AS Microeconomics application

Question 1

Demand and Supply application

Answer 1

• Rise in price of painkillers during covid 19: raw material shortage which increased cost of painkillers by up to 30%
• Excess demand driving up prices: during covid 19 market price for one type of ventilator increased from £21,700 to £77,100 in a week

Question 2

Impacts of covid 19 application

Answer 2

Business that gained (increase in demand)
• Video streaming
• Sports/fitness equipment
• Takeaway platforms

Business that suffered (fall in demand)
• Hotels
• Gyms
• Cinemas

Question 3

Complementary goods application

Answer 3

• Cars and petrol
• Tennis balls and tennis rackets

Question 4

Substitute goods application

Answer 4

• Coke and Pepsi
• Starbucks and costa coffee

Question 5

Normal goods application

Answer 5

• Airline travel/holidays

Question 6

Inferior goods application

Answer 6

Bus travel

Question 7

Elasticity of supply application

Answer 7

• Housing in UK is price inelastic in supply due to tight planning regulations and large production time lags
• Covid vaccine manufacturers could respond quickly to huge changes in global demand by expanding their factory sizes indicating price elasticity of supply

Question 8

Elasticity of demand application

Answer 8

• demand for alcohol and cigarettes is inelastic
• during covid 19 demand for painkillers was inelastic

Question 9

Negative externalities application

Answer 9

Covid 19:
• students schools shut > impact on growth and learning
• job losses > strain on government finances and future burden for taxpayers

Smoking Cigarettes:
• costs NHS £2-6 billion

Drinking alcohol:
• costs NHS £3.5 billion

Air pollution:
• £42.88 million yearly health and social costs

Question 10

Positive externalities application

Answer 10

• covid 19 > stronger family ties during lockdown
• physical exercise > NHS saves £100 per person per year, employer benefits through greater productivity and lesser absenteeism
• education > greater productivity resulting in greater profits for firms > greater tax revenue for government

Question 11

Public goods application

Answer 11

• street lights
• road signs
• light houses

Question 12

Subsidies application

Answer 12

• Coronavirus Job Retention Scheme (CJRS):
> introduced to provide financial support to businesses affected by the pandemic and help them retain their employees
> government paid up to 80% of wages of eligible employees who were furloughed (put on temporary leave), up to a maximum of £2,500 p month

• Subsidies for electric cars

• Subsidies for construction companies to build low-cost affordable housing

Question 13

Indirect taxes application

Answer 13

• Fuel duty in France: 2018, French government announced plans to raise fuel duty on petrol and diesel to fight against climate change > policy failed due to its regressive impact so was scrapped

• Fat tax in Denmark: 2011, introduced world first tax on foods high in saturated fat > had to be abolished because it put jobs at risk and increased food prices

• Sugar tax in UK: 2018, aimed to reduce obesity, since implemented 50% firms reduced sugar volumes

Question 14

Minimum prices (price floor) application

Answer 14

• Minimum unit pricing (MUP) policy for alcohol in Scotland > set a minimum price of 50 pence per unit > reduced alcohol consumption by 8% since

• Minimum price floor on Cocoa in Ivory Coast and Ghana > responsible for 60% of global cocoa bean supply > minimum price implemented to protect farmers

Question 15

Maximum prices (price ceiling) application

Answer 15

• 2010, UK gov introduced new funding system for higher education > allowed universities to charge tuition fees up to £9000 per year

• Max price set on basic food items in Venezuela such as coffee, milk, butter, meat to improve affordability > resulted in black market trade and shortages

• Rent control in San Fran, New York, Paris

Question 16

Government intervention - regulation application

Answer 16

• age limits in bars and clubs
• compulsory warning on smoking packaging
• compulsory covid 19 vaccines
• ban on new petrol and diesel cars from 2035 in UK
• ban on energy drinks for u16

Question 17

State provision application

Answer 17

• state schools in UK
• free school lunches for vulnerable students in UK
• NHS system providing free healthcare

Question 18

Tradable pollution permits application

Answer 18

• The ETS (emissions trading scheme) in EU
• EU countries are set a cap and must reduce pollution or buy permits from firms who have not used their permits fully
• if countries exceed pollution targets - pay a fine

Question 19

Provision of information application

Answer 19

• gov runs gambling addiction awareness campaigns
• UK gov website Gov.UK provides info on all government services i.e. state benefits, housing, labour market, pensions, driving and taxation

Question 20

Government failure application

Answer 20

• black market for cigarettes in UK - £2 billion p year (unintended consequences)
• black market for alcohol in UK - £1.8 billion p year (unintended consequences)
• Waiting times at hospitals or A&E departments (unintended consequences)
• HS2 infrastructure project in UK suffered from gov failure with delays, poor management and underestimated costs (poor information)

Question 21

Government failure application

Answer 21

• black market for cigarettes in UK - £2 billion p year (unintended consequences)
• black market for alcohol in UK - £1.8 billion p year (unintended consequences)
• Waiting times at hospitals or A&E departments (unintended consequences)
• HS2 infrastructure project in UK suffered from gov failure with delays, poor management and underestimated costs (poor information)