As October 2020 Flashcards
Which one of the following is the best example of the rationing function of the price mechanism? (1 mark)
D - When there is a shortage of a product, the price will rise and discourage some consumers from buying the product
Explain one advantage of a free market economy compared to a command economy. (2 marks)
- Competitive markets responsive to consumers
- No competition in command economies to ensure firms are efficient
The income elasticity of demand for bus travel is estimated to be -1.5.
This implies that: (1 mark)
D- bus travel is an inferior good
Explain why a firm might try to reduce the price elasticity of demand for its products. (3 marks)
K:
* The lower the PED the less price sensitive the product is
App:
* Example: a product with a PED of -0.1 had a 10% price rise, sale volume would fall by 1% (ceteris paribus)
Ana:
* The lower a product’s price elasticity, the easier it is to boost revenue by increasing the price
The total amount spent by the government on subsidies is represented by the area: (1 mark)
C
Explain an opportunity cost to the government of granting subsidies to energy suppliers to install loft insulation. (3 marks)
K:
* Opportunity cost - The next best alternative foregone
App:
* Government spending (e.g. schools/hospitals)
Ana:
* Government subsidies carry an opportunity cost and in the long run there are better ways of saving energy
The government’s tax revenue is shown by the area: (1 mark)
C
Using an example, explain why the government imposes specific taxes on many goods and services. (3 marks)
K:
* Specific tax - set amount per unit of the product sold
App:
* Alcohol and cigarettes
Ana:
* Internalise the externalities from the consumption of products causing external costs
Define the term ‘government failure’. (1 mark)
This occurs when government intervention in the economy causes a net welfare loss/decline in economic welfare
Explain one likely microeconomic reason why the government is using ‘taxpayers’ money to fund HS2. (2 marks)
- Positive externalities resulting from people using railways rather than roads
The shift of the demand curve from D1 to D2 is most likely to result from a: (1 mark)
A
Explain why ‘the price elasticity of demand for higher education is about -0.5’ may be of relevance to English universities.
Refer to Extract A in your answer (5 marks)
K:
* PED - The responsiveness of quantity demanded to a change in price
App:
* Fees (e.g. £9,250/PED of -0.5)
* 825% increase in fees
Ana:
* PED is inelastic
* Government spending and universities know that students are prepared to accept higher fees
Assess the likely impact of these drop-out rates on the allocation of resources within an economy. (10 marks)
KAA
- The statement is concerning because people that are poor are less likely to apply to universities in the first place (Extract A, Figure 3), so when they go and drop out, failing to maximise the use of scarce resources
- Universities are trying to increase access but failing to keep poor students. This means that graduates are from wealthier families and poor students are leaving because of high level of debt
- Would this happen if England had low/no tuition fees?
- PPF diagram
- Opportunity cost; government and universities spending money/resources spent elsewhere
Assess the likely impact of these drop-out rates on the allocation of resources within an economy. (10 marks)
Ev
- Extract A: ‘students from all backgrounds are more likely to go to university than ever before’
- Poor students continue to attend university and schemes exist to support them
- Are tuition fees important for drop-out rates?
With reference to Extract A, explain one likely private benefit to students and one likely external benefit of higher education. (6 marks)
K/U
* External benefit: tax revenue
* Private benefit: higher earnings
App:
* ‘the government will benefit greatly from additional tax revenues’
* ‘the rest will be in the form of their extra spending power’
Ana:
* Higher productivity enable firms to achieve lower costs and, therefore, lower prices
