Econ AS Paper 1 2018

1 (a) Which one of the following best describes the two statements above?            (1)

C Positive Normative

(b) Cuba’s population is estimated to be 11 million. With reference to Statement 1

above, calculate the estimated number of doctors in Cuba. You are advised to

show your working.                                                                                                              (2)

No. of doctors = Population / people per doctor = 11,000,000/155

= 70,967.74 = 70,968

(c) Define the term ‘command economy’.                                                                                    (1)

An economic system in which the govt. centrally plans and controls economic activity, allocating resources, production, and distribution, with little or no role for the private sector.

2 In February 2016 the Daily Mail newspaper increased its price from 60p to 65p.

By August 2016 its sales had fallen by 5.41%.

(a) Ceteris paribus, calculate the price elasticity of demand for the Daily Mail

newspaper over this period. You are advised to show your working.                         (2)

Step 1: Calculate % change in price

% Change in Price = Change in price / Original price X 100

= 65-60/60 ×100 = 5/60 ×100 = 8.33%

PED = Change in quantity demanded / Change in Price = -5.41/ 8.33 = -0.65.

(b) Which one of the following is most likely to be a determinant of price elasticity of

demand for the Daily Mail newspaper?                                                                            (1)

A – Availability of rival newspapers

(c) Define the term ‘ceteris paribus’.                                                                                                         (1)

“all other things being equal”, or that all other factors remain unchanged.

3 (a) Using the data above, which one of the following is a function of the price

mechanism in the market for private dental care?                                                         (1)

A - Acting as a signal to dentists when deciding whether to provide

private dental treatment

(b) Explain one possible reason why the state provides NHS dental treatment.       (2)

To reduce inequality. Some people cannot afford private dental care, so state provision ensures everyone can access treatment regardless of income, helping to prevent a misallocation of resources and protect public health.

(c) Define the term ‘asymmetric information’.                                                                  (1)

Occurs when 1 party in a transaction has more or better information than the other; e.g. when providers know more about a product or service than consumers.

4 (a) Which one of the following is the most accurate explanation of the term ‘median

household income’?

B - The middle household income after placing all household incomes in numerical order

(b) Using the data provided, explain whether bus travel is a normal good or an

inferior good.                                                                                                                         (3)

Given:

• Median household income rises from £24,200 → £25,700

• Demand for bus travel falls by 3%

Step 1: Calculate % change in income

Change in income = 25,700 - 24,200 / 24,200 × 100 = 1,500/ 24,200 ×100 =6.2%

Step 2: Calculate YED (income elasticity of demand)

YED = Change in Quantity demanded / Change in income = -3/ 6.2 = -0.48

Step 3: Interpretation

• YED is negative → demand falls as income rises

• This is the definition of an inferior good

Conclusion:

Bus travel is an inferior good because as household incomes increased by 6.2%, demand for bus travel fell by 3%, giving a negative YED of approximately -0.48.

5 (a) Define the term ‘consumer surplus’.                                                                        (1)

The difference between what consumers are willing and able to pay for a good or service and what they actually pay, representing the extra welfare or utility they gain from consumption.

(b) The diagram shows the production possibility frontier for the BBC. Assuming

the BBC is at point W, annotate the diagram to show the opportunity cost of

providing more educational programmes.

(2)

DIAGRAM

(c) BBC programmes are often referred to as being public goods. This is because: (1)

(1)

C - the consumption of these programmes is non-rivalrous

6 (a) With reference to Figure 1 and Extract A, explain why the price of uranium has

‘fallen to a 13-year low’ (Extract A, lines 2 and 3) in 2016. Include a supply and

demand diagram in your answer.                                                                                                  (5

Knowledge

• A fall in price occurs when supply increases or demand decreases.

• Shown on a supply and demand diagram by a rightward shift of supply or a leftward shift of demand, lowering equilibrium price.

Application

• Increased supply: Kazakhstan greatly expanded uranium production after 2007, creating a surplus of around 7 million kg. High stockpiles led some firms to stop production, indicating oversupply.

• Decreased demand: The Fukushima disaster (2011) reduced confidence in nuclear power. Countries such as Japan shut nuclear plants, while safety concerns and high waste storage costs delayed new projects.

Analysis

• Supply shifts right and demand shifts left, creating excess supply at the original price.

• This surplus pushes the market price down.

• As a result, uranium prices fell to a 13-year low in 2016.

(b) With reference to Extract A and your own knowledge, assess whether the supply

of uranium is likely to be price elastic or price inelastic.                                    (10)

Knowledge

• Price elasticity of supply (PES) measures how responsive quantity supplied is to a change in price.

• Inelastic supply: quantity supplied changes little when price changes (steep supply curve).

• Elastic supply: quantity supplied changes significantly when price changes (flatter supply curve).

Application

• Time lags: New uranium mines (e.g. Spain, 2.2 million kg/year) take over a decade to develop.

• Extraction difficulty: Uranium is common, but economically viable concentrations are hard to locate.

• Regulation: Strict controls over radioactive waste slow expansion of supply.

Analysis

• Uranium supply is price inelastic in the short run because output cannot increase quickly even if prices rise.

• Factor immobility: Mines are location-specific and cannot be easily repurposed.

• A steep supply curve shows that price rises lead to only small increases in quantity supplied.

Evaluation

• Supply is more elastic in the long run:

  • Stockpiles can be released in response to higher prices.

  • Uranium is relatively abundant, allowing new mines to be developed.

  • The Spain mine opening demonstrates increased long-run responsiveness.

• Overall: Uranium supply is highly inelastic in the short run, but becomes more elastic over time.

(c) With reference to Extract B, explain two likely reasons why many consumers of

energy have not switched to suppliers offering lower prices.                                       (6)

Reason 1: Consumer inertia

• Knowledge (1 mark): Many consumers do not switch suppliers due to inertia—they lack the motivation or time to change.

• Application (1 mark): Extract B states that four million households are still on the most expensive energy rates, despite rising energy bills.

• Analysis (1 mark): Inertia means consumers continue paying higher prices even when cheaper alternatives exist, leading to persistent overpayment for energy.

Reason 2: Information gaps / computational problems

• Knowledge (1 mark): Consumers may face difficulty comparing tariffs, or may not know which supplier offers the lowest price.

• Application (1 mark): Extract B notes that energy prices have risen by 158% in the last 15 years, yet many households remain on expensive rates, suggesting some do not have clear information or find switching complicated.

• Analysis (1 mark): The complexity of energy tariffs and lack of clear information discourages consumers from switching, so they remain with their current supplier even when cheaper options are available.

(d) Using examples from the information provided, explain what is meant by

renewable and non-renewable energy.                                                                            (4)

Knowledge (2 marks):

·       Renewable energy comes from resources that can be naturally replenished or have an essentially infinite supply, e.g., sunlight or wind.

·       Non-renewable energy comes from resources that are finite and cannot be replaced once used, e.g., coal, oil, or uranium.

Application (2 marks):

·       Examples from the extract: nuclear energy (uranium) and coal are non-renewable, as the resources are limited.

·       Solar power and wind power are renewable, because the sun and wind are naturally replenished and will not run out.

The UK Government is considering introducing a maximum price for energy.

(e) Discuss the likely microeconomic effects of this decision on energy producers and consumers. Include a supply and demand diagram in your answer.    (15)

Knowledge (3 marks):

• A maximum price (price ceiling) is a legally set upper limit on the price a good or service can be sold for.

• Its aim is typically to make essential goods more affordable for consumers.

• Standard microeconomic theory shows that a price ceiling below the market equilibrium leads to shortages, as quantity demanded exceeds quantity supplied.

• Diagram: Draw a standard supply and demand diagram with the maximum price below equilibrium, showing excess demand (shortage).

Application (3 marks):

• Consumers:

  • Energy prices are made more affordable, helping households who are currently paying high bills (Extract B notes energy prices have risen 158% over 15 years).

  • The quantity of energy demanded increases due to the lower price.

• Producers:

  • Supply contracts because selling at a lower price reduces profit incentives.

  • Some power stations may be turned off, leading to reduced energy production and potential shortages.

  • Producer revenue and surplus fall, as they cannot charge higher market prices.

Analysis (3 marks):

• Consumers:

  • Short-term gain from lower prices and higher affordability.

  • Potential inefficient overuse of energy due to artificially low prices.

  • Risk of long-term shortages, as supply cannot meet increased demand.

• Producers:

  • Loss of revenue may reduce investment in new energy infrastructure (e.g., nuclear or renewable projects).

  • Long-term supply could decline further if producers exit the market or cut back production.

Evaluation (6 marks):

• Effectiveness depends on the level of the maximum price:

  • If set just below equilibrium, shortages may be small.

  • If set well below equilibrium, shortages will be severe, leading to black markets or rationing.

• Elasticities:

  • If supply is inelastic (difficult to increase energy production in the short run), a maximum price may cause only small increases in quantity supplied, worsening shortages.

  • If demand is inelastic, quantity demanded will not increase much, limiting shortages.

• Costs to consumers:

  • Short-term: lower prices, increased affordability, some increase in consumer surplus.

  • Long-term: potential loss of consumer surplus if shortages occur, rationing, or higher future prices due to reduced investment.

• Impact on producers:

  • Lower prices reduce revenue and profit margins.

  • May reduce long-term investment in energy generation.

  • Could lead to government intervention to subsidize producers.

• Government failure / unintended consequences:

  • Price signals distorted: producers underinvest, consumers overconsume.

  • Could lead to black markets, misallocation of resources, or deterioration in quality of service.

(g) Evaluate ways in which government intervention could be used to reduce carbon

emissions. Use at least one appropriate diagram in your answer.                  (20)

Knowledge (4 marks):

• Governments intervene to correct market failure, particularly negative externalities like carbon emissions, which are not reflected in market prices.

• Carbon emissions contribute to climate change, creating costs for society (health, environmental damage) that producers/consumers do not pay.

• By intervening, the government can align private costs with social costs, promoting a more efficient allocation of resources.

• Diagram: Standard MSC > MPC diagram, showing socially optimal output (Q*) versus market equilibrium (Qmarket) with overproduction of carbon emissions.

Application (4 marks):

• Indirect taxation: A carbon tax on coal or gas power stations or workplace parking incentivizes firms and individuals to reduce emissions, shifting supply left (or raising costs for polluters).

• Subsidies: Government support for renewable energy (solar, wind, nuclear), cycling, and public transport encourages low-carbon alternatives, effectively shifting supply right for cleaner energy.

• Regulation: Policies like shutting down coal-fired stations by 2025 or low emission zones directly reduce carbon output.

• Tradable pollution permits: EU ETS caps emissions and allows trading, giving firms a financial incentive to reduce emissions.

• Information provision / energy efficiency programs: Educate consumers about carbon footprints and promote reduced energy consumption.

Analysis (6 marks):

• Indirect taxes increase the price of carbon-intensive goods, reducing demand, but may disproportionately affect low-income households.

• Subsidies lower the cost of clean energy, promoting adoption, but may lead to government budget pressures or over-reliance on intermittent sources like wind and solar.

• Regulation ensures emissions fall, but may be costly to enforce and reduce market flexibility.

• Tradable permits create market incentives but require accurate monitoring and enforcement; prices can be volatile.

• Information provision reduces information gaps, but its effect depends on consumer behavior (e.g., inertia or lack of motivation).

• Diagram interpretation: Taxes shift the MPC curve upward, reducing quantity from Qmarket to Qtax; subsidies shift MSC or supply curves to promote cleaner production.

Evaluation (6 marks):

• Effectiveness depends on elasticities: if demand for energy is inelastic, taxes may reduce emissions less than expected.

• Government failure risks:

  • Price distortions, unintended shortages, administrative costs, or ineffective subsidy allocation.

  • Non-carbon energy sources may have external costs (e.g., nuclear accidents, environmental impacts of renewables).

  • Policies may not address global emissions if other countries do not act.

• Long-term vs short-term: Market-based solutions (taxes, permits) provide continuous incentives; regulation and subsidies may require ongoing government intervention.

• Overall, a combination of measures (taxes, subsidies, regulation, information) is likely more effective than a single policy, balancing environmental goals, economic costs, and feasibility.