Economics Workbook Answers

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    WORKBOOK ANSWERSAQA AS Economics Unit 1Markets and Market Failure

    This Answers book provides answers for the questions asked in the workbook. They are intended as a

    guide to give teachers and students feedback. The candidate responses for the longer essay-style

    questions are intended to give some idea about how the exam questions might be answered. The

    examiner commentaries (underlined text) have been added to give you some sense of what is rewarded in

    the exam and which areas can be developed. Again, these are not the only ways to answer such

    questions but they can be treated as one way of approaching questions of these types.

    Topic 1 The economic problem

    1 The use of resources to make goods or services which have market value, or the process or set ofprocesses which convert inputs (factor services) into outputs. (1 mark)

    2 Firms use resources to produce goods or services which they sell to households who consume them.

    Capitalist firms engage in production in order to make profits from selling products to households, who

    benefit from the exchange by achieving higher living standards. (4 marks)

    3 Resource depletion occurs when resources are used up in the course of production, for example

    energy, whereas, degradation refers to the quality of resources falling, for example as a result of

    pollution. (2 marks)

    4 Many households reuse plastic containers and glass jars. Second-hand and charity shops provide a

    means for clothing, records and other household items to be reused. Local councils allow for recyclingof paper, cardboard, bottles and some plastics either at recycling centres or through regular collections.

    (4 marks)

    5 Income is limited which means that all households have to consider carefully which goods and services

    they choose to purchase. Consumer goods are made from scarce resources which means that people

    have to make a decision about which goods to buy and which goods to go without every week.

    (3 marks)

    6 The passage mentions that Ford decided to build cars at Dagenham ( where to produce), and from the

    1920s onward (when to produce). How to produce is suggested by using a large site which enables

    production to be vertically integrated and economies of scale to be used to reduce average costs. The

    passage does not explicitly address the question of for whom to produce orwhen to produce in the

    sense for example of using night shifts as well as day shifts or using continuous flow production.

    (5 marks)

    7 An excess of sales receipts over the spending by a business on the services or factors of production

    during a period of time, i.e. profit = revenue costs. (2 marks)

    8 Each week, or possibly each month or year, shortage of money or income means that most people

    have to choose between consuming their income or saving their income. The fact that income is not

    unlimited forces this choice. (3 marks)

    9 The funds available for the British government to spend are limited. Choosing to spend more on aircraft

    carriers means that less tax revenue is available to spend on primary education in Africa (and vice

    versa). (3 marks)

    AQA AS EconomicsUnit 1 Markets and Market Failure 1

    Philip Allan, an imprint of Hodder Education Ray Powell, James Powell

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    TOPIC 1 The economic problem

    10 In addition to the point made in the answer to Question 9, the decision not to build aircraft carriers may

    mean sacrificing defence capability. (3 marks)

    11 The firm would not be operating at full capacity. It would be operating inside its production possibility

    frontier. Maximum possible combinations of television sets and mobile phones would not be

    produced. (3 marks)

    12 This is a positive statement, which means that it can be tested, though it is inconceivable that it would

    actually be tested. Economists could count the number of pensioners who have died from hypothermia

    after a cut to the state pension. They could then compare these figures with previous years when

    pensions were not cut and see whether the statement is correct or incorrect. (4 marks)

    13 This is a normative statement. It is a not very pleasant opinion or value judgement which cannot be

    tested scientifically. (4 marks)

    Answers to exam-style questions (objective)

    1 C

    Explanation of answer: The production possibility curve diagram shows that when car production

    rises by 40, from 60 to 100 cars, productive resources must be taken away from bike production. Since

    the economy is producing on its production possibility frontier, there are no spare resources to use.

    Switching of resources away from bike production causes bike output to fall by 200.

    2 D

    Explanation of answer: With this type of question, it is important to read the stem of the question

    carefully, taking note of the word except. All the possible answers are true exceptD. This is because

    statement D relates to consumption choices and not to production choices.

    3 C

    Explanation of answer: Only statement C provides a widely accepted definition of the central

    economic problem. Statements B and D do relate to economic problems, but not to what is usually

    regarded as the central economic problem. Statement A relates to an aspiration and not to an

    economic problem.

    4 B

    Explanation of answer: On first sight, statement A might appear to be the correct answer. However, it

    is a wrong answer because different people have different views on what is equitable (fair) and

    inequitable (unfair). Views on fairness cannot be scientifically tested to see if they are right or wrong.

    The words oughtand shouldin statements C and D indicate that they are normative rather thanpositive statements. This leaves statement B as the correct answer. It is possible to measure incentive

    and disincentive effects.

    5 A

    Explanation of answer: Statement A provides a definition of opportunity cost. All the other statements

    have nothing to do with the meaning of opportunity cost.

    AQA AS EconomicsUnit 1 Markets and Market Failure 2

    Philip Allan, an imprint of Hodder Education Ray Powell, James Powell

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    Topic 2 The allocation of resources in

    competitive markets

    1 A downward-sloping demand curve shows an inverse relationship between planned quantity

    demanded and the price of a good or service. (2 marks)

    2 The total amount of a good or service which firms are willing to sell in the marketplace in a given time

    period. (2 marks)

    3 Market equilibrium is when the forces of supply and demand are balanced. This occurs when planned

    demand is equal to planned supply. (3 marks)

    4 A shift in demand occurs following a change in at least one of the conditions of demand, in which case

    the ceteris paribus assumption no longer holds. The demand curve shifts to a new position, sliding

    along the supply curve. An adjustment along the supply curve happens when the price of the good or

    service changes. In the following diagram, the demand curve shifts from D1 to D2, and at the new

    equilibrium at point Z, supply has adjusted from Q1 to Q2. Essentially, an increase in demand leads to

    an expansion of supply. (4 marks)

    5

    The diagram above, which develops Figure 1 on p. 10 in the workbook, can be used to show excess

    demand. Immediately after the shift of the demand curve from D1 to D2 shown in the diagram, quantity

    Q3 is demanded at price P1. However, at this price, firms are only willing to supply Q1. Excess demand

    at this price is shown by the distance between points X and V (or between Q1 and Q3). This excess

    demand causes the price to rise until a new equilibrium is reached at point Z and price P2.

    (4 marks)

    6 The term refers to how scarce resources are allocated between competing uses. In the marketplace

    resources are allocated by the price mechanism which is guided by the forces of supply and demand.

    (4 marks)

    7 The shift in demand was driven by speculators entering the market seeking to buy copper at a low

    price and sell it at a later date at a higher price, with the aim of making a considerable profit. The

    speculative demand increased the price of copper because of two factors that limited supply. First,

    stockpiles of copper were very low; second, it was difficult for new copper to be mined. This meant that

    the supply of copper was inelastic with respect to a price increase and thus unresponsive to the

    increased surge in demand. (6 marks)

    AQA AS EconomicsUnit 1 Markets and Market Failure 3

    Philip Allan, an imprint of Hodder Education Ray Powell, James Powell

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    TOPIC 2 The allocation of resources in competitive markets

    8 A rapid increase in the price of copper will mean higher prices for consumers which in turn will mean

    that they will purchase less. Also, the higher cost of production of goods made in part from copper

    feeds into the general inflation figures for the economy. Higher prices will affect households negatively

    because they will have to pay more for goods, thus having less disposable income for other purchases.

    However, copper mining companies should experience higher sales revenue if demand for copper is

    price inelastic. The significant long-term effect of the higher price of copper will be to send a signal to