AS June 2016 Flashcards
Which one of the following is the most likely consequence of an increase in the division of labour in the production of smartphone? (1 mark)
C - Decrease in the cost per unit of smartphones
Explain what function money has in improving specialisation in the production of smartphones. (3 marks)
- Money acts as a medium of exchange
- Money is an incentive to workers to improve output and quality of smarphones
- For example, a firm paying workers ‘per unit produced’, productivity increases
Define the term ‘external benefits’. (1 mark)
External benefits are when social benefits are greater than private benefits
Which one of the following measures could a government introduce to achieve the social optimum consumption of nursery school places? (1 mark)
B - subsidy of RS per unit
Annotate on Diagram A the welfare gain area and the new social optimum output resulting from successful government intervention in the market for nursery places. (2 marks)
- Welfare gain: area VTR
- Social optimum output: Q1
Explain one measure the Kenyan government could use to reduce the impact of water extraction from Lake Naivasah. (3 marks)
- Indirect tax/regulation on water/flower industry
- Increased taxes/regulation makes it more expensive/less profitable, reducing consumption
With reference to the statement above explain what is meant by ‘diminishing marginal utility’. (3 marks)
- Diminishing marginal utility is the decline in the additional satisfaction from consuming an additional unit of a good
- The ‘All you can eat buffet’ operates as they know each additional plate of food gives less utility than the one before
What is the expected % change in quantity of petrol demanded if the price elasticity of demand is -0.2?
D - +4%
Explain the change to the total revenue of petrol stations as a result of cutting their prices. (3 marks)
- A fall in price = fall in total revenue
- % rise in quantity demanded (QD) is lower than the % fall in price as demand is price inelastic
With reference to Figure 1, explain one possible reason for the difference in price elasticity of supply of new housing between countries. (5 marks)
K:
* PES measures the responsiveness of quantity supplied (QS) to a change in price
* PES = % change in Qs / % change in price (P)
App:
* Above unit elastic (e.g. USA/Finland)
* Below unit elastic (e.g. Netherlands/UK)
* Compare elasticity’s (e.g. USA +2.0 and UK +0.4)
* Supply is unresponsive to prices in Netherlands
Ana:
* Unit PES means demand shock housing output increases more than prices and below is unresponsive
* Easier to build houses in USA than UK (e.g. planning restrictions in UK)
* Factors affecting PES
With reference to Extract A, assess the likely impact of the Help to Buy scheme on the market for rented properties in the UK. (10 marks)
KAA:
* Help to Buy is a subsidy making home ownership attractive
* Cross elasticity of demand (XED) measures the responsiveness of Qd for one good to a change in the price of another good
* Home ownership and rented properties as substitutes
* Positive XED (e.g. decrease demand in rental sector, left shift)
* Deposit size is 5% rather than 20% (i.e. demand (D) increases)
* Price and quantity of rental properties to fall
* Consumer and producer surplus falls
Ev:
* Scale and Time (e.g. short and long term)
* Closeness of substitutes
* Scheme affects first time buyers
* PES
* Other factors (e.g. income)
Explain the likely impact on producer surplus of an increase in the demand for housing. Use a diagram to illustrate your answer. (6 marks)
K:
* Producer surplus (PS)- difference between what producers are willing and able to supply a good for and the price they actually receive
Ana:
* Increased PS from D shifting right
App:
* Increase in prices as demand for houses rise
* Extention in supply
* House builders make a larger surplus (i.e. profit)
* PS is for new housing
* PED/PES on PS
With reference to Figure 2, calculate the % change in house prices between the first quarter of 2009 and the first quarter of 2015. (4 marks)
- % change = (new-original)/original * 100
- % change = (373-300)/300 * 100 = 24%
With reference to Figures 1 and 2 and your own knowledge, discuss the functions of the price mechanism in allocating housing. (15 marks)
KAA:
* Singal function - adjusted when resources are needed
* Incentive function - consumers/suppliers
* Rationing functions - House price index fell in 2007/09 from 360 to 300. House price index increased in 2009/14 from 300 to 375
* PES in Figure 1
* Smith’s invisible hand
Ev:
* Signals ignore negative externalities of flood risk
* Incentives have asymmetric information
* Housing is an asset (i.e. more shortages like a ‘runaway train’)
* Housing price mechanism fails to meet D for affordable housing
* Government intervention/failure
