AS econ session 1

A Level Economics – Year 1 (AS) Revision Workshop
Session 1 – Answers to workbook

Today’s event:
02
Session Topic
1 How markets work and elasticities
2
Market Failure and Government
Intervention
Break (back for 12:15)
3 Measuring UK Economic performance
Lunch (back for 13:55)
4
Demand Side policies (Fiscal and
Monetary)
5
Supply side policies and policy conflicts

Session 1
How Markets Work and
Elasticities
03
In this session we will consider the importance of price as a means to
allocating resources in an economy, the factors that impact on demand
and supply of products, the calculation of elasticities and the factors
that impact on elasticities.

The Price Mechanism
What are the functions of the price mechanism?
03
R I S
Rationing Incentive Signalling

The Price Mechanism
03
5p charge on bags
from supermarkets
and other retailers
Rationing Incentive Signalling

What factors affect demand and supply for a
product or service?
Demand Supply
2 minutes
Price (change)
Price of related goods
Income
Taste & Preference
Competition
Cost of Production
No. of sellers
Change in Technology
Govt taxes & subsidies
Changes in climate
03

Which is the most important factor that can impact on
demand and supply for each of the following firms?
Demand Supply
A Luxury Gold
Watch
A budget tablet
Flight between
Mcr and Ldn
Dry cleaning
service
Income
Price of related goods
Competition
Price
Cost of Production
Change in technology
Cost of Production
No. of sellers
04

Application - Hoverboards
04

04
Factor Explanation
1
2
Taste and
Preference
Price of related
goods
Leisure Products
are less popular
after Christmas
Price of bicycles
could impact on
demand
What are the most
important factors that
have influenced the
price of hoverboards
in the UK from
January 2016?

04
Factor Explanation
1
2
Taste and
Preference
Cost of production if
safety modifications
are required
People less
willing to
purchase
Will this push
prices up?
What about
the safety
concerns?

Application – Availability of diesel
Tax on diesel fuel
reduced in 2001.
Govt encourage
use.
UK sales in diesel
fuelled cars
increase.
2011, Govt have
evidence that
diesel has higher
impact on poor
health
Time lag between
Govt change in tax
and change in
consumption
Issue
compounded by
lack of refineries
to create diesel
fuel
Shortage of diesel
05

List 2 factors that have impacted on the
demand and supply of diesel.
05
Factor Cause Impact on price
D
S
Government
cuts tax on
diesel
Lack of diesel
refinery
capacity
Lower the costs
of production of
diesel
Technology -
difficulty of creating
diesel refineries
Lower price
Possible
increase in price
due to shortage

What has caused a potential failure of
government intervention in this market?
•Lack of Information (about the impact of
diesel fuel on health)
•Time lags
05

Price of
Diesel
Quantity of
Diesel
D1
S1
06
P1
Q1
What has
happened to
demand and
supply of
diesel over
the last 15
years?
S2
P2
Q2
P3
Q3
S3

Quantity of
Product A
Price of
product
A
D1
D2S1
D3S2
S3
X
G
I
C
A
BD
E
F
06
Demand and Supply Criss-Cross
G
Workers making Product A
receive a pay increase
1
Demand for product C (which
uses Product A as a
component) decreases.
Producers of Product A install
new machinery to reduce cost
of production.
2
Product A and Product D are in
joint supply. There has been
an increase in demand for
product D.
3
F
There has been a large
increase in utility bills in the
past few months. The poor
weather conditions have
hampered production of Good
A
4
I
Product Z is a complement to
product A. Product Z falls in
price. The government
increases an indirect tax on
Product A
5
C
The Government provides a
subsidy to the manufacturers
of Product A. New
manufacturers enter the
market for Product A.
6
FD
You are about to be shown 6 changing
market conditions that could cause the
demand and/or supply curve for good A
to shift. Assuming for each question the
original equilibrium point is at position
X, what is the new equilibrium position
after each change that has occurred?
Assume that Product A is a
normal good.
6 and not 10 as it
says in the workbook

What are the factors that can impact on
elasticity?
Price Elasticity Of Demand
(PED)
Income Elasticity Of Demand
(YED)
The Price Elasticity Of Supply
(PES)
1
2
Number of
substitutes
Degree of
necessity
Luxury
(YED > +1)
Inferior
(YED < 0)
Spare
production
capacity
Time period
07

The Impact of Elasticities
Student 1 response:
The price elasticity of demand for peak rail
tickets is inelastic. As the cost of
purchasing these tickets increases the
demand for rail travel will decrease but by
a relatively small proportion compared to
the increase in cost. This will mean that the
government will see an increase in revenue
from increasing taxes rail travel.
08

The Impact of Elasticities
Student 2 response:
The elasticity of demand for peak rail
tickets is price inelastic. Extract C (line 3)
indicates that some substitutes do exist
(such as road travel) but many rail users
choose to do so as it is the quickest form of
transport for their daily commute. So if, for
example, the government increases taxes
by 5% the government will see a rise in
revenue. Some of this rise in revenue may
be offset by the fact that all rail fares will
increase so there may be some reduction in
demand for rail use during off-peak times.
08
States ‘price’
elasticity
References case
study
Uses valid own
example
Ensures comments
apply to case study

Exam tip
Elasticity is an important topic when you are evaluating Government
policies to combat market failures. It is worth attempting to include
discussion about elasticity of the product or service that you are
covering in any evaluative questions
08

Is demand for these price elastic or inelastic? What
would be the impact of an increase in government
indirect tax on consumption?
Cigarettes Air travel Crisps
Elasticity
Impactofindirecttax
increaseon
consumption
Price Inelastic
Little change
Price Inelastic in
short term
Small decrease
in short term
Price Elastic
Larger decrease
as substitutes
available
08

Application - Substitutes for Solar Panels
09
Govt give
subsidies for solar
panels to increase
consumption
1.5% of UK
households now
have solar panels
Govt believes that
profits made by
solar panel firms
during this period
allows them to
produce at low
cost without need
for subsidy
Money saved can
be used
elsewhere!

Assess
whether
market forces
should be left
to determine
the price of
solar panels.
Price of
Solar
Panels
Quantity of
Solar Panels
D1
S1
P1
Q1
S2
P2
Q2

Argument against subsidies
Point:
Subsidy of industry reduces incentive to become productively efficient
Explanation:
Subsidy keeps the price to customers artificially low – increasing demand.
Firms might keep profits as a reward rather than use them for innovating in
the industry assuming government maintain subsidy.
09

Argument for subsidies
Point:
Subsidy increases demand for a merit good
Explanation:
Lower price to consumer ensure greater demand for a merit good (solar panel
has lower impact on environment than gas or coal).
09

Extension
activities
10

AS econ session 1

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