Sunday, May 23, 2010

Possible Case Studies and Nature of Data Response Question for Unit 1: Markets: How They Work and Why They Fail? (coming soon)

This post is meant for all those international students who will be sitting for the Edexcel Economics Unit 1: Competitive Markets this coming Friday. Bear in mind that the contents serve as a GUIDE, and again I strictly mean GUIDE rather than leaking out any actual examination questions. There are two reasons for me to put this up. First, is due to the overwhelming request from my fellow students. Secondly, Unit 1 is rather easy and to some extent the examination questions are really predictable

Why do I say so?

(1) MCQs
I have compiled all those MCQs in a booklet according to topics and I found that almost all topics are tested again and again in similar ways. For instance the concept of PPF and rising opportunity costs as well as PPF shifting inward or outward. Others are like diagram of taxation (subsidies) and students are required to identify incidence of tax onto consumers and producers (subsidies enjoyed by producers and consumers) and in many cases, involve calculation. In most cases, a table involving several items will be provided and students have to identify which are normal goods and which is inferior good. This is just a non-exhaustive list

(2) Data response
There are certain ‘fixed questions’ for each type of case studies. For instance, do expect:


(a) Demand and supply diagram, showing an increase/ fall in price + explanations

(b) Whether a good is elastic/ inelastic in demand: Define PED + mention if it’s inelastic and why + evaluations
(c) Whether another good is the substitute/ complementary for the mentioned good in extract: Define XED + mention that it is substitute/ complement + have positive/ negative XED + explain how relationship works + evaluation
(d) Is the good elastic/ inelastic in supply: Define PES + inelastic in short run/ elastic in long run and why + evaluation
(e) Impact of increase in production costs for firms
(f) What happen if the good is subsidise by government: Define subsidies + diagram + explain the diagram and impact onto producers + evaluation
(g) Effectiveness of buffer stock: Define buffer stock + diagram +explanation of diagram + evaluations
(h) Government failure: Negative impact of government interventions + evaluations of why it is not that bad with government intervention

Cigarettes/ Alcohol/ Education/ Healthcare:

(a) Definition of private cost + external cost + examples for each type of cost
(b) Definition of private benefit + external benefit + examples for each type of benefit
(c) Diagram showing existence of external costs/ external benefits

Congestion/ Pollution
(a) Definition of private cost + external cost + examples for each type of cost
(b) Diagram showing that negative externalities exist
(c) Methods to overcome congestion + evaluation of each method
(d) Methods to overcome pollution + evaluation of each method

(3) In real examination, questions are likely to contain both the elements of How They Work and Why They Fail? Depending on nature of case studies, certain case studies like congestion or pollution are likely to carry more questions on Why They Fail. Extracts like rice, rubber, cocoa and oil are likely to carry more questions on How They Work. It is highly unlikely for question like ‘What are the private/ external benefits of consuming cocoa?” or questions like income elasticity on demand to appear in an extract of pollution

(4) The Examination Board will have to think of a case study where questions from both How They Work and Why They Fail can fit into. As such, those ‘weird’ case studies such as Financing BBC (2007), Wind Power Farms and many more are unlikely to be tested

What will probably turn out in this round for Unit 1?

National Health Service (NHS) is in my top list. It is one of the most popular case studies which are yet to be tested thus far. So this round, it has the possibility of 90% to appear in your exam. The nature of the questions maybe somewhat similar to the questions tested in Education (Jan 09)

They are:

(1) How does an increase in government spending onto NHS represent an opportunity cost?
Opportunity cost is defined as the next best alternative foregone. If the UK government does not spend this amount of money onto NHS, the equal amount of money could have been used elsewhere, such as improving the standard of education, betterment of public infrastructures and others

(2) Examine the likely impact on the PPF due to the increase in government investment on NHS. Illustrate your answer with PPF

Production possibility frontier is a curve that shows the combination of two goods than can be produced in an economy if all resources are fully and efficiently utilised

Public expenditure onto NHS will have the impact of increasing the productive capacity of UK’s economy. Healthier workforce on average will have higher productivity and as such higher output per person is expected. This will increase the potential growth as shown by the outward shift of PPF

However the increase in NHS spending is likely to result in austerity measures in other public sectors, for instance education. This is related to the concept of opportunity cost. As such the PPF growth may not be as impressive or it seems. To some extent it could be entirely muted

(3) Explain two other external benefits of higher spending onto NHS (most possibly there will be an external benefit diagram)
External benefits refer to benefits gained by a third party, which is not directly part of an economic transaction

First, healthier workers can contribute productively to an organization. Higher output will result in fall of production costs. Firms can operate more profitably

Secondly, a more productive workforce will be a great attraction to FDI. Foreign firms will be highly interested to set up operations in a country where production costs are low. It will also increase the competitiveness of UK economy. On top of that, government can also collect more tax revenue

(4) Other than external benefits, explain three reasons for state intervention in NHS
UK has an increasing number of old populations just like Italy, Japan and US. As such, demand for healthcare is great

Secondly, healthcare is a normal good. During the period of rising income, increasing number of people will increase their spending onto seeking treatments for instance more regular body check up and other necessary treatments

Merit good like healthcare is often under-consumed due to the presence of asymmetric information. As such government needs to intervene to increase the free market level of consumption to the socially optimal level

Others are like increasing number of new diseases/ rising population

Stay tune for next forecast question: Air pollution

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