Markets and Market Failure · 7136/1
AQA A-level Paper 1, November 2021
All 14 written questions from AQA A-level Paper 1 (November 2021), Markets and Market Failure. Case studies: The pharmaceutical industry and The ethnic pay gap. 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.
Summer exams were cancelled, so this paper was sat in the autumn series. The paper itself is headed June.
Context 1
The pharmaceutical industry
Extracts: Rising prices in the global pharmaceutical market · Is the market for pharmaceuticals working well?
Q1
Using the data in Extract A (Figure 1), calculate the mean amount of profit that pharmaceutical companies would have made on a new drug in 2019, given that the average development cost was $2.6bn. Give your answer to the nearest million dollars.
TopicMarket structuresMonopoly & market power
Q2
Explain how the data in Extract A (Figure 2) show that greater competition leads to lower prices in the market for generic drugs.
TopicMarket structuresMonopoly & market powerOligopoly
Q3
Extract B (lines 9–10) states: ‘After the monopoly’s patent expires, other companies can manufacture and market the same drug under its generic name, usually at a lower price.’
With the help of a diagram, explain why prices of pharmaceutical drugs supplied by a monopoly are likely to be higher than in markets which are more competitive.
With the help of a diagram, explain why prices of pharmaceutical drugs supplied by a monopoly are likely to be higher than in markets which are more competitive.
TopicMarket structuresMonopoly & market power
Examiner insight
- What to cover
- A monopoly faces the market demand curve and sets output where MC = MR. Price is above MC, output is lower and supernormal profit persists because patents block entry. In a competitive market, price would be closer to MC.
- Diagram
- Monopoly diagram against the competitive outcome (P = MC), showing higher price, lower output and the deadweight loss.
- Watch out
- Name patents as the barrier to entry. Once the patent ends, generic competition brings prices down.
Q4
Extract C (lines 1–3) states: ‘The market for most generic drugs is oligopolistic, with just two or three manufacturers making each product. This enables significant economies of scale within firms, but also presents the risk of consumer interests being harmed.’
Using the extracts and your knowledge of economics, assess the view that the market structure of the pharmaceutical industry is damaging for consumers.
Using the extracts and your knowledge of economics, assess the view that the market structure of the pharmaceutical industry is damaging for consumers.
TopicMarket structuresOligopoly
Examiner insight
- What to cover
- Damaging: monopoly pricing under patents, oligopoly in generics with few firms, risk of collusion, high prices for health systems.
- Diagram
- Monopoly or kinked demand diagram.
- Evaluation
- Benefits: patents fund research and new drugs, economies of scale, regulation of prices by health systems, generic entry after patents expire. Judge by stage of the drug life cycle and strength of regulation.
- Watch out
- Use the data on price rises and generic drug markets in the extracts.
Context 2
The ethnic pay gap
Extracts: The Ethnic Pay Gap · Tackling the ethnic pay gap
Q5
Using the data in Extract D (Figure 3), calculate how much a worker of Bangladeshi ethnicity earned on average in 2018, given that a White British worker earned £28 677.
Give your answer to the nearest pound.
Give your answer to the nearest pound.
TopicThe labour marketDiscrimination & pay gaps
Q6
Explain how the data in Extract D (Figure 4) show that the ethnic pay gap is more significant for older ethnic minority employees.
TopicThe labour marketDiscrimination & pay gaps
Q7
Extract F (lines 18–19) states: the Government ‘could also take steps to recognise foreign qualifications, thus removing obstacles for well-qualified foreign-born workers.’
With the help of a diagram, explain how UK firms not recognising foreign qualifications may lead to some ethnic groups receiving lower pay.
With the help of a diagram, explain how UK firms not recognising foreign qualifications may lead to some ethnic groups receiving lower pay.
TopicThe labour marketDiscrimination & pay gaps
Examiner insight
- What to cover
- Not recognising qualifications lowers productivity as seen by firms, so demand for those workers falls, or they work in lower-paid jobs.
- Diagram
- Two labour markets with different wages.
- Watch out
- Link the diagram to the occupational choice of those workers.
Q8
Extract E (lines 3–4) states: ‘significant pay gaps remain, even when education and occupation are taken into account, particularly for those born outside the UK.’
Using the extracts and your knowledge of economics, evaluate possible government policies to reduce the ethnic pay gap.
Using the extracts and your knowledge of economics, evaluate possible government policies to reduce the ethnic pay gap.
TopicThe labour marketDiscrimination & pay gaps
Examiner insight
- What to cover
- Match policies to causes. Discrimination: equal pay law and enforcement, pay gap reporting. Skills and qualifications: recognition of foreign qualifications, training. Occupational segregation: careers advice, mentoring. Regional factors: regional policy.
- Evaluation
- Judge by cause (discrimination or productivity differences), cost, enforcement and time lag. Use the extract that gaps remain after education and occupation are accounted for.
- Watch out
- A list of policies with no link to a cause stays in the middle levels.
Q9Essay 1
Explain how perfect competition should lead to outcomes which are both productively and allocatively efficient.
Essay stimulus. Price comparison websites were used to purchase 53% of car insurance policies in 2017, improving competition and reducing prices for consumers. In other sectors, dominant firms such as Amazon have used innovation to capture market share. In the UK, 70% of online consumers say that Amazon is the first online retailer they visit when buying goods.
TopicMarket structuresPerfect competition
Examiner insight
- What to cover
- In long-run equilibrium, firms make normal profit. Price equals MC, so the value consumers place on the last unit equals its cost (allocative efficiency). Output is at the lowest point of average cost (productive efficiency).
- Diagram
- Firm and industry diagrams in long-run equilibrium, with P = MC = minimum AC.
- Watch out
- Explain why entry and exit drive the firm to the bottom of the AC curve.
Q10Essay 1
Evaluate the view that technological change tends to bring industries closer to the market structure of perfect competition.
Essay stimulus. Price comparison websites were used to purchase 53% of car insurance policies in 2017, improving competition and reducing prices for consumers. In other sectors, dominant firms such as Amazon have used innovation to capture market share. In the UK, 70% of online consumers say that Amazon is the first online retailer they visit when buying goods.
TopicMarket structuresPerfect competitionTechnological change
Examiner insight
- What to cover
- Technology lowers entry barriers (online selling, cheaper equipment), improves price information and increases the number of sellers, so markets become more competitive.
- Evaluation
- Technology can also concentrate markets: network effects, economies of scale, data advantages and patents (Amazon, Google). Judge by industry, with named examples.
- Watch out
- Use named examples from both sides. The best answers say when each effect is stronger.
Q11Essay 2
Explain how the concept of cross elasticity of demand can be used to understand the relationship between markets.
Essay stimulus. Vaping, the use of e-cigarettes, is argued by many UK health experts to be a much less harmful substitute than smoking tobacco cigarettes. E-cigarettes contain fewer harmful chemicals such as tar, but they still contain addictive nicotine. The industry has been attacked for promoting sales amongst teenagers. This has led to San Francisco banning the sale of e-cigarettes.
TopicPrice determination in a competitive marketCross elasticity
Examiner insight
- What to cover
- XED measures how demand for one good responds to a change in the price of another. Positive values mean substitutes, negative values mean complements, and the size shows how strong the link is. Firms use it for pricing, product strategy and competition analysis.
- Watch out
- Give numerical examples and real pairs of goods. Explain how firms and regulators use XED.
Q12Essay 2
Discuss the view that individual economic agents will always act as rational decision makers so as to maximise their utility.
Essay stimulus. Vaping, the use of e-cigarettes, is argued by many UK health experts to be a much less harmful substitute than smoking tobacco cigarettes. E-cigarettes contain fewer harmful chemicals such as tar, but they still contain addictive nicotine. The industry has been attacked for promoting sales amongst teenagers. This has led to San Francisco banning the sale of e-cigarettes.
TopicIndividual economic decision makingBehavioural economicsUtility
Examiner insight
- What to cover
- Traditional theory assumes consumers have full information and maximise utility.
- Evaluation
- Behavioural economics shows bounded rationality, bounded self-control, biases (anchoring, availability), social norms and altruism. Agents can still act rationally for large, repeated decisions. Judge how far and when.
- Watch out
- "Always" invites a clear counter-argument with examples.
Q13Essay 3
Explain how a firm may benefit from both internal and external economies of scale.
Essay stimulus. Aston Martin, the luxury car manufacturer, became a publicly listed company on the London Stock Exchange in October 2018, being valued at £3.89bn. The company had hoped to expand into new markets, enabling it to exploit economies of scale. However, following poor sales and weak profits, the company had lost 75% of its value by February 2020.
TopicProduction, costs and revenueCosts & economies of scale
Examiner insight
- What to cover
- Internal economies: technical, purchasing, financial, managerial. External economies: skilled labour, infrastructure, suppliers.
- Diagram
- LRAC curve showing economies of scale, and a shift down for external economies.
- Watch out
- External economies shift the whole LRAC curve down, not along it.
Q14Essay 3
Discuss how the divorce of ownership from control may affect both the conduct and performance of firms.
Essay stimulus. Aston Martin, the luxury car manufacturer, became a publicly listed company on the London Stock Exchange in October 2018, being valued at £3.89bn. The company had hoped to expand into new markets, enabling it to exploit economies of scale. However, following poor sales and weak profits, the company had lost 75% of its value by February 2020.
TopicMarket structuresBusiness objectives & growth
Examiner insight
- What to cover
- Owners want profit; managers may pursue sales, growth or their own benefits.
- Diagram
- Diagram comparing profit and revenue maximisation.
- Evaluation
- Principal-agent problem. Judge by firm type and incentives for managers.
- Watch out
- Cover both conduct and performance.
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.