Paper 1: Introduction to Markets and Market Failure · 8EC0/01
Edexcel A AS Paper 1, June 2017
All 14 written questions and 5 multiple choice questions from Edexcel A AS Paper 1 (June 2017), Introduction to Markets and Market Failure. Case studies: The market for cigarettes. 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)
Explain, using marginal analysis from the table above, the concept of opportunity cost. (You may use the last column in answering the question.)
Mark splitKnowledge 1Application 1Analysis 1
TopicNature of economics
Q1(b)
Which one of the following is the most likely effect of an economy producing more capital goods?
- AReduced specialisation of labour
- BA shift in the production possibility frontier
- CA reduction in marginal utility
- DA shift in demand for consumer goods
Show the answer
The answer is B.
TopicNature of economicsHow markets work
Q2(a)
Define the term ‘base year’.
Mark splitKnowledge 1
Q2(b)
Calculate the index numbers for 2011 and 2012, using 2010 as the base year.
Mark splitApplication 2
Q2(c)
The percentage change in wheat production from 2014 to 2015 was:
- A0.03
- B–2.87
- C–2.95
- D–477
Show the answer
The answer is B.
Mark splitApplication 1
Q3(a)
Define the term ‘subsidies’.
Mark splitKnowledge 1
Q3(b)
The most likely effect of cutting subsidies for the installation of solar panels is to:
- Aincrease producer surplus
- Bdecrease the provision of public goods
- Cdecrease consumer surplus
- Dincrease government expenditure
Show the answer
The answer is C.
Mark splitKnowledge 1
TopicHow markets workMarket failureGovernment intervention
Q3(c)
Annotate the diagram below to show the effect of removing the solar panel installation subsidy on the equilibrium price and quantity.
Mark splitApplication 2
TopicHow markets workGovernment intervention
Q4(a)
Explain how the price mechanism responds to excess supply in a free market.
Mark splitKnowledge 1Application 1Analysis 1
TopicHow markets work
Q4(b)
Which one of the following is likely to result in an increase in carbon emissions?
- AIntroducing a tradable pollution permits scheme
- BShutting down steel factories
- CSubsidising the steel industry to install cleaner technology
- DReducing indirect taxes on steel products
Show the answer
The answer is D.
Q5(a)
Explain why reducing the tuition fee cap may result in excess demand for university places.
Mark splitKnowledge 1Application 1Analysis 1
TopicHow markets work
Q5(b)
Which one of the following statements is correct?
- AThe marginal social benefits exceed the marginal private benefits from
- BUniversity education is an inferior good
- CUniversity education is a public good
- DThe social optimum equilibrium quantity is less than the market
Show the answer
The answer is A.
TopicMarket failureHow markets work
Section B
Case study
The market for cigarettes
Extracts: A: Government intervention on tobacco · B: Free market approach
In the extracts: Tobacco, Include, Christopher Snowdon, Low-middle-income, Comprehensive, Education Ltd, High-income, Television, Businesses, Everyone
Q6(a)
Explain why ‘bans on tobacco advertising’ (Extract A, line 7) may result in a decrease in the revenue of tobacco firms. Include a supply and demand diagram in your answer.
Mark splitKnowledge 1Application 2Analysis 2
TopicMarket failureHow markets work
Examiner insight
- What to cover
- An advertising ban weakens brand loyalty and persuasion, so demand for tobacco falls. Price and quantity both fall, so total revenue falls. Link the chain to Extract A.
- Diagram
- Cigarette market with demand shifting left from D1 to D2, price P1 to P2 and quantity Q1 to Q2, with revenue rectangles P1Q1 and P2Q2 marked.
- Watch out
- Shifting supply, or showing a movement along demand, instead of shifting demand to the left.
Q6(b)
With reference to the information provided and your own knowledge, assess the view that tobacco consumers switching to e-cigarettes is an example of rational behaviour.
Mark splitKnowledge 2Application 2Analysis 2Evaluation 4
TopicHow markets work
Examiner insight
- What to cover
- Rational consumers maximise utility given the information they have. E-cigarettes are substitutes and are cheaper and less harmful, so switching raises utility. Use the extract evidence.
- Evaluation
- Weigh the rational case against addiction, habit and imperfect information about long run health risks. Judge whether the switch truly maximises utility.
- Watch out
- Explaining what rational behaviour means in theory but never testing it against the e-cigarette evidence.
Q6(c)
Explain how changes in the price of tobacco cigarettes may affect the demand for e-cigarettes over time.
Mark splitKnowledge 2Application 2Analysis 2
TopicHow markets work
Examiner insight
- What to cover
- The two goods are substitutes, so cross elasticity of demand is positive. A rise in cigarette prices raises demand for e-cigarettes. Explain why the response grows as habits and information adjust.
- Diagram
- E-cigarette market with demand shifting right from D1 to D2, raising price and quantity, after a rise in the price of tobacco cigarettes.
- Watch out
- Treating the two goods as complements, so the demand shift is drawn in the wrong direction.
Q6(d)
With reference to Extract A, lines 11–13, calculate the price elasticity of demand for tobacco cigarettes in high-income countries and in low-middle-income countries. You are advised to show your working.
Mark splitKnowledge 2Application 2
TopicHow markets work
Q6(e)
With reference to Figure 1, assess the likely reasons for the difference in price elasticity of demand for tobacco cigarettes and e-cigarettes.
Mark splitKnowledge 3Application 3Analysis 3Evaluation 6
TopicHow markets work
Examiner insight
- What to cover
- Use the Figure 1 values. Cigarettes are addictive with few close substitutes, so demand is inelastic. E-cigarettes have closer substitutes and weaker habit, so demand is more elastic.
- Diagram
- Two demand curves on the same axes, a steep curve for cigarettes and a flatter one for e-cigarettes, with the same price change giving different quantity responses.
- Evaluation
- Weigh addiction against availability of substitutes, proportion of income spent and the time period. Consider whether the figures are reliable across different groups of smokers.
- Watch out
- Confusing the sign and the size of price elasticity of demand when comparing the two values.
Q6(f)
Evaluate the possible advantages of a free market approach to cigarette consumption.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
Examiner insight
- What to cover
- Build the free market case first. Consumer sovereignty lets smokers choose, the profit motive drives efficiency and lower prices, and competition brings innovation such as e-cigarettes.
- Diagram
- Negative externality in consumption with MPB above MSB, free market output Q1 above the social optimum Q*, and the welfare loss triangle shaded.
- Evaluation
- Set choice and efficiency against addiction, imperfect information and the external costs of passive smoking and health care. Judge whether consumer sovereignty holds for an addictive good.
- Watch out
- Attacking the free market throughout without first setting out its advantages as the question asks.
Q6(g)
Evaluate the impact of government intervention in the cigarette market.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
Examiner insight
- What to cover
- Take two or three of indirect tax, advertising bans, age limits and plain packaging. Show how each shifts supply or demand left, raising price and cutting quantity toward the social optimum.
- Diagram
- Cigarette market with supply shifting from S to S+tax, price rising, quantity falling, and tax revenue plus the consumer and producer share of the burden shaded.
- Evaluation
- Because demand is inelastic, a tax cuts quantity little, raises large revenue and is regressive. Weigh that against smuggling and black markets, then judge.
- Watch out
- Claiming a tax on an addictive, inelastic good produces a large fall in quantity demanded.
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.