Paper 1: Introduction to Markets and Market Failure · 8EC0/01
Edexcel A AS Paper 1, June 2016
All 13 written questions and 5 multiple choice questions from Edexcel A AS Paper 1 (June 2016), Introduction to Markets and Market Failure. Case studies: The market for housing. Each question shows its marks and topic, with an examiner insight on 6, and opens the question paper and mark scheme at the right page.
Section A
Q1(a)
Which one of the following is the most likely consequence of an increase in the division of labour in the production of smartphones?
- ADecrease in boredom for smartphone workers
- BDecrease in use of specialised manufacturing equipment
- CDecrease in the cost per unit of smartphones
- DIncrease in training costs per worker
Show the answer
The answer is C.
TopicNature of economics
Q1(b)
Explain what function money has in improving specialisation in the production of smartphones.
Mark splitKnowledge 1Application 1Analysis 1
TopicNature of economics
Q2(a)
Define the term ‘external benefits’.
Mark splitKnowledge 1
TopicMarket failure
Q2(b)
Which one of the following measures could a government introduce to achieve the social optimum consumption of nursery school places? It could introduce a:
- Amaximum price of 0P1 per unit
- Bsubsidy of RS per unit
- Ctax of VT per unit
- Dminimum price of 0P1 per unit
Show the answer
The answer is B.
TopicGovernment interventionMarket failure
Q2(c)
Annotate on Diagram A the welfare gain area and the new social optimum output resulting from successful government intervention in the market for nursery places.
Mark splitApplication 2
TopicMarket failureGovernment intervention
Q3(a)
The impact of the flower industry on workers in the fishing industry is an example of:
- Aprivate benefits
- Bprivate costs
- Cexternal costs
- Dexternal benefits
Show the answer
The answer is C.
TopicMarket failure
Q3(b)
Explain one measure the Kenyan government could use to reduce the impact of water extraction from Lake Naivasha.
Mark splitKnowledge 1Application 2
Q4(a)
With reference to the statement above explain what is meant by ‘diminishing marginal utility’.
Mark splitKnowledge 1Application 2
TopicHow markets work
Q4(b)
If the price of an “all you can eat buffet” fell from £8.99 to £6.99, which one of the following is likely to happen?
- AThere is an extension in demand
- BThe demand curve shifts to the left
- CThe supply curve shifts to the left
- DThere is a contraction in demand
Show the answer
The answer is A.
TopicHow markets work
Q5(a)
What is the expected percentage change in the quantity of petrol demanded if the price elasticity of demand is –0.2?
- A–0.4%
- B+0.4%
- C–4%
- D+4%
Show the answer
The answer is D.
TopicHow markets work
Q5(b)
The price elasticity of demand for petrol is –0.2. Explain the change to the total revenue of petrol stations as a result of cutting their prices.
Mark splitKnowledge 1Application 2
TopicHow markets work
Section B
Case study
The market for housing
Extracts: A: Problems facing UK first time buyers · B: Housing and flood defences
In the extracts: OECD, Genworth, Help, National Infrastructure Plan, Netherlands Supply in OECD, OECD Economics Department, Oxford Flood Alleviation, Great Britain Finland, OECD Publishing, Humber Estuary
Q6(a)
With reference to Figure 1, explain one possible reason for the differences in price elasticity of supply of new housing between countries.
Mark splitKnowledge 1Application 2Analysis 2
TopicHow markets work
Examiner insight
- What to cover
- Quote the price elasticity of supply figures for two countries in Figure 1. Explain one determinant, such as land availability or planning restrictions, and why it makes new housing supply more or less responsive to a price rise.
- Watch out
- Describing the Figure 1 numbers without linking a named supply determinant to the size of the quantity response.
Q6(b)
With reference to Extract A, assess the likely impact of the Help to Buy scheme on the market for rented properties in the UK.
Mark splitKnowledge 2Application 2Analysis 2Evaluation 4
Examiner insight
- What to cover
- Help to Buy subsidises deposits, so some tenants move into owner occupation. Demand for rented property shifts left, so rents and quantity rented fall. Lower landlord returns may then reduce rental supply.
- Diagram
- Market for rented property with demand shifting left from D1 to D2, rent falling P1 to P2 and quantity falling Q1 to Q2.
- Evaluation
- Weigh how many renters actually qualify against the price elasticity of supply of new housing. Judge whether rents fall much, and note landlords adjust slowly over time.
- Watch out
- Answers drift onto the owner occupied market and never say what happens to rents.
Q6(c)
Explain the likely impact on producer surplus of an increase in the demand for housing. Use a diagram to illustrate your answer.
Mark splitKnowledge 2Application 2Analysis 2
TopicHow markets work
Examiner insight
- What to cover
- Define producer surplus as the gap between the price received and the minimum price suppliers would accept. Show demand rising, price rising along the supply curve, and explain why the surplus area grows.
- Diagram
- Housing supply and demand, D1 shifting right to D2, price P1 to P2 and quantity Q1 to Q2, with producer surplus shaded above the supply curve and below price, before and after.
- Watch out
- Shading consumer surplus instead of producer surplus, or shifting supply when demand is what rises.
Q6(d)
With reference to Figure 2, calculate the percentage change in house prices between the first quarter of 2009 and the first quarter of 2015. You are advised to show your working.
Mark splitKnowledge 2Application 2
Q6(e)
With reference to Figures 1 and 2 and your own knowledge, discuss the functions of the price mechanism in allocating housing.
Mark splitKnowledge 3Application 3Analysis 3Evaluation 6
TopicHow markets work
Examiner insight
- What to cover
- Explain the rationing, incentive and signalling functions using Figures 1 and 2. Rising house prices ration scarce homes to those willing to pay, signal the shortage, and give builders the incentive to supply more.
- Diagram
- Housing market with demand shifting right, price rising and quantity expanding along the supply curve, to show signalling and incentive at work.
- Evaluation
- Weigh how well the mechanism works against inelastic supply, planning limits and the equity problem of pricing low income households out. Judge over short and long run.
- Watch out
- Listing the three functions as textbook definitions without applying them to the housing data.
Q6(f)
Evaluate the likely microeconomic effects of government intervention in the UK housing market.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
Examiner insight
- What to cover
- Choose two or three interventions such as Help to Buy, rent control or planning reform. Trace each through demand or supply to price, quantity, and the welfare of buyers, tenants and builders.
- Diagram
- Maximum rent set below equilibrium showing excess demand, or a subsidy shifting supply right with the subsidy per unit marked.
- Evaluation
- Set intended gains against unintended effects such as shortages and higher prices where supply is inelastic. Consider government failure and opportunity cost, then judge which intervention works best.
- Watch out
- Listing several policies without reaching a supported judgement on which is most effective.
Q6(g)
Evaluate the case for government provision of goods and services such as flood defence schemes or housing.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
Examiner insight
- What to cover
- Flood defence is non rival and non excludable, so free riding means the market under provides it. Housing carries external benefits and is a merit good, so it is also under consumed.
- Diagram
- Positive externality in consumption with MSB above MPB, free market output Q1 below social optimum Q*, and the welfare loss triangle labelled.
- Evaluation
- Weigh the missing market and equity gains against government failure, poor information about the right quantity, and the opportunity cost of tax funding. Judge each good separately.
- Watch out
- Treating housing as a pure public good when it is both rival and excludable.
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.