2018 AS paper

Question 1

define command economy

Answer 1

• centrally planned
• government run
• no or limited private sector
• government allocates most/all resources

Question 2

PED

Answer 2

PED = %changeQd / %changeP

Question 3

percentage change

Answer 3

new-old / old * 100

Question 4

determinant of PED for Daily Mail?: change in population size

Answer 4

not correct because ‘population’ is a non price determinant of demand not PED determinant

Question 5

determinant of PED for Daily Mail?: decrease in cost of producing the Daily Mail

Answer 5

not correct because ‘cost’ is a non price determinant of supply not PED determinant

Question 6

determinant of PED for Daily Mail?: expected rise in the price of Daily Mail

Answer 6

not correct because ‘expected rise in the price’ is a non price determinant of demand not PED determinant

Question 7

determinant of PED for Daily Mail?: availability of rival newspapers

Answer 7

correct - determinant of PED

Question 8

ceteris paribus

Answer 8

all other things being equal

Question 9

function of the price mechanism in the market for private dental care?: acting as a signal to dentists when deciding whether to provide private dental treatment

Answer 9

correct

Question 10

function of the price mechanism in the market for private dental care?: eliminating a shortage of private dentists by allowing the price of private treatment to fall

Answer 10

not correct because a shortage will be eliminated by a rise in price rather than a fall in price

Question 11

function of the price mechanism in the market for private dental care?: encouraging government intervention to set dental care targets

Answer 11

not correct because setting ‘targets’ is not a clear application of the rationing function using the price mechanism

Question 12

function of the price mechanism in the market for private dental care?: incentivising private dentists to offer only NHS treatment

Answer 12

not correct because the lower NHS price will act as a disincentive

Question 13

reasons state provides NHS treatment

Answer 13

• Risk/Imperfect information (1) which may lead to a misallocation of resources (1)
• Inequality (1) provide for those priced out of unaffordable private care (1)
• Positive externalities (1) spillover benefits to third parties i.e. employers/families (1) Diagram may illustrate this (1)
• Growth/economic freedom/welfare safety net (1) ensure the ill can recover and return to workforce (1).

Question 14

define asymmetric information

Answer 14

• Where one party in a transaction has more or superior information compared to another
• Providers know more than consumers or vice versa

Question 15

explanation of bus travel being an inferior good

Answer 15

correct definition of inferior good e.g. as incomes rise demand falls OR
YED formula = %changeQd / %changeY
OR as incomes falls more demand for inferior goods

Application
calculating percentage change in income = 1.5/24.2 =+6.2%
1 mark for calculating YED = -3%/+6.2% = -0.48 (accept range -0.48 to -0.5)

Analysis
1 mark for linked development e.g. bus travel is an inferior good as YED is negative
Or explanation of the inverse relationship

Question 16

define consumer surplus

Answer 16

• Measure of the welfare (utility) that people gain from consuming goods and services
• Difference between the total amount that consumers are willing and able to pay and the total amount that they actually pay.
• Diagram showing area under the demand curve and above the market equilibrium price.

Question 17

public good

Answer 17

• non-excludable

* non-rivalrous

Question 18

why price of uranium has ‘fallen to a 13-year low’ in 2016

Answer 18

Knowledge
1 mark for an increase in supply or a decrease in demand. This may be illustrated on a diagram

Application
2 marks for using source data explaining change in supply and demand, e.g.
• Estimated surplus (1) of approximately 7 million kg of uranium (1)
• Kazakhstan’s production has increased significantly/stockpiles (1)
• Confidence in nuclear industry declined/Japan closed some of its nuclear plants (1)

Analysis
Accurate diagram – showing price fall (1) correct shift in demand and supply (1): demand curve left, supply curve right

Question 19

assess whether supply of uranium is likely to be price elastic or price inelastic (KAA)

Answer 19

• Shows or demonstrates understanding of price elasticity of supply.
• Reasons why uranium is price inelastic.
• Diagram to show price inelastic supply.
• Time. Two years to build a uranium mine in Spain, ten years in ‘development’, difficult to find in right concentrations.
• Factor immobility e.g. uranium mine cannot be switched to other uses
• Regulation. ‘Have to clear extra hurdles’ due to government concerns regarding negative externalities.

Question 20

PES

Answer 20

• measures the relationship between change in quantity supplied following a change in price
• When PES > 1, then supply is price elastic
• When PES < 1, then supply is price inelastic
• When PES = 0, supply is perfectly inelastic
• When PES = infinity, supply is perfectly elastic following a change in demand
• PES = %change Qs / %change P

Question 21

assess whether supply of uranium is likely to be price elastic or price inelastic (Ev)

Answer 21

Reasons why uranium is price elastic:
• Time. Ability to store stockpiles of uranium, Figure 1 surplus suggests and ‘stockpiles until 2020’.
• ‘Uranium is a relatively common metal’. Extract A Line 2
• Distinction between short run and long run and its significance for elasticity of supply. By 2018 mine in Uranium producing ‘2.2 million kilos a year’.

Question 22

reasons many consumers of energy have not switched to suppliers offering lower prices

Answer 22

Knowledge/understanding
• Identification of two separate reasons: inertia, computational problems, information gap, all providers increasing prices over time.

Application
• ‘Irrational consumers pay the price’.
• Energy prices have risen by 158% in the last 15 years.(1)
• Four million households are still on the most expensive energy rates. (1)

Analysis
Linked development of why not switching to a supplier offering lower prices (1)
e.g.
• Inertia (1) despite a decade of rising energy bills (1) as consumers do not have the time or motivation to switch (1).

Question 23

define renewable and non-renewable energy

Answer 23

Knowledge/understanding

• Renewable energy is a resource made from something which can be renewed itself/infinite supply
• Non-renewable energy is a resource which once exploited cannot be replaced/finite supply

Application
Energy generated by nuclear or coal is non-renewable (1) Solar or wind energy is renewable (1).

Question 24

microeconomic effects of introducing a max price for energy of producers and consumers (KAA)

Answer 24

• Understanding of maximum price.

The effect of a maximum price on consumers:
• Energy prices more affordable for consumers, end of ‘decade of rising energy bills’, extension in demand for energy or increase in quantity demanded (inefficient use).

The effect of a maximum price on producers:
• Contraction in supply or decrease in quantity
supplied, power stations turned off ‘undermine energy market’, decline in producer surplus or revenue/profit.

Question 25

microeconomic effects of introducing a max price for energy of producers and consumers (Ev)

Answer 25

• It depends on whether and how far the maximum price is below the market equilibrium price.
• It depends on the PES of energy.
• It depends on the PED for energy.
• Comment on the costs to consumers – loss of consumer surplus, energy shortages, ‘higher prices in the future’.
• Comment on the impact on producers – producer behaviour e.g. may move up to the price cap, reduce investment
• Government failure e.g. distortion of price signals, unintended consequences

Question 26

using concept of external costs, evaluate whether nuclear power is under-provided or over-provided in the energy market (KAA)

Answer 26

Diagram(s) accurately drawn – with clearly labelled ‘welfare loss’ shaded triangle (on mark scheme & PP)
Explain costs to third parties in context.
External costs:
• Risk of nuclear accident – local schools and businesses close, impact on property prices.
• High doses of nuclear radiation leaks increase the risk of cancer – loss of family income, employment, contribution to local economy, costs to NHS.
• Cost of storage for future generations – opportunity cost of resources (land) tied to this, resulting in loss of income to farmers for example.
• Opportunity cost of subsidies to nuclear industry, subsidy cuts to solar businesses.

Question 27

using concept of external costs, evaluate whether nuclear power is under-provided or over-provided in the energy market (Ev)

Answer 27

Reduced external costs in production of substitutes/external benefits may mean it is under-produced:
• Curb greenhouse gas emissions which are causing climate change, by using nuclear, resulting in less flooding or storm damage reducing insurance costs to businesses. Extract C
• Building new nuclear reactors allow positive local
economic effects from job creation.
• Provide ‘affordable energy’ helping businesses stay open thus protecting jobs and ending fuel poverty resulting in lower demands for health care.

Other evaluation points might include:
• Magnitude – depends on relative size of external cost.
• Measurement difficult – putting a value on external costs.
• Energy efficiency measures more preferable.
• Short term/long term costs and benefits.

Question 28

Evaluate ways in which gov intervention could be used to reduce carbon emissions. (KAA)

Answer 28

Reasons for government intervention e.g. to correct market failure
Link intervention to reducing carbon emissions.
Appropriate diagram(s) accurately drawn.
Ways might include:
• Indirect taxation (ad valorem and/or specific) on carbon emissions providers e.g. coal/gas power stations, or workplace parking, reference to taxes
directed at getting people out of their cars
• Subsidies to solar/wind/nuclear energy/cycling/public transport
• Maximum price on low/zero carbon emissions providers and minimum prices on carbon emitters.
• Tradable pollution permits e.g. EU emissions trading scheme.
• Provision of information, energy efficiency measures.
• Regulation e.g. shut down all coal-fired power
stations by 2025, reduction in car emissions by using low emission zones.
If there is no Diagram, max Level 3

Question 29

Evaluate ways in which gov intervention could be used to reduce carbon emissions. (Ev)

Answer 29

Why the ways given may or may not be successful e.g.
• Distortion of price signals.
• Unintended consequences, energy shortages.
• Excessive administrative costs, pollution permits.
• Information gaps, external costs of non-carbon based energy sources, questioning link between carbon emissions and climate change.
• Government failure to provide, solar and wind power ’vary with weather’, nuclear accidents.
• Relative benefits/costs of government intervention versus market based solutions.

Question 30

Factors determining PES

Answer 30

1) Spare production capacity (plenty = elastic supply in response to change in demand)
2) Stocks of finished products and components (if high = able to respond to a change in demand so elastic supply)
3) Ease and cost of factor substitution (if mobile elasticity of supply likely to be higher as resources can be mobilised to supply the extra output)
4) Time period and production speed (supply more price elastic the longer the time a firm is allowed to adjust its production levels)

Question 31

PES when PES>1 following a change in demand. Market supply price elastic when:

Answer 31

• Supplier has plenty of spare capacity to increase output
• High stock levels are available to meet rising demand
• A short production time frame to get extra products on the market
• Ease of factor substitution is high, i.e. resources can be easily relocated