Markets and Market Failure · 7136/1
AQA A-level Paper 1, June 2018
All 14 written questions from AQA A-level Paper 1 (June 2018), Markets and Market Failure. Case studies: Competition in UK Banking and Automation and the Labour Market. Each question shows its marks and topic, with an examiner insight on 10, and opens the question paper and mark scheme at the right page.
Context 1
Competition in UK Banking
Extracts: Customers switching personal bank accounts in 2016 · Gradual change in the UK banking market · The rise of challenger banks
Q1
Using Extract A, calculate the ratio of customers gained to customers lost by Nationwide. Give your answer correct to one decimal place.
TopicMarket structuresMonopoly & market power
Q2
Explain how the data in Extract A show that the market power of the Big Four banks is weakening against competition from smaller rivals.
TopicMarket structuresMonopoly & market power
Q3
Extract C (lines 10–11) states that ‘There is ample opportunity for new players to enter the sector.’
With the help of a diagram, explain how the lowering of barriers to entry in the banking market might lead to lower prices and a situation in which banks make normal profit.
With the help of a diagram, explain how the lowering of barriers to entry in the banking market might lead to lower prices and a situation in which banks make normal profit.
TopicProduction, costs and revenueRevenue & profitContestability & barriers
Examiner insight
- What to cover
- Lower barriers let new banks enter. Supply rises, price falls, supernormal profit is competed away to normal profit.
- Diagram
- Short run to long run move in a competitive or monopolistically competitive diagram.
- Watch out
- End clearly at normal profit where AR = AC.
Q4
Extract B (lines 4–6) states that ‘banks do not feel enough pressure to compete on price or quality, leading some to call for the Big Four to be split into a number of smaller banks.’
Use the extracts and your knowledge of economics to assess the view that the government should intervene further in the banking sector to promote greater competition.
Use the extracts and your knowledge of economics to assess the view that the government should intervene further in the banking sector to promote greater competition.
TopicMarket structuresCompetition policy & regulationMonopoly & market power
Examiner insight
- What to cover
- Explain the problems of the Big Four: market power, weak switching, higher prices. Discuss options: break-ups, switching schemes, open banking, lower entry barriers.
- Evaluation
- Weigh economies of scale and financial stability against gains from competition. Consider regulatory cost and government failure.
- Watch out
- Use data in the extracts on switching rates. Answers without data lose application marks.
Context 2
Automation and the Labour Market
Extracts: The threat of automation to selected UK industries · The rise of the robots · Policy responses
Q5
Using Extract D, calculate the number of transportation and storage jobs at high risk of automation, as a percentage of those who are at high risk across all industries. Give your answer to two decimal places.
TopicThe labour marketLabour demand & supplyTechnological change
Q6
Explain how the data in Extract D show that workers employed in routine, repetitive work are at greater risk from automation.
TopicThe labour marketLabour demand & supplyTechnological change
Q7
Extract E (lines 4–5) claims that workers in the 18th century saw wages rise in line with productivity.
With the help of a diagram, explain how advances in modern technology are likely to lead to rising wages in some industries.
With the help of a diagram, explain how advances in modern technology are likely to lead to rising wages in some industries.
TopicThe labour marketLabour demand & supplyTechnological change
Examiner insight
- What to cover
- Technology raises labour productivity, so MRP rises and labour demand shifts right. Wages rise where workers are complements to technology.
- Diagram
- Labour market diagram with demand shifting right.
- Watch out
- Say which industries: those where technology complements labour, not replaces it.
Q8
Extract E (lines 14–16) states that ‘The market economy is not going to create the jobs by itself for those workers who are most affected by the change.’
Extract F (lines 4–5) states that ‘taxing productivity-enhancing tools like robots or machines makes no economic sense.’
Use the extracts and your own knowledge of economics to evaluate whether governments should allow markets to respond freely to the opportunities and challenges presented by technological progress, without any state intervention.
Extract F (lines 4–5) states that ‘taxing productivity-enhancing tools like robots or machines makes no economic sense.’
Use the extracts and your own knowledge of economics to evaluate whether governments should allow markets to respond freely to the opportunities and challenges presented by technological progress, without any state intervention.
TopicThe labour marketLabour demand & supplyTechnological change
Examiner insight
- What to cover
- Free-market view: markets reallocate labour, create new jobs, and fund innovation.
- Evaluation
- Case for intervention: structural unemployment, inequality, retraining needs, occupational immobility. Judge by speed of adjustment and cost.
- Watch out
- The question says "without any state intervention". An absolute view is easy to evaluate.
Q9Essay 1
Explain why the use of petrol and diesel cars may be a source of market failure.
Essay stimulus. According to Public Health England, poor air quality is the largest environmental risk to public health in the UK. In particular, diesel cars are estimated to be responsible for 40 000 premature deaths each year. In response, the Government announced in 2017 that it would ban the sale of new petrol and diesel cars by 2040.
TopicMarket failure and government interventionExternalitiesMarket failure (general)
Examiner insight
- What to cover
- Cars cause negative externalities (pollution, congestion, carbon) and drivers lack full information, so the market over-consumes car use.
- Diagram
- Negative externality in consumption diagram.
- Watch out
- Explain why the market fails, not only that pollution is bad.
Q10Essay 1
Assess the view that regulation is a better policy for dealing with the problem of air pollution than the allocation of property rights or taxation.
Essay stimulus. According to Public Health England, poor air quality is the largest environmental risk to public health in the UK. In particular, diesel cars are estimated to be responsible for 40 000 premature deaths each year. In response, the Government announced in 2017 that it would ban the sale of new petrol and diesel cars by 2040.
TopicMarket failure and government interventionExternalitiesGovernment intervention (micro)
Examiner insight
- What to cover
- Compare regulation (limits, bans), taxation (internalises cost) and property rights (tradable permits).
- Diagram
- Tax on a negative externality diagram, or permit market.
- Evaluation
- Judge by information, enforcement cost, flexibility and incentive to innovate.
- Watch out
- The question lists three policies. You must weigh regulation against both others.
Q11Essay 2
Explain how the Lorenz curve and Gini coefficient may be used to illustrate increasing income inequality in a country.
Essay stimulus. The Resolution Foundation estimates that 1% of adults, about 488 000 people, own 14% of the UK’s assets – worth about £11 trillion. At the other end of the scale, 15% of adults, about 7.3 million people, either own no assets at all, or are in debt. Meanwhile, income is also unequally distributed, but not to the same extent as wealth.
TopicDistribution of income and wealthInequality & poverty
Examiner insight
- What to cover
- The Lorenz curve moves further from the line of equality as inequality rises. The Gini coefficient is the area ratio and rises towards 1.
- Diagram
- Lorenz curve with two years on one diagram.
- Watch out
- Define the Gini coefficient correctly (A divided by A + B).
Q12Essay 2
Assess the view that, in the UK, the consequences of wealth inequality are more damaging than the consequences of income inequality.
Essay stimulus. The Resolution Foundation estimates that 1% of adults, about 488 000 people, own 14% of the UK’s assets – worth about £11 trillion. At the other end of the scale, 15% of adults, about 7.3 million people, either own no assets at all, or are in debt. Meanwhile, income is also unequally distributed, but not to the same extent as wealth.
TopicDistribution of income and wealthInequality & poverty
Examiner insight
- What to cover
- Wealth inequality: inheritance, housing, lower mobility, political influence. Income inequality: incentives, poverty, health.
- Evaluation
- Judge by how the two are linked, how persistent each is, and how easily policy can reduce each.
- Watch out
- Keep income (a flow) and wealth (a stock) separate. Mixing them costs marks.
Q13Essay 3
Explain the role of profit in a market economy.
Essay stimulus. In the United States, corporate profits since 2010 have averaged 9% of GDP, compared to 5% in the 1990s. This is causing concern that the US economy is increasingly dominated by companies with monopoly power.
TopicProduction, costs and revenueRevenue & profitEconomic systems
Examiner insight
- What to cover
- Profit plays three roles. It signals where consumers want resources to go, it gives firms an incentive to supply and innovate, and it is a source of finance for investment. Losses signal that resources should leave an industry.
- Diagram
- A demand and supply diagram showing supernormal profit attracting new entry is useful.
- Watch out
- Link profit to the signalling, incentive and rationing functions of the price mechanism.
Q14Essay 3
Evaluate the view that a firm making low profits must be inefficiently managed.
Essay stimulus. In the United States, corporate profits since 2010 have averaged 9% of GDP, compared to 5% in the 1990s. This is causing concern that the US economy is increasingly dominated by companies with monopoly power.
TopicProduction, costs and revenueRevenue & profitProductivity & efficiency
Examiner insight
- What to cover
- Low profit can result from poor management (X-inefficiency, high costs).
- Evaluation
- Other causes: strong competition, profit not the objective (satisficing, sales maximisation), recession, heavy investment. Judge by market structure and time period.
- Watch out
- Use theory of firms' objectives. Answers that just list causes of low profit stay mid-level.
Question text is quoted from the question papers, © AQA, for students’ private study. Open the official papers and mark schemes from the links on each question. Examiner insights are written with AI assistance and moderated by Finn.