Paper 1: How markets work

Which one of the following is a factor of production?

Opportunity cost is:

In a free market economy, resources are allocated mainly by:

A fall in the price of a good, other things equal, leads to:

Which one of the following would shift the supply curve for wheat to the left?

If price elasticity of demand is −2.0, demand is:

Average cost is calculated as:

Division of labour means:

A monopoly is a market with:

Which one of the following is an example of a negative externality?

Explain what is meant by the basic economic problem.

A firm sells 500 units at £8 each. Its total costs are £3,100. Calculate its profit.

Explain one reason why specialisation can increase productivity.

Explain one disadvantage to consumers of a market dominated by one firm.

Extract A (data are illustrative, written for this paper): The UK coffee-shop market has grown quickly. In one town, a coffee chain raised the price of a latte from £3.00 to £3.30. Daily sales fell from 1,000 to 950 cups. Milk and coffee-bean prices have risen because of poor harvests, and wages have increased. Many customers say coffee is 'a daily habit', but more people now make coffee at home. Define 'price elasticity of demand'.

Using Extract A, calculate the price elasticity of demand for lattes.

Explain why demand for lattes is price inelastic.

Explain the effect of rising milk and coffee-bean prices on the supply of lattes. You may use a diagram.

Calculate the change in the coffee chain's daily revenue from lattes in this town, and explain what this shows about inelastic demand.

Analyse how competition between coffee shops might benefit consumers.

Evaluate whether the coffee chain should continue to raise its prices.

Extract B (data are illustrative, written for this paper): Sugary drinks are linked to obesity and tooth decay, costing the NHS an estimated £6 billion a year in obesity-related care. In 2018 the UK introduced a Soft Drinks Industry Levy on drinks with high sugar content. Many manufacturers reduced the sugar in their drinks. Sales of the highest-sugar drinks fell by about 50%, while some consumers switched to sugary snacks instead. Define 'market failure'.

Identify two external costs of the consumption of sugary drinks.

Explain why the free market leads to over-consumption of sugary drinks.

Explain how the sugar levy is intended to reduce consumption of high-sugar drinks. You may use a diagram.

Explain one other way the government could reduce consumption of sugary drinks.

Analyse the possible unintended consequences of taxing sugary drinks.

Evaluate whether the Soft Drinks Industry Levy has been successful in correcting market failure.