A Level Economics Paper 1
Covers Demand, Supply and Price Determination, Elasticity of Demand and Supply, Market Failure and Externalities and 9 more.
Questions
Question 1 [2 marks]
Measuring Economic Performance
Define "real GDP" and explain why it is generally considered a better measure of a country's output than nominal GDP.
Question 2 [3 marks]
International Trade and the Balance of Payments
Define "non-tariff barrier" and give one example of how a government could restrict imports without using a tariff or a quota.
Question 3 [3 marks]
Labour Markets and Wage Determination
Define "occupational immobility of labour", give one example of a barrier that causes it, and explain one consequence for unemployment.
Question 4 [3 marks]
Market Structures and Competition
Define "non-price competition", and give two examples of how oligopolistic firms in the UK supermarket industry might compete with each other without changing price.
Question 5 [5 marks]
Fiscal and Monetary Policy
A government currently spends 820 billion pounds and raises 760 billion pounds in tax revenue in a given year. National debt at the start of the year was 2100 billion pounds.
Calculate the size of the budget deficit for the year, and the resulting national debt at the end of the year, assuming no other changes to the debt.
Question 6 [5 marks]
Money, Banking and the Financial Sector
A bank holds total assets of 900 million pounds, of which 45 million pounds are held as liquid reserves.
Calculate the bank's liquidity ratio as a percentage of total assets, and explain the trade-off the bank faces in choosing how high to set this ratio.
Question 7 [5 marks]
Supply-Side Policy and Economic Growth
Analyse two potential drawbacks of relying on interventionist supply-side policies, such as large-scale government spending on infrastructure and education, to raise long-run growth.
Question 8 [5 marks]
Elasticity of Demand and Supply
A train operating company has a PED of -0.4 for its off-peak tickets, currently priced at 12 pounds. The company is considering a 5 percent price rise.
Calculate the expected percentage change in quantity demanded, and state what will happen to the company's total revenue as a result.
Question 9 [5 marks]
Government Intervention in Markets
A factory emits smoke that affects a nearby laundry business. Instead of a government tax or regulation, the government considers assigning clear legal property rights over local air quality to the laundry business, allowing it to bargain directly with the factory.
Explain how extending property rights in this way could allow the externality to be resolved through private bargaining rather than government intervention, and identify one condition needed for this to work well.
Question 10 [6 marks]
Aggregate Demand and Aggregate Supply
An economy's current real GDP is 900 billion pounds, and its estimated potential output is 950 billion pounds, so the economy has spare capacity. Aggregate demand then rises by 40 billion pounds due to a rise in consumer confidence, and the economy's multiplier is 1.25.
Calculate the total rise in aggregate demand once the multiplier effect is included, calculate the resulting level of real GDP, and analyse, using the concept of the Keynesian LRAS curve, why this rise in AD is unlikely to cause a significant rise in the price level.
Question 11 [6 marks]
Demand, Supply and Price Determination
In 2025 a prolonged drought reduced wheat harvests across East Anglia by an estimated 30 percent, while global wheat demand continued to rise due to population growth.
Analyse the likely effect of these combined events on the equilibrium price of bread in the UK, and identify one factor that might limit the size of the price change.
Question 12 [6 marks]
Market Failure and Externalities
A government issues 500 tradable pollution permits, each covering one tonne of carbon emissions, to a steel plant. The market price of a permit is 45 pounds. The plant currently emits 650 tonnes per year.
Calculate the cost to the plant of buying enough extra permits to cover its current emissions, and analyse how this cost is likely to affect the plant's incentives regarding future emissions.
Question 13 [6 marks]
Fiscal and Monetary Policy
A government increases spending by 50 billion pounds, funded entirely by borrowing. Economists estimate the simple fiscal multiplier, ignoring any crowding-out effect, at 1.6, but also estimate that the resulting rise in government borrowing will crowd out 15 billion pounds of private investment that would otherwise have occurred.
Calculate the initial estimated rise in national income using the simple multiplier, and evaluate how much smaller the actual rise in national income is likely to be once crowding out and the multiplier effect on the lost investment are both taken into account, given that the same multiplier of 1.6 applies to the fall in investment.
Model solutions
| Question 1[2 marks] | |
|---|---|
| Answer or working | Marks |
| a correct definition of real GDP as the value of output or national income adjusted for inflation | 1 |
| explaining it is a better measure because it strips out the effect of price changes, allowing genuine changes in output to be compared over time | 1 |
| Final answer: Real GDP is GDP adjusted for inflation; it is a better measure because it isolates true changes in output from price changes. | |
| Question 2[3 marks] | |
|---|---|
| Answer or working | Marks |
| a correct definition of a non-tariff barrier as any government measure, other than a tariff or quota, that makes it harder or more costly for foreign firms to sell in the domestic market | 1 |
| a valid example, e.g. imposing very strict product safety or technical standards that are more costly for foreign firms to meet than for domestic firms | 1 |
| explaining that this raises costs or delays for foreign firms trying to sell in the market, discouraging imports in a similar way to a tariff or quota, without the government having to impose either directly | 1 |
| Final answer: A non-tariff barrier is any measure, other than a tariff or quota, that makes importing harder, e.g. imposing strict product standards that are costlier for foreign firms to meet, discouraging imports without a formal tariff or quota. | |
| Question 3[3 marks] | |
|---|---|
| Answer or working | Marks |
| a correct definition of occupational immobility as the inability of workers to move between different types of job or occupation | 1 |
| a valid example, e.g. a lack of the qualifications or skills needed for a new occupation | 1 |
| explaining a consequence, e.g. this can cause structural unemployment to persist even where vacancies exist in other occupations | 1 |
| Final answer: Occupational immobility is the inability of workers to move between different jobs, e.g. because they lack the qualifications needed for a new occupation; this can leave structural unemployment even when vacancies exist elsewhere. | |
| Question 4[3 marks] | |
|---|---|
| Answer or working | Marks |
| a correct definition of non-price competition as firms competing for customers using methods other than lowering price | 1 |
| a valid example, e.g. loyalty card schemes offering points and personalised discounts | 1 |
| a second valid example, e.g. advertising, in-store experience, or product range and quality | 1 |
| Final answer: Non-price competition means competing without cutting price, e.g. supermarkets using loyalty card schemes, advertising, or improving in-store experience and product range. | |
| Question 5[5 marks] | |
|---|---|
| Answer or working | Marks |
| identifying the budget deficit as government spending minus tax revenue | M1 |
| a budget deficit of 820 - 760 = 60 billion pounds | A1 |
| adding the deficit to the starting national debt | M1 |
| national debt at the end of the year = 2100 + 60 = 2160 billion pounds | A1 |
| correctly distinguishing the deficit, a flow measured over the year, from the debt, a stock measured at a point in time | 1 |
| Final answer: Budget deficit = 60 billion pounds; national debt rises to 2160 billion pounds. | |
| Question 6[5 marks] | |
|---|---|
| Answer or working | Marks |
| liquidity ratio = liquid reserves / total assets x 100 | M1 |
| liquidity ratio = 45 / 900 x 100 = 5% | A1 |
| identifying that a higher liquidity ratio would make the bank more able to meet a sudden surge in customer withdrawals | 1 |
| explaining that holding more liquid, often lower-yielding, reserves means less is available to lend out at higher interest rates, reducing profitability | 1 |
| concluding that banks and regulators must balance the safety benefits of higher liquidity against this profitability cost | 1 |
| Final answer: Liquidity ratio = 45 / 900 x 100 = 5%; a higher liquidity ratio would make the bank better able to meet a surge in withdrawals, but holding more low-yielding liquid assets reduces the amount available to lend at higher interest and so reduces profitability. | |
| Question 7[5 marks] | |
|---|---|
| Answer or working | Marks |
| identifying a drawback relating to cost, e.g. interventionist policies are often expensive and must be financed by higher taxation or borrowing | 1 |
| explaining a consequence of this, e.g. higher borrowing may increase national debt, or higher taxation could reduce incentives elsewhere in the economy, partly offsetting the supply-side benefit | 1 |
| identifying a second drawback relating to time, e.g. many interventionist policies, such as building infrastructure or educating a workforce, take a long time to feed through into higher productive capacity | 1 |
| explaining a consequence of this, e.g. the policy will not address a current, short-term problem such as a demand-side downturn, and the long time lag makes its effects hard to evaluate | 1 |
| a further valid point, e.g. government may lack the information to identify which projects will most effectively raise productive capacity, risking inefficient spending | 1 |
| Final answer: Interventionist supply-side policies can be costly (requiring higher tax or borrowing) and slow to take effect, so they may not solve short-term problems and could involve inefficient spending. | |
| Question 8[5 marks] | |
|---|---|
| Answer or working | Marks |
| using %change in Qd = PED x %change in P | M1 |
| substituting -0.4 x 5% | M1 |
| a 2% fall in quantity demanded | A1 |
| correctly stating total revenue will rise | 1 |
| explaining that this is because demand is price inelastic, so the percentage fall in quantity is smaller than the percentage rise in price | 1 |
| Final answer: Quantity demanded falls by 2%; total revenue increases because demand is price inelastic, so the percentage fall in quantity is smaller than the percentage rise in price. | |
| Question 9[5 marks] | |
|---|---|
| Answer or working | Marks |
| explaining that if the laundry has a legal right to clean air, the factory must compensate it, or pay to pollute, if it wants to continue emitting smoke | 1 |
| explaining that the two parties can then negotiate a mutually acceptable payment, reflecting the true cost of the externality, without the government needing to set a tax or standard itself | 1 |
| explaining that this internalises the externality, since the factory now faces a cost that reflects the damage caused to the laundry | 1 |
| identifying that this is an example of the Coase theorem, in which clearly defined property rights can allow an efficient outcome to be reached through bargaining | 1 |
| a valid condition needed for this to work well, e.g. low transaction (negotiating) costs, a small number of parties involved, and property rights that are clearly defined and enforceable | 1 |
| Final answer: Giving the laundry a legal right to clean air forces the factory to negotiate and pay compensation reflecting the true cost of its pollution, internalising the externality without government tax or regulation (the Coase theorem); this works well only where transaction costs are low, few parties are involved, and property rights are clear and enforceable. | |
| Question 10[6 marks] | |
|---|---|
| Answer or working | Marks |
| calculating the total rise in aggregate demand as 40 x 1.25 | M1 |
| a total rise in aggregate demand of 50 billion pounds | A1 |
| a new level of real GDP of 900 + 50 = 950 billion pounds | A1 |
| explaining that the Keynesian LRAS curve is relatively flat below full employment output, since there is spare capacity of labour and capital that can be brought back into use | 1 |
| explaining that because the economy started with 50 billion pounds of spare capacity, exactly matching the rise in AD, firms are able to meet the higher demand mostly by increasing output rather than by raising prices | 1 |
| a developed point, e.g. only once real GDP reaches the level of potential output, at 950 billion pounds, would further rises in aggregate demand be expected to cause a much larger rise in the price level, as the LRAS curve becomes increasingly steep near and beyond full employment | 1 |
| Final answer: The total rise in aggregate demand, once the multiplier is applied, is 50 billion pounds, taking real GDP to 950 billion pounds, exactly its potential output. Because the economy had spare capacity, the Keynesian LRAS curve is relatively flat over this range, so the rise in AD is absorbed mostly through higher output rather than higher prices; only demand rises beyond this point, once potential output is reached, would be expected to cause significant inflation. | |
| Question 11[6 marks] | |
|---|---|
| Answer or working | Marks |
| identifying that a fall in wheat harvests is a fall in supply of a key input to bread production | 1 |
| explaining that this shifts the supply curve for bread to the left and raises production costs | 1 |
| identifying that rising global wheat demand adds further upward pressure on wheat and bread prices | 1 |
| describing, in words, a supply and demand diagram in which a leftward supply shift raises equilibrium price and lowers equilibrium quantity | 1 |
| correctly identifying a limiting factor, such as the price elasticity of demand for bread, or the availability of imported wheat as a substitute source of supply | 1 |
| developed analysis linking the limiting factor to a smaller than expected change in price or quantity | 1 |
| Final answer: Bread prices are likely to rise as costs increase and supply falls while demand grows; the size of the rise may be limited by substitute imported wheat or by demand remaining fairly stable. | |
| Question 12[6 marks] | |
|---|---|
| Answer or working | Marks |
| identifying the shortfall in permits, 650 - 500 = 150 permits | M1 |
| the cost of buying extra permits, 150 x 45 = 6750 pounds | A1 |
| explaining that this cost creates a financial incentive for the plant to reduce emissions, e.g. by investing in cleaner technology, to avoid buying further permits | 1 |
| explaining that if the plant instead reduces emissions below its allocation, it could sell spare permits for extra revenue, reinforcing the incentive to cut emissions | 1 |
| a developed point on the market mechanism, e.g. the permit price itself may rise if many firms need extra permits, strengthening the incentive to invest in abatement | 1 |
| a valid evaluative caveat, e.g. the strength of the incentive depends on the permit price remaining high relative to the plant's own cost of reducing emissions | 1 |
| Final answer: The plant must buy 150 extra permits at a cost of 6750 pounds; this cost gives it a financial incentive to invest in lower emissions, since cutting emissions below its allocation would let it avoid these costs or even sell spare permits, though the strength of the incentive depends on the permit price relative to abatement costs. | |
| Question 13[6 marks] | |
|---|---|
| Answer or working | Marks |
| calculating the initial estimated rise in national income, 50 x 1.6 | M1 |
| an initial estimated rise of 80 billion pounds | A1 |
| calculating the multiplied effect of the crowded-out investment, 15 x 1.6 | M1 |
| a fall in national income from crowding out of 24 billion pounds | A1 |
| identifying the net rise in national income once crowding out is included, 80 - 24 = 56 billion pounds | 1 |
| an evaluative point, e.g. crowding out significantly reduces, but here does not fully eliminate, the expansionary effect of the fiscal stimulus, so the policy is still likely to raise national income, though by considerably less than the simple multiplier alone would suggest | 1 |
| Final answer: The simple multiplier suggests an initial rise in national income of 80 billion pounds, but once the multiplied effect of 24 billion pounds of crowded-out investment is subtracted, the net rise in national income is likely to be closer to 56 billion pounds, showing crowding out significantly reduces, though does not eliminate, the effectiveness of the fiscal stimulus. | |