2015 specimen AS paper

Question 1

positive statement

Answer 1

• statements about facts which deal with the objective or scientific explanations of the economy
• can be proved or are a statement of fact

Question 2

normative statement

Answer 2

• contain a value judgement and are subjective

- reflect peoples’ views and cannot be proved

Question 3

explain external benefits

Answer 3

1) external benefits are where third parties not involved in a transaction benefit from it
2) Education has external benefits
3) as someone getting an education and becoming a doctor will save the lives of third parties

Question 4

define ‘production possibility frontier’

Answer 4

• a curve showing the maximum potential output assuming all available resources are used fully
• shows the maximum possible output combinations of two goods or services an economy can produce using all its available resources and using them in the most efficient possible way

Question 5

likely PES for energy generated by nuclear power plants

Answer 5

• PES = responsiveness of supply to changes in price (1)

Application
• 10 years to be operational (1)

Analysis
• PES is likely to be inelastic – takes time to build nuclear power stations (1)
• whilst PES is likely to be inelastic in the short run it is likely to be elastic in the long run (1).

Question 6

explain why defence is a public good

Answer 6

• defence is a public good as it is non excludable and
non rival as you cannot exclude people from consuming it and one person consuming it will not stop the military from protecting others
• defence has the free rider problem as people would benefit from the defence but not pay for it and defence will be under-provided by the private sector.

Question 7

example of market failure (cigarettes)

Answer 7

over consumption of cigarettes owing to consumers’ lack of information

Question 8

explain why users would not consider changing to an insurance provider with lower prices

Answer 8

consumers may not act rationally because:
• inertia - means people do not have the energy or
inclination to move, so will not spend the time searching for the best deal
• the importance of habitual behaviour - people are
in the habit of using the same provider so continue to do so, and will not spend the time searching for the best deal
• computation problems - where they cannot calculate the benefits they will accrue from switching providers, so will not see better deals available in terms of lower premium.

Question 9

define supply

Answer 9

the quantity of a product that a producer is willing and able to supply onto the market at a given price in a given time period

Question 10

define demand

Answer 10

the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period

Question 11

define equilibrium

Answer 11

a state of equality or balance between market demand and supply

Question 12

impact of a 3% increase in price of UK beef on market for lamb (KAA)

Answer 12

• Define cross elasticity of demand.
• Identify lamb as substitute.
• XED – positive – as price of beef rises the demand for lamb will rise.
• Diagram to show increased demand for lamb.
• Price and quantity both rise for this good.
• Likely to lead to increased revenue.
• Increased producer surplus.
• Increased consumer surplus.

Question 13

define cross price elasticity of demand (XED)

Answer 13

measures the responsiveness of demand for good X following a change in the price of a related good Y.

Question 14

impact of a 3% increase in price of UK beef on market for lamb (Ev)

Answer 14

• Magnitude – depends on amount of price adjustment.
• Short run little change – people do not adjust to price changes straight away/long run may take time for people to substitute.
• Closeness of substitutes – inelastic supply means little impact/elastic larger impact.

Question 15

likely impacts on dairy farmers in the UK of growth in the middle classes in emerging markets such as China

Answer 15

Application
• desire for protein/dairy – 30–50m litres
• increased demand

Knowledge/understanding
• higher prices (1)
• higher output (1)
• revenue rise (1).

Analysis
• increased profits/producer surplus identified/shown
in diagram
• investment required for machinery and logistics –
getting products to China
• firms will export more products

Question 16

producer surplus

Answer 16

the difference between what producers are willing and able to supply a good for and the price they actually receive

Question 17

consumer surplus

Answer 17

the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price).

Question 18

reasons for subsidies being paid to Scottish famers (KAA) reasons for subsidies

Answer 18

• Define subsidy: payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price.
• Application – £554m – 79%/69% of income.

Reasons for a subsidy include:
• lowers production costs
• increases supply (on diagram or written)
• lowers price
• increases quantity
• more accessible to poor (low price)
• higher meat and milk consumption
• vital rural economy – protects incomes/jobs
• maintains/guarantees food supply
• trickle-down effect
• food industry relies on them.

Question 19

trickle down effect

Answer 19

• if high-income earners gain an increase in salary, then everyone in the economy will benefit as their increased income and wealth filter through to all sections in society.
• Ronald Reagan: cut income tax for high earners, limited trickle-down effect with median wages growing very slowly compared to wages growing for top 1% of income earners

Question 20

reasons for subsidies being paid to Scottish famers (Ev) reasons against subsidies

Answer 20

• 79% / 69% of income is subsidy
• reliant on subsidy
• X – inefficient
• should be allowed to get out of market and make room for someone else
• cost to government – opportunity cost.

Question 21

using concept of external costs, evaluate the possible economic effects of increased beef production (KAA)

Answer 21

• Define external costs
• Diagram accurately drawn – with MPC, MSB, MPB
and MSC, welfare loss triangle.
• It takes 1,800 gallons of water to make a single pound of grain-fed beef.
• Thirty per cent of the world’s land is used to raise livestock.
• Cows as major producers of methane gas.
• These animals produce more climate-changing
greenhouse gases than 22 million cars a year.
• Manure, tons of fertilisers and toxic contaminants used in slaughterhouses.

Question 22

using concept of external costs, evaluate the possible economic effects of increased beef production (Ev)

Answer 22

• Magnitude – depends on how much additional meat.
• Measurement difficult – putting a value on external
costs.
• Increased demand – higher revenues.
• Benefits of increased consumption – export income.

Question 23

define external cost

Answer 23

• the cost incurred by an individual, firm or community as a result of an economic transaction which they are not directly involved in
• total external cost is the sum of the marginal external costs of production

Question 24

define demerit goods

Answer 24

a good which when consumed generates costs beyond those borne by the consumer

Question 25

evaluate the impact of a guaranteed minimum price in the beef market on consumers and producers (KAA)

Answer 25

• Diagram showing minimum price above market equilibrium.
• Define minimum price: the lowest price that can legally be set
• Reasons for minimum price – protect incomes of producers.
• Raise price of beef/ cause excess supply.
• Contraction of demand/ extension supply.
• Government may have to buy excess supply
• Reduce consumption of meat – reduce obesity.
• Link to NHS.

Question 26

evaluate the impact of a guaranteed minimum price in the beef market on consumers and producers (Ev)

Answer 26

• Anti competition.
• Magnitude of price changes – increase then may put
businesses out of business – job losses.
• Delays – time lag before it starts.
• Encourage smuggling – if minimum price.
• Imports.
• Magnitude – depends on size of minimum/maximum
price.
• Elasticity of demand– if inelastic little change.
• Time lag – people will not change behaviour
immediately.