Econ AS Paper 1 2019

1 (a) The benefits of specialisation and division of labour are mostly associated with:

(1)

A – Adam Smith

(b) Explain one advantage of the division of labour in car production.                       (3)

The division of labour is where a task is broken down into smaller, specialised tasks, with each worker focusing on one part of the production process. For example, in car production, one worker may only fit the tyres onto the car. This allows workers to become highly skilled at their specific task, which increases productivity and reduces the cost per car.

2 (a) Annotate the diagram to show the change in consumer surplus in the market for

diesel vehicles, following the change in demand caused by the proposed 2025

ban in some city centres.                                                                                                    (2)

 

DIAGRAM

(b) A ban on diesel vehicles in city centres will reduce the demand for diesel fuel.

This is because:                  

C - the goods are complements

 

(c) Define the term ‘demand’.                                                                                            (1)

Demand is the amount of a good or service that consumers are willing and able to buy at a particular price over a given period of time.

3 (a) The most likely cross price elasticity of demand for close substitutes is:          (1)

D - + 2.1

Step 1 – Knowledge:
Total revenue = Price × Quantity

 

Step 2 – Application – calculate new quantity using PED:

• Original price

• Original quantity

• Price increase = 3% →

• Price elasticity of demand

Percentage change in quantity demanded:

ΔQ/Q = PED × ΔP/P = -0.5 × 0.03 = -0.015 –1.5%

New quantity:

Step 3 – Calculate new total revenue:

4 (a) The amount of VAT paid per year from energy bills by an average household in

2016 was:     

A – £53.50

(b) On the diagram below annotate the effect of a rise in VAT on the market for

household energy use.                                                                                                                                (2)

DIAGRAM

(c) Define the term ‘indirect tax’.                                                                                        (1)

An indirect tax is a tax on a good or service that is added to its price, usually paid to the government by the producer or supplier.

a) Calculate the percentage change in quantity demanded for Freddos between

2015 and 2017, ceteris paribus:   

C - –2.5%

(b) Explain one reason why the income elasticity of demand is significant to the

producer of Freddos.                                                                                                                                               (3)

Income elasticity of demand (YED) measures how demand changes when consumer incomes change. For Freddos, which are an inferior good with a negative YED, demand falls as incomes rise. This is significant for the producer because sales revenue may decrease during periods of rising incomes, so the company should plan production accordingly.

6 (a) With reference to Extract A and Figure 2, explain how the health care market in

the UK illustrates the economic problem. (5)

Definition:

• Economic problem = infinite wants vs finite resources.

Application to UK Health Care:

• Infinite wants:

  • Growing medical needs (ageing population, demand for new treatments).

• Finite resources:

  • Limited doctors, nurses, hospital beds.

  • Bed occupancy ≈ 99%.

  • Waiting times increased from 5.7% → 10.7% (Figure 2).

Implications:

• Scarcity forces choices about who to treat and when.

• Opportunity cost: prioritising certain treatments means others are delayed or unavailable.

• Government must make decisions on resource allocation.

(b) Explain how ‘asymmetric information’ (Extract B, line 30) can lead to market failure in health provision. (6)

Definition:

• Asymmetric information = when producers know more than consumers or information is incomplete/imperfect.

Application to Health Care:

• Patients lack full knowledge of:

  • Risk of needing treatment.

  • Necessity or complexity of procedures.

• Doctors have much more medical knowledge and expertise.

Consequences / Market Failure:

• Underconsumption: Patients may avoid necessary care → conditions worsen.

• Overconsumption / Waste: Patients may receive unnecessary treatments → resources wasted.

• Overcharging: Patients unaware of true costs → misallocation of resources.

(c) ‘Public parks are a public good’ (Extract C, line 1). Assess this statement. (10)

Definition / Characteristics:

• Non-excludable: People cannot be prevented from using them.

• Non-rivalrous: One person’s use does not reduce another’s enjoyment.

• Example: Public parks allow free entry and shared use (Extract C).

• Running in a park does not stop others from enjoying it → illustrates non-rivalry.

Limitations / Partial Excludability and Rivalry:

• Some parks charge for specific events (e.g., parkruns).

• Exclusive areas exist (e.g., booked tennis courts, football pitches).

• High user numbers can reduce enjoyment → introduces rivalry.

• Gates or restricted opening times limit access → introduces excludability.

Evaluation:

• Public parks have public good characteristics but are not pure public goods.

• Best described as quasi-public goods due to partial excludability and rivalry.

(d) Calculate the annual revenue raised by charging £12 per GP visit. Assume there

will be 450 million GP visits per year and 90% of these will not be charged. You are

advised to show your working.                                                                                          (4)

Step 1 – Knowledge:
Revenue = Price × Quantity charged

Step 2 – Application – calculate revenue:

• Price per visit = £12

• Total visits = 450 million

• Only 10% of visits are charged (since 90% are not charged)

Charged visits = 450 million x 10% = 45 million visits

Revenue = 45 million x £12 - £540 million

Answer: £540 million

(e) Discuss likely reasons why the prices of treatments in private sector hospitals are

increasing. Draw a supply and demand diagram to support your answer.

(15)

Price Determination:

• Determined by the interaction of supply and demand.

• Recent years have seen rising prices due to shifts in both demand and supply.

Demand-Side Factors (Increase Demand → Higher Prices):

• Ageing population and higher migration → more patients.

• Advances in medical technology → new treatments.

• Long NHS waiting times or lower perceived quality → private care more attractive.

• Social factors: peer pressure, desire for premium services.

Supply-Side Factors (Decrease Supply → Higher Prices):

• Rising wages for doctors and nurses due to shortages.

• Higher administrative and management costs.

• Increasing rents for hospital buildings.

• Investments in medical machinery.

• Reduction in government subsidies or higher taxes.

Analysis – Impact on Prices:

• Rightward shift in demand + leftward shift in supply → higher equilibrium price.

• Magnitude depends on the relative size of demand vs supply shifts.

• Price elasticity of demand: limits price rises if patients can switch back to NHS.

• Supply inelasticity: fixed health infrastructure → can cause significant price increases.

• Other factors (government support, productivity, healthier lifestyles) may reduce upward pressure.

• Evaluation of Price Increases:

  • Magnitude of price rises depends on:

    • Size of demand and supply shifts.

    • Elasticities of demand and supply.

  • Long-term moderation:

    • Improvements in NHS capacity.

    • Government intervention or regulation.

  • Conclusion:

    • Rising demand + constrained supply → main reason private hospital treatment prices are increasing.

(f) Evaluate possible ways the government could intervene to reduce the excess

demand for state-funded health care.                                                                              (20)

1. Knowledge – Define Excess Demand (4 marks)

• Occurs when quantity demanded > quantity supplied at current price.

• In NHS: demand for GP visits, hospital treatments, or elective surgery exceeds available resources.

• Results in long waiting times and limited access.

2. Application – UK Health Care Example (4 marks)

• Hospital bed occupancy ~99%; waiting times increasing.

• Ageing population and rising chronic illness prevalence increase demand.

• Limited number of doctors, nurses, and beds → clear excess demand.

3. Government Interventions (Analysis 6 marks)
A. Increasing supply

• Build hospitals, train more staff, expand bed capacity.

• Shifts supply curve right (S → S1), reduces excess demand and waiting times.

• Price fixed at zero for NHS.

B. Rationing through charges

• Small fees for GP visits/prescriptions reduce unnecessary demand.

• Risk: underconsumption if charges too high.

C. Taxes & subsidies

• Taxes on sugary/high-fat foods reduce diet-related illnesses → lower future demand.

• Subsidies for healthy foods, gyms, preventive care → reduce NHS demand.

D. Regulation & information

• Food regulations (e.g., sugar limits, labeling) encourage healthier behavior.

• Public campaigns (e.g., “5 a day”) educate consumers, reducing illness.

E. Supporting private provision

• Subsidize private treatment or insurance to shift some demand away from NHS.

4. Evaluation – Limitations & Government Failure (6 marks)

• Distorted price signals may cause underconsumption (e.g., charges deter necessary care).

• High administrative costs reduce net welfare gains.

• Information gaps and irrational behavior limit policy effectiveness.

• Time lags (e.g., training doctors) mean excess demand persists short-term.

• Effectiveness depends on size of funding changes and demand/supply elasticities.

Conclusion

• Mix of interventions (increasing supply, influencing behavior, private sector support) is most effective.

• Careful monitoring needed to avoid government failure (net welfare loss, underconsumption, high costs).