Paper 1: Introduction to Markets and Market Failure · 8EC0/01
Edexcel A AS Paper 1, November 2020
All 14 written questions and 5 multiple choice questions from Edexcel A AS Paper 1 (November 2020), Introduction to Markets and Market Failure. Case studies: The market for higher education in the UK. 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.
Summer exams were cancelled, so this paper was sat in the autumn series. The paper itself is headed with the original May date.
Section A
Q1(a)
Define the term ‘free market economy’.
Mark splitKnowledge 1
TopicNature of economics
Q1(b)
Which one of the following is the best example of the rationing function of the price mechanism?
- AAn increase in demand, leading to a rise in price, will encourage new firms
- BChanges in price provide information to both producers and consumers
- CIf a product is scarce, a rise in price is likely to make the shortage worse
- DWhen there is a shortage of a product, the price will rise and discourage
Show the answer
The answer is D.
TopicHow markets work
Q1(c)
Explain one advantage of a free market economy compared to a command economy.
Mark splitKnowledge 2
TopicNature of economics
Q2(a)
The income elasticity of demand for bus travel is estimated to be –1.5. This implies that:
- Aa 10% increase in fares will lead to a 15% decrease in passengers
- Bas unemployment falls, more people will use buses
- Cbus travel has a negative cross elasticity of demand compared to rail travel
- Dbus travel is an inferior good
Show the answer
The answer is D.
TopicHow markets work
Q2(b)
Explain why a firm might try to reduce the price elasticity of demand for its products.
Mark splitKnowledge 1Application 1Analysis 1
TopicHow markets work
Q3(a)
In the diagram below, the government grants a subsidy to energy suppliers to install loft insulation. This shifts the market supply curve for loft insulation from Supply1 to Supply2. Price of loft insulation Supply1 Supply2 Demand O Q1 Q2 Quantity of loft insulation The total amount spent by the government on subsidies is represented by the area:
- AOP1JQ2
- BOP3LQ2
- CP3P1JL
- DP4P2KM
Show the answer
The answer is C.
TopicGovernment interventionHow markets work
Q3(b)
Explain an opportunity cost to the government of granting subsidies to energy suppliers to install loft insulation.
Mark splitKnowledge 1Application 1Analysis 1
TopicNature of economicsGovernment intervention
Q4(a)
In the diagram below, the government imposes a specific tax on a product. This shifts the supply curve from Supply1 to Supply2. Price Supply2 H Supply1 Demand O Q1 Q2 Quantity The government’s tax revenue is shown by the area:
- AOP1HQ1
- BP2P1HJ
- CP3P1HK
- DP3P2JK
Show the answer
The answer is C.
TopicHow markets workGovernment intervention
Q4(b)
Using an example, explain why the government imposes specific taxes on many goods and services.
Mark splitKnowledge 1Application 1Analysis 1
Q5(a)
Define the term ‘government failure’.
Mark splitKnowledge 1
Q5(b)
Explain one likely microeconomic reason why the government is using taxpayers’ money to fund HS2.
Mark splitKnowledge 2
Q5(c)
The diagram below shows the demand for and supply of passenger rail services. Rail fares O Q1 Q2 Quantity of rail passengers The shift of the demand curve from D1 to D2 is most likely to result from a:
- Agovernment decision to impose a tax on workplace parking
- Bgovernment decision to increase subsidies for rail travel
- Cplanned expansion of the government’s railway track building programme
- Dreduction in the tax imposed on a litre of petrol
Show the answer
The answer is A.
TopicHow markets workGovernment intervention
Section B
Case study
The market for higher education in the UK
Extracts: A: Rethinking tuition fees · B: Low-income university students twice as likely to drop out than high-income ones
In the extracts: English, England, According, Research, Number, UCAS, Philosophy English Agriculture, Wales and Northern Ireland, Universities and Colleges, University College London
Q6(a)
Explain why ‘the price elasticity of demand for higher education is about –0.5’ may be of relevance to English universities. Refer to Extract A in your answer.
Mark splitKnowledge 1Application 2Analysis 2
TopicHow markets work
Examiner insight
- What to cover
- A value of 0.5 in size means demand for higher education is price inelastic. A fee rise causes a smaller proportionate fall in applications, so university total revenue rises. Use Extract A.
- Diagram
- Steep demand curve for university places with a fee rise from P1 to P2 and the two total revenue rectangles compared.
- Watch out
- Ignoring the minus sign or reading 0.5 as elastic rather than inelastic.
Q6(b)
Assess the likely impact of these drop-out rates on the allocation of resources within an economy.
Mark splitKnowledge 2Application 2Analysis 2Evaluation 4
TopicNature of economics
Examiner insight
- What to cover
- Dropping out wastes the teaching resources and student time already used. Human capital and future productivity are lower than planned, so scarce resources are misallocated.
- Diagram
- Production possibility frontier with the economy producing inside the frontier to show the productive inefficiency.
- Evaluation
- Weigh the scale of the waste against the chance that leavers move into work or apprenticeships, which may use resources better. The effect depends on the size of the gap.
- Watch out
- Writing about inequality between income groups and never addressing resource allocation.
Q6(c)
With reference to Extract A, explain one likely private benefit to students and one likely external benefit of higher education.
Mark splitKnowledge 2Application 2Analysis 2
TopicMarket failure
Examiner insight
- What to cover
- Give one private benefit the student captures, such as higher lifetime earnings, and one external benefit third parties gain, such as higher national productivity or lower crime. Use Extract A.
- Watch out
- Offering two private benefits, or calling a benefit external when the student receives it.
Q6(d)
With reference to Figure 2, calculate the percentage increase in outstanding student loans from 2013 to 2018. You are advised to show your working.
Mark splitKnowledge 2Application 2
Q6(e)
With reference to Figure 1 and Extract A, discuss the benefits of allowing universities to charge higher tuition fees for some degree courses.
Mark splitKnowledge 3Application 3Analysis 3Evaluation 6
Examiner insight
- What to cover
- Higher fees on high demand courses signal scarcity, raise revenue to fund places and facilities, and ration places to students who value them most. Use Figure 1 to support this.
- Diagram
- Market for a high demand degree course with demand shifting right, price rising, and universities expanding places along the supply curve.
- Evaluation
- Weigh the revenue and signalling gains against reduced access for low income students and lost external benefits. Note the supply of places is inelastic in the short run. Judge.
- Watch out
- Drifting into whether tuition fees are fair instead of discussing the benefits the question asks for.
Q6(f)
Evaluate the possible advantages of a free market approach to providing services such as education.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
Examiner insight
- What to cover
- Explain consumer sovereignty, competition raising quality, the profit incentive driving efficiency and innovation, and prices signalling which courses students most want.
- Diagram
- Positive externality in consumption with MSB above MPB, showing free market output below the social optimum, used to test the free market case.
- Evaluation
- Set choice and efficiency against under consumption of a merit good, external benefits, imperfect information about future returns and inequity of access. Judge whether the gains outweigh these.
- Watch out
- Only attacking the free market when the question asks first for its advantages.
Q6(g)
Evaluate whether government intervention is able to correct market failure in education.
Mark splitKnowledge 4Application 4Analysis 6Evaluation 6
TopicMarket failureGovernment intervention
Examiner insight
- What to cover
- Explain state provision, subsidies, compulsory schooling and information campaigns. Show how each raises consumption of education toward the social optimum where MSB equals MSC.
- Diagram
- Positive externality in consumption with a subsidy shifting supply right so output rises from Q1 to Q*, with the subsidy per unit and the welfare gain labelled.
- Evaluation
- Weigh the correction against government failure, weak information about the right subsidy, the opportunity cost of the spending and unintended effects. Judge whether the failure is actually corrected.
- Watch out
- Listing policies with no reference to the social optimum or to whether the market failure is removed.
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.