Markets and Market Failure · 7136/1
AQA A-level Paper 1, June 2019
All 14 written questions from AQA A-level Paper 1 (June 2019), Markets and Market Failure. Case studies: The market for sand and The British railway system. 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
The market for sand
Extracts: Is the world running out of sand? · The need for international action
Q1
Using the data in Extract A (Figure 1), calculate the percentage change in the price of construction sand between January 2014 and January 2018. Give your answer correct to one decimal place.
TopicPrice determination in a competitive marketDemand & supplyCommodity markets
Q2
Explain how the data in Extract A (Figures 1 and 2) show that expansion in the global sand market is leading to prices of construction sand rising in real terms.
TopicPrice determination in a competitive marketDemand & supplyCommodity markets
Q3
Extract B (line 18) states that the global trade in sand has been ‘made possible by cheaper transportation’.
With the help of a diagram, explain how cheaper transportation and a construction boom in East Asia have led to growth in the market for sand.
With the help of a diagram, explain how cheaper transportation and a construction boom in East Asia have led to growth in the market for sand.
TopicPrice determination in a competitive marketDemand & supplyCommodity markets
Examiner insight
- What to cover
- Cheaper transport lowers costs and raises supply. The construction boom raises demand. Output in the market grows.
- Diagram
- Demand and supply diagram with both curves shifting right; quantity rises clearly.
- Watch out
- State that price may rise or fall, but quantity rises. Explain which shift dominates using the data.
Q4
Extract C (lines 14–15) states that ‘Rising prices will eventually also force builders in developing countries to explore alternatives to sand.’
Use the extracts and your knowledge of economics to assess the view that the increasing scarcity of sand is a problem best solved by market forces, rather than through government intervention.
Use the extracts and your knowledge of economics to assess the view that the increasing scarcity of sand is a problem best solved by market forces, rather than through government intervention.
TopicMarket failure and government interventionGovernment intervention (micro)Scarcity & choice
Examiner insight
- What to cover
- Market forces: rising price rations sand and creates incentives for substitutes and recycling.
- Evaluation
- Intervention: illegal mining, environmental damage, common resource problems. Judge by speed of response, externalities and enforcement.
- Watch out
- Link the scarcity to externalities and the tragedy of the commons for the top level.
Context 2
The British railway system
Extracts: Privatisation of British Rail · A return to Government ownership?
Q5
Using the data in Extract D (Figure 3), calculate the amount of government funding per £ of passenger income in the UK rail industry for the year 2015–16. Give your answer correct to the nearest penny.
TopicMarket structuresCompetition policy & regulation
Q6
Explain how the data in Extract D (Figure 4) show that in the UK, between 2004 and 2017, changes in the demand for rail travel contributed to changes in the price of rail travel.
TopicPrice determination in a competitive marketDemand & supply
Q7
Extract E (lines 10–11) describes the British railway sector as a ‘natural monopoly’, which was split up into ‘no less than 100 pieces’ when it was privatised.
With the help of a diagram, explain why breaking up a natural monopoly in rail may affect long-run average costs.
With the help of a diagram, explain why breaking up a natural monopoly in rail may affect long-run average costs.
TopicProduction, costs and revenueCosts & economies of scaleMonopoly & market powerCompetition policy & regulation
Examiner insight
- What to cover
- A natural monopoly has large economies of scale. Splitting it removes those economies, so long-run average costs rise.
- Diagram
- Natural monopoly diagram with LRAC falling over the whole market demand.
- Watch out
- Show on the diagram why one firm has the lowest average cost.
Q8
Extract F (lines 9–10) suggests that ‘the British public really don't care about who runs the trains; what they care about is reliability, comfort and price.’
Use the extracts and your knowledge of economics to evaluate the case for renationalising railways in the UK.
Use the extracts and your knowledge of economics to evaluate the case for renationalising railways in the UK.
TopicMarket structuresCompetition policy & regulation
Examiner insight
- What to cover
- Case for renationalisation: natural monopoly, public good elements, coordination, lower cost of borrowing.
- Evaluation
- Case against: government failure, lack of profit incentive, cost to taxpayers. Judge by evidence on reliability, fares and investment in the extracts.
- Watch out
- Keep the focus on what the public cares about: reliability, comfort and price.
Q9Essay 1
Explain how rules of thumb and irrationality can affect consumers’ demand for goods and services.
Essay stimulus. For a long time, supermarkets and other commercial firms have understood the benefits of behavioural economic concepts such as choice architecture and framing. The public sector has been slow off the mark, but at last governments are now taking advantage of the opportunities provided by nudging.
TopicIndividual economic decision makingBehavioural economics
Examiner insight
- What to cover
- Rules of thumb (buying the usual brand, choosing the second-cheapest wine) save time but can give poor choices. Irrational behaviour (herding, habit, overconfidence, framing) means demand does not always respond to price as traditional theory predicts.
- Watch out
- Use examples throughout, and say how each one changes demand, for example making it less price elastic.
Q10Essay 1
Using examples to illustrate your answer, assess the usefulness of behavioural economic theory compared to traditional economic policies in helping governments to correct market failures
Essay stimulus. For a long time, supermarkets and other commercial firms have understood the benefits of behavioural economic concepts such as choice architecture and framing. The public sector has been slow off the mark, but at last governments are now taking advantage of the opportunities provided by nudging.
TopicIndividual economic decision makingBehavioural economicsMarket failure (general)
Examiner insight
- What to cover
- Behavioural tools: nudges, defaults, framing. Traditional tools: taxes, subsidies, regulation.
- Diagram
- Market failure diagram for a traditional policy.
- Evaluation
- Judge by cost, effectiveness, long-term impact and whether behaviour change lasts.
- Watch out
- Examples are required. The pension auto-enrolment scheme is a strong one.
Q11Essay 2
Explain the factors a profit-maximising firm will take into account when deciding whether to shut down or to carry on operating, both in the short run and in the long run.
Essay stimulus. Several loss-making retailers including Homebase, House of Fraser and Poundworld have had to decide whether to shut down operations or carry on while making losses. In contrast, the music- streaming firm Spotify was valued at $27 billion in 2018, despite never having made a profit in any year since it was founded. Spotify has been more focused on expanding market share.
TopicProduction, costs and revenueRevenue & profitCosts & economies of scale
Examiner insight
- What to cover
- Short run: stay open if price covers average variable cost. Long run: exit if price is below average total cost.
- Diagram
- Cost curves showing the shut-down point and break-even point.
- Watch out
- The AVC rule is the key mark. Many answers only mention profit.
Q12Essay 2
Discuss the validity of the traditional economic assumption that the main objective of firms is to maximise profits.
Essay stimulus. Several loss-making retailers including Homebase, House of Fraser and Poundworld have had to decide whether to shut down operations or carry on while making losses. In contrast, the music- streaming firm Spotify was valued at $27 billion in 2018, despite never having made a profit in any year since it was founded. Spotify has been more focused on expanding market share.
TopicMarket structuresBusiness objectives & growthRevenue & profit
Examiner insight
- What to cover
- Profit maximisation (MC = MR) is the traditional assumption.
- Diagram
- Diagram showing profit, revenue and sales maximisation outputs.
- Evaluation
- Alternatives: satisficing, divorce of ownership from control, revenue maximisation, social objectives. Judge by firm size and ownership.
- Watch out
- Show why other objectives exist, not only that they exist.
Q13Essay 3
Explain how the impact of a minimum price for a good or service is affected by its price elasticity of demand and its price elasticity of supply.
Essay stimulus. ‘Each time the Government imposes a minimum price or wage, the result is almost always excess supply. What matters is the extent to which this is a problem.’
TopicMarket failure and government interventionPrice controlsPrice elasticity of demandPrice elasticity of supply
Examiner insight
- What to cover
- With inelastic demand and supply, a minimum price causes a small surplus. With elastic demand and supply, the surplus is large.
- Diagram
- Two minimum price diagrams with different elasticities.
- Watch out
- Compare the size of excess supply on both diagrams.
Q14Essay 3
Discuss the view that a national minimum wage is beneficial for an economy.
Essay stimulus. ‘Each time the Government imposes a minimum price or wage, the result is almost always excess supply. What matters is the extent to which this is a problem.’
TopicThe labour marketMinimum wage
Examiner insight
- What to cover
- Benefits: higher pay for low-paid workers, less poverty, higher productivity and demand.
- Diagram
- Minimum wage in a competitive market and in a monopsony market.
- Evaluation
- Costs: unemployment where demand for labour is elastic, higher prices. Judge by the level of the wage relative to median pay.
- Watch out
- The monopsony diagram is the strongest evaluation point.
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.