account, just raising the price due to higher demand. (1 mark)

• Issues of monopoly power (1 mark): if Uber starts to dominate the market in certain towns/cities they have the power to put their fares up (1 mark), hurting consumer welfare/reducing consumer surplus. (1 mark)

Price, income and cross elasticities of demand

14 Possible answers include:

• Product being a luxury (1 mark): luxuries will tend to have more price elastic demand as they are not essential to the consumer, so are more likely to switch away when price rises. (1 mark)

• Large number of substitutes (1 mark): if there are many substitutes then consumers are more likely to reduce their demand when the price rises as they can switch to the cheaper alternative. (1 mark)

• High percentage of income (1 mark): products that take up a large percentage of income have price elastic demand as consumers will want to switch away if possible, because the price rise is taking up a significant proportion of their income. (1 mark)

• Narrower market definition (1 mark): a narrower market definition, such as soft drinks rather than drinks, means there are more substitutes and therefore consumers will switch away more when the price rises. (1 mark)

• Over time (1 mark): over time, there is time for substitute products to be developed to which consumers may switch. Therefore consumers are more likely to reduce demand as the price rises, meaning demand is more price elastic. (1 mark)

15 a Possible answers include:

• Income elastic demand is where there is a more than proportionate change in demand following a change in income. (1 mark)

• Income inelastic demand is where there is a less than proportionate change in demand following a change in income. (1 mark)

b Possible answers include:

• Substitutes are products whose demand will increase when the price of a related product increases (i.e. positive XED). (1 mark)

• Complements are products whose demand will decrease when the price of a related product increases (i.e. negative XED). (1 mark)

16 2 marks for each calculation (1 mark workings, 1 mark answer):

−0.4 × 5% = −2% (buses)

−0.5 × 5% = −2.5% (rail)

17 Possible answers include:

Diagram (up to 4 marks), showing:

• Inelastic demand curve. (1 mark)

• Increase in price and fall in quantity. (1 mark)

• Old revenue shaded/annotated/referred to in answer. (1 mark)

• New revenue shaded/annotated/referred to in answer. (1 mark)

Explanation (up to 4 marks):

• Definition of inelastic demand OR PED (1 mark), e.g. where demand changes less than proportionately than quantity demanded OR the responsiveness of quantity demanded to a change in price.

• Definition of total revenue (1 mark), e.g. price × quantity OR the money a company earns from selling goods and services.

• Identification that demand is inelastic and therefore a rise in price will boost revenue. (1 mark)

• Further explanation (which could include a numerical example) (2 marks), e.g. the loss of customers from the higher fare will be more than compensated for by the higher fare paid by the remaining customers.

18 Possible answers include:

• Car journeys are a normal good. (1 mark)

• Because when incomes fell in the UK, quantity demand for cars also fell. (2 marks)

• Reference to UK car figures, e.g. 3.5% fall in car demand. (1 mark)

• Car journeys would have a positive YED. (1 mark)

• Explanation of inferior goods (1 mark), e.g. inferior goods would have seen a rise in demand when incomes fell OR have a negative YED OR buses and rail journeys were inferior goods.

19 Possible answers include:

Analysis (up to 6 marks):

• Buses and cars are substitutes/have positive XED. (1 mark)

• Application (1 mark): XED between cars and public transport is +0.04.

• If the price (cost) of car journeys increased then quantity demanded for bus journeys would increase as travellers will switch to the cheaper form of transport. (1 mark)

• Diagrammatical analysis (2 marks), for a diagram showing:

o Higher demand. (1 mark)

o Higher equilibrium price and quantity. (1 mark)

• Explanation of knock-on effects, such as:

o Higher price/quantity (1 mark) shown on diagram or written explanation. (1 mark)

o Higher consumer surplus (1 mark) shown on diagram or written explanation. (1 mark)

o Higher producer surplus (1 mark) shown on diagram or written explanation. (1 mark)

o Higher revenue (1 mark) shown on diagram or written explanation. (1 mark)

Evaluation (2 marks), such as:

• Buses and cars are weak substitutes (1 mark) and explanation (1 mark), e.g. car users still prefer the convenience/comfort of their car even if it costs more OR car users may not switch due to public transport being viewed as unreliable etc. OR reference to XED figure of close to zero in the extract.

• In the long term, more switching may occur (1 mark) and explanation (1 mark), e.g. time to find public transport information/time to switch OR public transport may improve over time, making switching more likely.

• There may need to be a significant increase in car journey prices (1 mark) to give enough of an incentive to switch to buses (especially if bus journeys are seen as lower quality). (1 mark)

Price elasticity of supply

20 Possible answers include:

• The responsiveness of quantity supplied to a change in price. (2 marks)

• = % change quantity supplied/% change in price. (2 marks)

21 a

• Perfectly price elastic supply is where there is an infinite change in quantity supplied following a change in price (i.e. PES equals infinity). (1 mark)

• Perfectly price inelastic supply is where there is no change in quantity supplied following a change in price (i.e. PES equals zero). (1 mark)

b

• The short run is a time period where at least one factor (of production) is fixed. (1 mark)

• The long run is a time period where all factors (of production) are variable. (1 mark)

22

• 3%/25% (1 mark) = 0.12 (1 mark)

• PES is inelastic (as it is less than +1). (1 mark)

23 Possible answers include:

• Time period (1 mark): in the long term, PES will become more price elastic (1 mark) as there is more time to explore/extract more oil in response to price rises. (1 mark)

• Levels of stockpiles (1 mark): greater stockpiles of oil will make the PES more price elastic (1 mark) as stockpiles can be quickly released onto the market following a rise in the oil price. (1 mark)

• Lack of perishability (1 mark): as oil is not perishable, PES will be more price elastic (1 mark) as oil can be stockpiled and released onto the market in response to an increase in oil price. (1 mark)

• Spare capacity (1 mark): if oil refineries have spare capacity then PES will be more price elastic (1 mark) as oil production could be increased following an increase in the oil price. (1 mark)

24 Possible answers include:

Analysis (5 marks):

• Define PES (responsiveness of quantity supplied to a change in price. (1 mark)

• Understanding of price elastic or price inelastic supply (1 mark), e.g. there will be a more/less than proportionate change in quantity supplied following a change in price OR diagrammatical analysis to illustrate PES.

• PES of avocados is likely to be price inelastic (1 mark) as it is difficult for avocado producers to respond to rising demand (1 mark) due to the specific growing conditions needed for avocados. (1 mark)

• Application to extract (1 mark), e.g. ‘slope of the terrain’ and ‘stable temperatures’ needed to grow avocados.

Consumer and producer surplus

25 Possible answers include:

• Consumer surplus is the difference between what consumers are willing and able to pay and the market price. (2 marks)

• Producer surplus is the difference between the market price and what producers are willing and able to supply at. (2 marks)

• For description of areas only (1 mark each), e.g. consumer surplus is the area below the demand curve and above the market price (1 mark), producer surplus is the area above the supply curve and below the market price. (1 mark)

26 a CEP1 and BFP2 (2 marks)

b P1EA and P2FA (2 marks)

27 a The area P1GFP2 is gained (1 mark) and the area CEGB is lost (1 mark), so overall consumer surplus has fallen. (1 mark)

b The area of P1EFP2 is lost (1 mark) and nothing is gained (1 mark), so overall producer surplus has fallen. (1 mark)

Indirect taxes and subsidies

28 Possible answers include:

• Grant/money given by the government to firms (1 mark) and one other point (1 mark), e.g. to reduce production costs OR to increase supply/production OR to reduce price.

29

• Ad valorem tax is a levy charged by the government as a percentage of the price. (1 mark)

• A specific (or unit tax) is a levy charged by the government set at a constant amount per unit. (1 mark)

• Figure 9 shows a specific tax (as it is a parallel shift). (1 mark)

30 a = £1.25 – £0.65 = £0.60 (1 mark)

b = £0.60 x 45 billion litre = £27 billion (1 mark)

c = (£0.50/£0.60) x 100 = 83% (1 mark)

d = (£0.10/£0.60) x 100 = 17% (1 mark)

31 a Possible reasons include:

• To raise tax revenue (1 mark): as demand is price inelastic, many drivers will continue to drive and pay tax to the government. (1 mark)

• Reduce external costs (1 mark): to discourage consumption of fuel due to the higher price and therefore reducing the impact on the environment. (1 mark)

b Possible reasons include:

• Protect employment (1 mark): by subsidising the industry it is more likely to survive and provide jobs for the local community/tax for the government.

• Reduce external costs (1 mark): as renewable energy will become cheaper, encouraging switching away from environmentally damaging non-renewable energy.

32 Possible answers include:

Analysis (6 marks):

Subsidy diagram (up to 3 marks), showing:

• Original demand and supply and equilibrium. (1 mark)

• Increase in supply, with lower equilibrium price and higher quantity. (1 mark)

• Subsidy area. (1 mark)

1 mark for any benefit and 1 mark for further development (up to 4 marks):

• Lower costs of production for farmers.

• Higher crop yields/productivity.

• Higher profits/incomes for farmers.

• Lower food prices, helping those on low incomes.

• Macroeconomic benefits, e.g. more exports and GDP.

• Higher consumer surplus.

• Higher producer surplus.

Evaluation (4 marks): up to 2 marks per point:

• Financial and opportunity cost for the government, e.g. money diverted away from cash transfers for the poor.

• Subsidies may be ineffective, e.g. may not reach farmers due to corruption.

• Other factors may affect crop yield/productivity, e.g. bad weather, acidic soil/land.

• Could lead to inefficiency/dependency of farmers.

• Impact on price and quantity depends on elasticity of demand.

• Magnitude arguments, e.g. over $1 billion spent on fertiliser subsidies.

• Prioritising/significance of benefits.

Alternative views of consumer behaviour

33 a Mitchell and Mark may prefer to stick to O2 because:

• it is what they have always done OR it is a habit (1 mark)

• of brand loyalty OR convenience. (1 mark)

b 2 marks for any of the following:

Mitchell and Mark may prefer to stick to O2 because:

• they may not be able to work out the best deal for mobile phones (1 mark) because there are too many calculations to make to find it (1 mark) due to the high number of tariffs or contract options available. (1 mark)

c 2 marks for any of the following:

Mitchell and Mark may prefer to stick to O2 because:

• that is what other people buy (1 mark) and therefore they assume this is the best deal for them too, (1 mark) e.g. Mitchell may always use the same phone provider as Mark. (1 mark)

34 Possible answers include:

• Understanding of irrationality, i.e. consumers may not be maximising their own utility. (1 mark)

• In the case of Bitcoin, herding behaviour means following the investment decisions of others OR being influenced by the behaviour of other investors/’investment mania’. (1 mark)

• However, investors may not have weighing up whether this investment in Bitcoin would be utility maximising for them personally. (1 mark)

Exam-style questions (multiple choice and short answer)

1 a KAA = 2 marks

Knowledge (1 mark):

• Identification of one function of price (1 mark), e.g. rationing/incentive/function.

Application (1 mark):

• Explanation of this function in context (1 mark), e.g. there is an incentive to expand supply of pantomimes to increase profits, following the increase in demand)

One function of the price mechanism is the incentive function. (1 mark) Given the rise in the ticket prices for pantomimes there is an incentive for the theatre to expand the supply of pantomimes. (1 mark)

Here the student gets 2/2. This a topic that students tend to struggle with, but this student has clearly identified one of the three functions of the price mechanism and applied it to the statement to gain the application mark.

b A (1 mark)

Ratios are a key part of the quantitative skills. Here you need to read the question carefully to get the correct ratio.

c KAA = 2 marks

Knowledge (1 mark):

• Identification/understanding of diminishing marginal utility. (1 mark)

Application (1 mark):

• Explanation of this concept in the context of pantomimes (1 mark), e.g. as the audience member watches the pantomimes, they will get less welfare, as they have seen the same jokes and plot at previous performances.

As the audience member keeps watching the pantomime, they will gain less welfare each time they watch the same show. (1 mark) This is an example of the economic theory of diminishing marginal utility. (1 mark)

Here the student scores full marks, because as with part (a), the key is to put the answer in the context of pantomimes to get the second mark. It does not matter that the student explained the answer and then identified diminishing marginal returns at the end of the answer.

2 a KAA = 4 marks

• Original demand and supply equilibrium. (1 mark)

• New demand and supply equilibrium, with an inward parallel shift in supply. (1 mark)

• Change in consumer surplus shown (2 marks), e.g. original and new consumer surplus OR change in consumer surplus.

[pic]

Consumer surplus has fallen by P1P2AB.

On this question no explanation is needed, just an accurate diagram. However, using letters to show areas on the diagram can be clearer than shading. This is a common type of short answer question.

Here the student scores full marks for an accurate diagram. They have been careful to do a parallel shift in supply because it is a specific tax and then have identified the change in consumer surplus.

b A (1 mark)

Demand is price inelastic as it is habit forming. This means the producer can pass the higher cost of the tax onto the consumer with a higher price.

3 a KAA = 4 marks

Knowledge (2 marks):

• Definition/understanding of utility OR utility maximisation. (1 mark)

• Identification of one reason (1 mark), e.g. habitual behaviour, computational difficulties, herding behaviour.

Application (1 mark):

• Application to the statement (1 mark), e.g. always ordering Big Mac shows herding behaviour OR computational difficulties due to variety of menu options OR herding behaviour by doing the same as his friends.

Analysis (1 mark):

• Linked development of why utility will not be maximised. (1 mark)

One reason for consumers not maximising their utility when shopping for fast food could be habitual behaviour. (1 mark) Here Martin always orders a Big Mac, he is brand loyal to this type of meal. (1 mark) Martin may be loss averse and be worried that other meals won’t maximise his welfare and enjoyment of the meal. However, this may not maximise his utility as there could be other meals he hasn’t tried that he could prefer. (2 marks)

Here the student gets 4/4 without a definition. The student has identified, applied and explained the reason for the irrational behaviour. They also clearly understand utility and utility maximisation (i.e. mentions welfare and enjoyment of the meal) so will get the final mark. However, it may be best to add the definition to be sure the mark is awarded.

b C (1 mark)

We assume that consumers maximise utility and producers maximise profits.

4 a KAA = 2 marks

Knowledge (1 mark):

• Identification that price elasticity of demand will increase/become more elastic/less inelastic. (1 mark)

Analysis (1 mark):

• Linked development, such as linked to more substitutes. (1 mark)

The development of e-cigarettes will make PED make cigarettes less price inelastic (1 mark). This is because smokers will have more substitutes to switch to when the price of cigarettes rises. (1 mark)

b B (1 mark)

Being able to use and rearrange the elasticity formulas is a key skill.

c KAA = 2 marks

Application (2 marks):

= (+2.6%/+2%) (1 mark) = 1.3 (1 mark)

NB Full marks for correct answer, even without workings.

= +1.3 (2 marks)

Here student gets full marks for +1.3, despite no workings. However, it is advisable you show your workings in case you make a mathematical error.

Exam-style questions (data response)

5 a KAA = 5 marks

Knowledge (1 mark):

• Original demand and supply diagram, with equilibrium. (1 mark)

Application (1 mark):

• Reference to Extract 1 (1 mark), e.g. shift towards electric vehicles/Chinese consumption rising.

Analysis (3 marks):

• Diagram showing increase in demand. (1 mark)

• New higher price and equilibrium. (1 mark)

• Explanation for rising demand (1 mark), e.g. higher derived demand for cobalt.

The reason for rising cobalt prices has been a rise in demand as shown in the diagram below (3 marks):

[pic]

This is due to ‘Demand for electric vehicles is rising’ (1 mark) and therefore a higher derived demand for cobalt to be used in the production of electric batteries for cars. (1 mark)

Here the student scores full marks due to a clear diagram, reference to extract 1 and clear explanation of why demand increases. They also use good terminology (derived demand) which secures the analysis mark.

On Paper 1 the breakdown for 5-mark questions is slightly different to other papers, with 1 mark for knowledge, 1 for application and 3 for analysis.

b KAA = 6 marks

Knowledge (2 marks):

• Identification that in the short run, supply likely to price inelastic. (1 mark)

• Identification that in the long run, supply likely to become price elastic. (1 mark)

Application (2 marks):

• ‘Currently cobalt price not high enough to justify production’ (1 mark) but ‘projected rise [in cobalt prices] by 8% to 10% a year’. (1 mark)

• In the short run, ‘little investment in exploring and extracting cobalt’. (1 mark)

• ‘About 300 companies worldwide are now on the hunt for cobalt’. (1 mark)

• Increase in production in Congo (1 mark) and USA restarted cobalt production in 2014. (1 mark)

Analysis (2 marks):

• In the short run, there could be capacity constraints/lack of time to explore and extract more cobalt. (1 mark)

• In the long run, there is time to expand exploration and current production capacity. (1 mark)

Evaluation = 2 marks (either one point developed or two points), such as:

• It depends, e.g. on spare capacity in current mines to raise production in the short run OR on stockpiles of cobalt available to release onto the market OR on the future path of cobalt prices as to whether investment will occur OR on the success of exploration of mining firms.

• Counterpoint, e.g. volatile prices may deter investment OR high cost of exploration may mean high barriers to entry OR in the very long run cobalt will have inelastic PES as it is a scarce resource.

In the short run, the PES of cobalt is likely to be price inelastic. (1 mark) This is because in the short run, firms are likely to face capacity constraints and therefore are unable to respond to higher prices by expanding supply. (1 mark)

In the long run, the PES of cobalt is likely to be become more price elastic. (1 mark) This is because over time, new mines may be able to come online and exploration of cobalt may be successful, allowing firms to respond to rising prices with higher supply. (1 mark) The extract mentions 300 companies hunting for cobalt, which should boost supply long term (1 mark), and who have been incentivised by the forecast of 8% to 10% rise in cobalt prices in the future. (1 mark)

However, the extent to which PES becomes more elastic over time will depend on how successful these mining companies are at finding new cobalt sources. If there are no new cobalt sites found then PES could remain inelastic into the long run, especially as it is a non-renewable resource. (2 marks)

Here the student gains 8/8. The analysis covers the two issues of the short- and long-run PES position, which is clearly explained and put into context. The final two marks are gained for one developed evaluation point.

c KAA = 6 marks

Possible answers include:

• Understanding/definition of XED.

• Understanding/definition of substitutes.

• Application to cobalt and nickel, e.g. cobalt price rises in Figure 10, e.g. cobalt and nickel substitutes, as shown in Extract 1.

• Diagrammatical analysis, e.g. demand and supply diagram, showing higher demand for nickel.

• Impacts on the nickel market, such as higher:

o equilibrium price and quantity

o revenue/profits

o consumer surplus

o producer surplus.

Evaluation = 4 marks

Possible answers include:

• Extent to which cobalt and nickel are effective substitutes, e.g. both can be used in electric car batteries OR nickel lasts longer but more chance of batteries catching fire.

• It depends, e.g. impact on price and quantity depends on PES for nickel.

• Evaluation of the data, e.g. lack of rise in nickel price since cobalt price rise.

• Long term vs short term, e.g. will more switching happen over time? OR will the price of cobalt continue to rise if firms are increasing supply?

• Other factors affecting market for nickel other than price of copper, e.g. availability/exploration of nickel.

• Significance and prioritisation of impacts.

Cobalt and nickel and substitute goods, with a positive XED. A substitute good is one whose demand will rise if the price of a related good rises or fall if the price of the related good falls.

According to Figure 10, the price of cobalt increased from around $25,000 per tonne in 2016 to around $90,000 per tonne in 2018. As both cobalt and nickel can be used in the production of nickel batteries, this rise in the price of cobalt will lead to a rise in the demand for nickel, because they use this instead as a cheaper alternative.

The rise in demand for nickel can be shown in the diagram below:

[pic]

Therefore, the impact on the nickel market of an increase in demand from D1 to D2 is an increase in the nickel price from P1 to P2 and an increase in equilibrium quantity from Q1 to Q2. This will have knock-on effects on nickel consumers, who will see consumer surplus increase from P1FB to P2EC, as well as producers who see producer surplus rise by P1P2EF.

However, the impact on equilibrium price and quantity of nickel will depend on its price elasticity of supply. In the short run, supply is likely to be price inelastic as it takes time to mine nickel to respond to the increased demand and therefore the impact will be more on price than quantity.

Moreover, nickel and cobalt will not be perfect substitutes. It mentions in Extract 1 that although nickel batteries last longer they are more prone to catching fire. Therefore, electric car manufactures like Tesla may continue to use cobalt instead of nickel as they may be concerned about the impact of faults in the battery on the quality of the cars they sell. This will limit the rise in demand for nickel.

Here the student scores top level analysis 6/6. The student has developed an answer clearly in the context of nickel and cobalt, with a clear explanation of the impact on the market (i.e. price, quantity, CS, PS). Although a diagram is not required it shows good use of theory and is rewarded.

There are also two evaluation points, which are both developed and in the context. Therefore, both score level 2 evaluation, allowing the student to score 4/4, as they have sustained this level.

Exam-style question (A level essay)

6 KAA = 16 marks

Possible answers include:

• Definition/understanding of subsidies.

• Application to the solar panel industry.

• Use of diagrammatical analysis, e.g. demand and supply, cost/revenue diagram, externality diagrams.

• Explanation of microeconomic effects of reduced subsidies, such as impact on:

o producers, e.g. impact on costs, revenue, profits, share price, producer surplus, efficiency.

o consumers, e.g. impact on price, quantity/choice, consumer surplus, quality.

o government, e.g. impact on government spending, opportunity cost.

o externalities, e.g. external benefits.

Evaluation = 9 marks

Possible answers include:

• Counterpoints, e.g. demand for solar panels may reduce due to US protection.

• It depends, e.g. on the PED for solar panels.

• Magnitude of subsidy, e.g. impact depends on size of subsidies.

• Long term vs short term, e.g. long-term vs short-term impacts of providing solar panel subsidies.

• Significance and prioritisation of effects (with justification).

A subsidy is grant given by a government to a product in order to increase supply, increase production and lower price. The lower cost of production provides an incentive for solar panel producers to increase supply and therefore increasing quantity (Q1 to Q2) and lowering price (P1 to P2), as shown in the diagram below

[pic]

There is first of all a significant effect on the Chinese government due to the cost of the subsidy. This can be shown on the diagram by the area WXZP2. This is because it is equal to the subsidy per unit (XZ) multiplied by the quantity after the subsidy was imposed (Q2). Eventually, any government spending will need to be funded in some way by the government in terms of higher taxation or cuts in government spending. Therefore, not only does the government face a financial cost but also an opportunity cost, meaning the value of the next best alternative forgone, for example by spending on the solar panel industry there is less to spend on healthcare, education and welfare. As an emerging economy, which is not yet a developed county, this is extremely important as China does not yet have the provision for these public services and social protection like we do in the UK.

However, the government can also benefit from providing these subsidies in terms of meeting other macroeconomic objectives. Due to the increase in quantity in solar panels (Q1 to Q2) there will be more derived demand for labour and therefore more employment. This means that the government will need to pay less in terms of unemployment benefits but crucially will be gaining tax revenue from the income and profits earned in the solar power industry. Not only this but it will help China meet its environmental objectives, which is crucial due to the magnitude of pollution China is creating following its industrialisation.

The second effect will be on solar panel producers in China. They will benefit directly from the subsidy in terms of area WXYP1. This is the producer benefit per unit (XY) multiplied by the new quantity (Q2). Furthermore, by having a lower cost per unit, Chinese solar panels will become more internationally competitive due to the price dropping from P1 to P2, which should boost their total revenue and profit. This can be shown on the following cost and revenue diagram:

[pic]

As can be seen in the cost and revenue diagram, an improvement in productivity will decrease marginal cost (MC1 to MC2) and average cost (AC1 to AC2) leading to a higher supernormal profit (shown by the larger shaded area). This can be reinvested by the solar panel producers into better research and development in order to improve their non-price competitiveness.

However, there are clearly other factors that will determine whether there will be an increase in profits for Chinese solar panel producers. Due to significant subsidies being given to these producers, there could be more complacency and inefficiency which may make costs and price rise and therefore make them unable to compete, especially if the subsidies were reduced. Even if they are efficient, the scope of demand could be limited by protectionism in other countries who believe China is acting anti-competitively. This is one of the rationales behind Trump’s increased used of tariffs during his presidency. Clearly, a more protectionist world economy could offset the subsidies given by the Chinese government.

Overall, it may not be sustainable or desirable for the Chinese government to subsidise the solar panel industry. This is because the cost may be too substantial due to the size of the industry, as China is the world’s largest producer of solar panels. Even if they could afford it, eventually it may be best to open these firms up to market competition by lowering subsidies. Only then will Chinese companies truly have to compete and therefore drive efficiency and the innovation needed to make a significant contribution to renewable energy and the fight against climate change.

Here the student scores 16/16 for analysis, in level 4. Both points are well developed and in detail to sustain the level, using their own knowledge about China to excellent effect. The student has used both the subsidy diagram and a cost and revenue diagram to show good use of theory. Showing synoptic links between Theme 1 and 3 is an excellent way to earn top level KAA even on a Theme 1 topic, such as subsidies.

Evaluation is detailed and in context. With a well-considered judgement at the end this scores 9/9 and 25/25 overall. Topic

Topic 3

Market failure

Types of market failure

1 2 marks for a correct definition:

When the price mechanism/free markets (1 mark) fails to deliver efficiency/results in a misallocation of resources. (1 mark)

2 1 mark each to maximum of 2:

• market power

• inequality

• imperfect information

• positive externalities.

Externalities

3 a 2 marks per difference:

• Private costs are direct costs to consumers and producers (1 mark) whereas external costs are costs to third parties/negative spill-over effects. (1 mark)

• Private costs are costs internal to an exchange (1 mark) whereas external costs are external to an exchange. (1 mark)

• Private costs are costs taken into account by the price mechanism (1 mark) whereas external costs are ignored by the price mechanism. (1 mark)

b 2 marks per difference:

• Private benefits are direct benefits to consumers and producers (1 mark) whereas external benefits are benefits to third parties/positive spill-over effects. (1 mark)

• Private benefits are benefits internal to an exchange (1 mark) whereas external benefits are external to an exchange. (1 mark)

• Private benefits are benefits taken into account by the price mechanism (1 mark) whereas external benefits are ignored by the price mechanism. (1 mark)

4 1 mark for identification of external benefit or cost and 1 mark for example:

a External benefit (1 mark), e.g. less spread of disease/productive UK workforce/higher economic growth/less absenteeism for firms. (1 mark)

b External cost (1 mark), e.g. congestion/air pollution/noise pollution/contribution to climate change/accidents. (1 mark)

c External cost (1 mark), e.g. anti-social behaviour/crime/litter/strain on healthcare/impact on labour productivity/absenteeism from work. (1 mark)

5 1 mark for correct letter representation, 1 mark for brief explanation:

a Q1 (1 mark) as MPC = MPB. (1 mark)

b Q2 (1 mark) as MSC = MSB. (1 mark)

c AEB (or equivalent) (1 mark) as this is the excess of social benefit above social cost OR as this is the welfare that would be gained from moving from Q1 to Q2. (1 mark)

6 Possible answers include (up to 4 marks):

• Definition of market failure, e.g. when the price mechanism fails to deliver an efficient allocation of resources. (1 mark)

• People ignore the external benefits and therefore there is underconsumption. (1 mark)

• As the free market equilibrium is below the social optimum (1 mark); reference to diagram, i.e. Q1 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download