Paper 3: Microeconomics and Macroeconomics · 9EC0/03
Edexcel A A-level Paper 3, June 2018
All 10 written questions from Edexcel A A-level Paper 3 (June 2018), Microeconomics and Macroeconomics. Case studies: Branded coffee shops and World coal prices, 2006–2016, US dollars per tonne. Each question shows its marks and topic, with an examiner insight on 9, and opens the question paper and mark scheme at the right page.
Section A
Case study
Branded coffee shops
Extracts: A: Starbucks in Britain – a loss-making business? · B: Tax on disposable coffee cups? · C: German city of Freiburg takes action on cutting the use of disposable coffee cups
In the extracts: Starbucks, Freiburg, Britain, London, Coffee, German, China, Caff, Nero, Manger Morrisons Starbucks
Q1(a)
With reference to Figure 1, briefly explain the market structure that best describes the UK branded coffee shop market.
Mark splitKnowledge 2Application 2Analysis 1
Q1(b)
With reference to Figure 3 and other information provided, discuss the price and non-price strategies that Starbucks may use to increase profitability.
Mark splitKnowledge 2Application 2Analysis 4Evaluation 4
Examiner insight
- What to cover
- Price strategies include price discrimination and loyalty offers. Non-price includes branding, product differentiation, store openings, app rewards and quality. Link each to higher revenue or a less elastic demand curve for Starbucks.
- Diagram
- Monopolistic competition or oligopoly diagram with AR, MR, AC and MC, showing demand becoming more price inelastic; label the profit area.
- Evaluation
- Weigh advertising costs, rival retaliation in this oligopoly and market saturation. Depends on price elasticity of demand and brand strength. Conclude which strategy raises profit most.
- Watch out
- Listing marketing tactics with no link to revenue, costs and profit.
Q1(c)
Examine the advantages of using an indirect tax as a means of reducing the use of disposable coffee cups.
Mark splitKnowledge 2Application 2Analysis 2Evaluation 2
Examiner insight
- What to cover
- The tax internalises the external cost of disposable cup waste, raising price and cutting quantity towards the social optimum. It also raises revenue that can fund recycling or reusable cup schemes.
- Diagram
- Negative externality with an indirect tax: supply shifting up from MPC towards MSC, the social optimum output and the tax revenue area labelled.
- Evaluation
- Depends on price elasticity of demand for takeaway coffee, since inelastic demand cuts use only slightly. Setting the tax at the right level is difficult.
- Watch out
- Spending most of the answer on disadvantages when the question asks only for advantages.
Q1(d)
Evaluate the microeconomic and macroeconomic factors that may influence Starbucks’ decision whether to expand in a particular country.
Mark splitKnowledge 4Application 4Analysis 8Evaluation 9
Examiner insight
- What to cover
- Cover both sides. Micro: local demand, tastes, rivals, wage and rent costs, and economies of scale. Macro: growth, incomes, exchange rates, inflation, corporation tax and political stability in the target country.
- Diagram
- Cost curve diagram showing economies of scale lowering long run average cost, plus AD/AS or an exchange rate diagram for macro conditions.
- Evaluation
- Weigh which factors dominate and over what time period, the risk and opportunity cost of the capital, and possible diseconomies of scale. Judge, covering micro and macro.
- Watch out
- Listing country facts without linking them to Starbucks expected costs, revenues and profit.
Q1(e)
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of increased UK demand for coffee at branded coffee shops.
Mark splitKnowledge 4Application 4Analysis 8Evaluation 9
TopicHow markets work
Examiner insight
- What to cover
- Cover both sides. Micro: demand for branded coffee shifts right, raising price, output, profit and derived demand for labour and beans. Macro: consumption and AD rise, lifting growth, jobs and import demand.
- Diagram
- Supply and demand for branded coffee with demand shifting right, plus AD/AS with AD shifting right; label price and quantity on each.
- Evaluation
- Weigh elasticity of supply, imported beans worsening the current account, spending diverted from other UK sectors, and waste or health externalities. Judge micro and macro.
- Watch out
- Writing only about the coffee market and never reaching the macroeconomic effects Paper 3 requires.
Section B
Case study
World coal prices, 2006–2016, US dollars per tonne
Extracts: D: Indonesia’s economic outlook · E: Indonesia’s economic policies as commodity prices collapse
In the extracts: Indonesia, GDP, Indonesian, Jatigede Dam in West, Asian Development, Infrastructure, Indian Ocean, Indonesia US, Keureuto Dam, Joko Widodo
Q2(a)
Using the data in Figure 4 and other information provided, explain the likely change to Indonesia’s terms of trade since 2011.
Mark splitKnowledge 2Application 2Analysis 1
Examiner insight
- What to cover
- Define the terms of trade as the index of export prices divided by the index of import prices, times 100. Falling commodity export prices since 2011 mean Indonesian terms of trade have worsened.
- Watch out
- Saying a fall in the terms of trade is automatically bad, instead of explaining it as export prices falling relative to import prices.
Q2(b)
Examine the likely effects on the profitability of Indonesian rice farmers of the government’s increased investment in dams (Extract E, lines 43-48). Use a cost and revenue diagram to support your answer.
Mark splitKnowledge 2Application 2Analysis 2Evaluation 2
TopicAggregate demand
Examiner insight
- What to cover
- Dams improve irrigation, so yields rise and cost per tonne of rice falls. With price unchanged, profit per unit and total profit for Indonesian rice farmers increase.
- Diagram
- Cost and revenue diagram for a farm: AC and MC shifting down with AR and MR drawn; label the larger profit rectangle between AR and AC.
- Evaluation
- Depends on whether higher national rice supply pushes the price down, the lag before dams are finished, and the weather. Farmers may face higher taxes to fund them.
- Watch out
- Drawing a market supply and demand diagram when a cost and revenue diagram is specified.
Q2(c)
Discuss the benefits of aid to Indonesia.
Mark splitKnowledge 2Application 2Analysis 4Evaluation 4
TopicEmerging and developing economies
Examiner insight
- What to cover
- Aid fills the savings and foreign exchange gap, funding infrastructure, health and education in Indonesia. Human and physical capital rise, shifting LRAS right, and emergency aid speeds recovery after natural disasters.
- Diagram
- AD/AS with AD and LRAS shifting right, or a production possibility frontier shifting outward; label higher real output.
- Evaluation
- Weigh dependency, corruption and tied aid, and note that middle income Indonesia can also access loans and foreign direct investment. Depends on aid size and governance. Conclude.
- Watch out
- Confusing aid with foreign direct investment or with commercial loans that must be repaid.
Q2(d)
With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects on Indonesia of the volatility of prices of commodities such as coal.
Mark splitKnowledge 4Application 4Analysis 8Evaluation 9
TopicGovernment interventionAggregate demandMacroeconomic objectives and policy
Examiner insight
- What to cover
- Cover both sides. Micro: swinging coal revenue makes mining firms investment and hiring unstable, and input costs vary for coal users. Macro: export earnings, the current account, tax revenue, the rupiah and growth all become unstable.
- Diagram
- Commodity market with inelastic demand and supply showing large price swings, plus AD/AS with AD shifting.
- Evaluation
- Weigh the gains when prices are high, buffer stocks, hedging or a sovereign fund, and the scope to diversify. Depends on the size of the swings. Judge micro and macro.
- Watch out
- Analysing only falling prices, when volatility means both rises and falls create uncertainty.
Q2(e)
Evaluate the likely microeconomic and macroeconomic effects of the supply-side policies recently introduced in Indonesia.
Mark splitKnowledge 4Application 4Analysis 8Evaluation 9
TopicMacroeconomic objectives and policy
Examiner insight
- What to cover
- Cover both sides. Micro: deregulation and infrastructure cut Indonesian firms unit costs and raise competition and productivity. Macro: LRAS shifts right, so growth rises with lower inflation and higher employment.
- Diagram
- AD/AS with LRAS shifting right, plus a firm average cost curve shifting downwards.
- Evaluation
- Weigh cost, opportunity cost, long time lags, inequality from deregulation, and the fact that supply side policy does not help if demand is weak. Judge micro and macro.
- Watch out
- Not using the specific Indonesian policies in the extracts, so application marks are lost.
Question text is quoted from the question papers, © Pearson Edexcel, 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.