Version 1. Genera January. omics. Econo ECON1. (Spec. the

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1 Version 1 Genera al Certificate of Education January 2013 (A-level) Econo omics ECON1 (Spec cification 2140) Unit 1: Markets and Market Failure Report on the Examination

2 Further copies of this Report on the Examination are available from: aqa.org.uk Copyright 2013 AQA and its licensors. All rights reserved. Copyright AQA retains the copyright on all its publications. However, registered schools/colleges for AQA are permitted to copy material from this booklet for their own internal use, with the following important exception: AQA cannot give permission to schools/colleges to photocopy any material that is acknowledged to a third party even for internal use within the centre. Set and published by the Assessment and Qualifications Alliance. The Assessment and Qualifications Alliance (AQA) is a company limited by guarantee registered in England and Wales (company number ) and a registered charity (registered charity number ). Registered address: AQA, Devas Street, Manchester M15 6EX.

3 Unit 1: Markets and Market Failure (ECON1) Section A: Objective Test (ECON1/1) General The mean mark for the paper was 14.7 and the standard deviation 4.2. These statistics indicated that students found the test to be slightly more demanding overall than the previous paper. The corresponding mean mark for the January 2012 paper was 14.8 with a standard deviation of 4.7. However, the paper was easier than the January 2011 paper which had a mean of 14.2 and a standard deviation of 4.6. This range of variability is to be expected and the level of difficulty this January was consistent with the examiners expectations when constructing the paper. The statistical analysis of the questions did indicate an issue with one question which was resolved in a way which did not invalidate the test as a whole or disadvantage any students. The individual question test statistics indicate that, with one exception, the test discriminated very effectively between more and less able students. All but one question performed within acceptable limits and, after adjustment, none were rejected from the test. The individual question test statistics indicated that students found Questions 1, 7, 9, 14, 18, and 25 fairly easy in that 65% or more of the students answered them correctly. Only Question 1 proved to be especially easy in that it was answered correctly by more than 80% of students. This compared with 4 easy and 3 very easy questions in January Question 1 was the easiest in the test with a facility of per cent. Questions, 10, 15 and 19, were demanding with facilities between per cent. Question 19 was the most demanding in the test followed by Question 10. Question 15 only just fell into the category of demanding. Despite their above average difficulty all three questions discriminated well between the more and less able students in the test. Question 11 was the most demanding in the test with a facility of only 29.67%. This low result for Question 11 was also associated with a prominent distractor. The reason for the prominent distractor raised an issue of concern to the Examiners. The issue is detailed below and was resolved in favour of students. Questions No common topic area or theme linked the three relatively demanding questions or Question 11 with its prominent distractor. Overall, the results indicated a generally satisfactory level of knowledge and understanding of the specification as a whole. The exceptions were the usual weakness in applying the concept of price elasticity and, more surprising, poor understanding of opportunity cost. Question 1 This question was included as the first in the test because it was expected to prove easy for the majority of students. Students are expected to have a sound knowledge and clear understanding of the meaning and nature factors of production and, on this occasion, this proved to be the case. 82.2% of students selected the Key, B. Few students opted for distractors A and C but a surprising 14 per cent thought that the productivity of labour was a factor of production, distractor D. This confusion indicated that in teaching this part of the specification a clear distinction needs to be made between the factors of production themselves and their attributes in use. 3

4 Question 10 This question involved understanding of the significance of external costs and benefits for government decisions affecting the economic welfare of the whole community. The question involved both application and analysis and, as common with many questions involving some simple numerical analysis, was expected to be amongst the more demanding questions in the test. The calculations of the net benefits of the four projects showed that the optimal decision to spend the limited resources is to build new hospitals, response B. The data provided gave a net benefit of ( ) (450+90) = million for new hospitals. The Key B was selected by 47.4% of students. An indication of students lack of understanding of the relevant concepts and their application was the choice by 29.6% of new railways, distractor A, as the optimal project. The data provided for new railways showed a negative net benefit of ( ( ) = million for this project. This implied that many of the students selecting distractor A were misled by the high absolute values for the private and external benefits for new railways and failed to make the necessary calculations to compare these benefits with the associated high costs. Question 11 In relation to the Examiners view regarding the correct response, Key B, this was the most demanding question in the test. The Specification states that the classification of merit and demerit goods depends upon value judgements and may also be subject to positive and negative externalities in consumption. Benefits in consumption are shown by the marginal private benefit (MPB) and marginal social benefit (MSB) curves and, by definition, a demerit good is one for which the marginal social benefits are less than the marginal private benefits, as illustrated in diagram B. However, response A attracted 57% of students, including many who otherwise performed amongst the top in the test overall, and the Examiners recognised that such a large response must have had some basis in what students had been taught. Some textbooks appear to classify merit and demerit goods as those involving a divergence between marginal private and social costs, even though these relate to production not consumption. On this definition diagram A, which shows the MSC curve to the left of the MPC curve, can be taken to illustrate a demerit good. The Examiners took the view that because of the difference in interpretation and explanation of merit and demerit goods apparent in textbooks that it would be unfair to penalize students for selecting a response which corresponded with what they had been taught. Accordingly responses A and B were marked as correct giving a combined overall facility of 87% for the question. Question 15 This question tested students ability to apply their knowledge and understanding of factors affecting the position of the supply curve and price elasticity of demand to the estimation of the value of elasticity derived from graphical and numerical information in a demand and supply diagram. The question proved moderately demanding with slightly less than 50% of students selecting the Key, B. The diagram illustrated a shift in supply resulting in a reduction in price of 20% and an increase in demand of 16%. This meant that demand was inelastic over the range of the price variation. Almost 29% of students went for distractor C, which also involved a correct reason for the shift in the supply curve but an implied elastic not inelastic value for price elasticity. 4

5 Question 19 This question proved much more challenging to students than expected by the Examiners. Only 41.4% of students selected the Key, A. The question did not involve numerical calculation or interpretation of numerical price/cost data. It simply required students to understand the concept of opportunity cost and apply this to a movement along a firm s production possibility frontier. The majority of students went for distractors B and C. The choice of either distractor implied a surprising lack of understanding of the concept of opportunity cost. Distractor B, 29%, implied an inability to apply the concept, even if understood, in a familiar context. The choice of distractor C, 28%, was even more worrying because it demonstrated a complete lack of understanding of the concept of opportunity cost in relation to the production possibility frontier. Distractor C stated that there was no change in a firm s opportunity cost of production had it changed output despite the fact that the production possibility frontier in the diagram provided is a curve. Students should know that opportunity cost is only constant along a straight line production possibility curve. 5

6 Section B: Data Response (ECON1/2) General The mean mark for ECON 1 was 29.0, which was slightly lower than for January 2012 when the mean was Context 2 proved to be significantly more popular than Context 1, with over 61% of students attempting the former. Many students were well prepared for the first part of the data-response question and provided a concise definition. However, where appropriate, they must consider both parts of the term which needs defining. Even though the definitions given were not always correct or complete, many students were able to gain up to 4 marks by providing partial definitions and/or a diagram and/or an example. With regard to Questions 02 and 06, students have become better prepared at identifying two significant points of comparison. These included comparing the beginning and the end of the two data series; comparing peaks in the two data series; comparing troughs in the two data series; noting that the values in one of the two data series are always above (or below) those of the second data series, where applicable; identifying positive or negative correlations between the two data series and identifying volatility or stability in a particular data series. Students should be aware that a good answer provides overview, backed up by evidence (statistics) from the data. They must also remember always to give the units of measurement in their answers when quoting statistics in order to gain maximum marks. The exception here is where the data are in the form of index numbers. In this case, examiners would wish to see some recognition in a candidate s answer of the fact that data are in the form of index numbers, but statistics can then be quoted without further reference to that fact. When answering Questions 03 and 07 of the data-response questions students should look for appropriate prompts in the relevant Extract(s) and ensure that they actually answer the question set. A prompt is there to help the student to answer the question, and provides a starting point from which the chain of reasoning in the explanation can be developed, and from which the diagram can be drawn. Marks are not rewarded for simply describing what the diagram shows, although marks are available for explaining the adjustment to the initial equilibrium. Students can also earn up to two marks for including relevant definitions. Finally, for the last question, students should remember that before they evaluate, they must first analyse, ie provide some relevant economic theory from which to build their evaluation. Students should also ensure that their theory is applied appropriately to the context in the question, and that the answer includes explicit reference to the data. It is good practice to evaluate each argument as it is introduced into the answer, as well as providing an overall conclusion. Students should be reminded that the essay questions provide each of them with the ideal opportunity to demonstrate their understanding of economics and their ability to think like an economist, and they should seize that opportunity. 6

7 Context 1 Question 01 The majority of students were able to define cross elasticity of demand and/or provide the correct formula, though some definitions were vague and displayed limited understanding of the concept. Some went on to earn full marks by identifying the substitute relationship. A few quoted examples or identified the fact that both must change in the same direction. However, a significant number ignored the requirement to define the positive part of the term. A few students made use of a diagram to help answer this question. Over 40% of students scored maximum marks on this part of the question. The mean mark for this question was 3.3. Question 02 This question was generally well answered though a common error was for students to ignore the thousands causing a constraint of 6 marks to be imposed. A few included no linking words which would have allowed the comparison to be clearly made and were limited to 2 marks for significant features only. Others ignored the fact that the data referred to Cars by fuel type and referred to petrol and diesel only. Students must take care to interpret the data correctly. The mean mark for this question was 4.8. Question 03 Just over half of the students achieved at least 8 marks on this part of the question. The mean mark for this question was 7.3. Many students were able to explain how the PED for road travel would affect the demand for road travel if the taxes on fuel increased. However, a minority of students went on to explain how this would affect the government s revenue. Indeed, if there were no reference to tax revenue, the answer was constrained to a maximum of 8 marks. The majority recognised that the implementation of an indirect tax shifted the supply curve to the left on the diagram. However, few students were able to show correctly the area of tax revenue on their diagram. A common misconception was that students confused total revenue with tax revenue. Consequently, the majority of diagrams scored 3 marks rather than the maximum 4. Definitions were often included as part of the answer, such as PED and taxation. Some students did not mention PED and and wrongly assumed that if taxes increased, demand would fall so revenue would always fall. Elasticity is an important topic and students should be prepared to apply it to the examination context as well as quote the formulas. Question 04 The mean mark for this question was There were some very good answers which included good analysis and evaluation of at least two policies. The analysis was often well supported by diagrams, and the answers made explicit reference to the data to add weight to different arguments, for example, the costs of providing bus subsidies or the running costs of road pricing. Weaker answers tended to be descriptive, sometimes paraphrased the data, generally lacked economic analysis, and contained superficial evaluation. Most students concluded that the best policy was probably a combination of policies, and a number of them referred to the current state of the economy and the inability/unwillingness or otherwise to finance possible schemes. 7

8 Context 2 Question 05 This question was not well answered with only about 20% of students scoring maximum marks. The mean mark for this question was 3.0. Many students gained 3 marks for defining private cost but did not deal with marginal. There was confusion with external or social costs, both in terms of the definition and the examples provided. A few students provided accurate diagrams to support the answer. Question 06 The majority of students were able to provide two significant points of comparison supported by accurate data. Those who failed to achieve full marks did not refer to prices and/or annual percentage change or in this question, more so than in Question 02, did not select comparisons considered to be significant. The mean mark for this question was 5.1. Question 07 This was a straightforward question with almost 30% of students scoring maximum marks. It was evident that most students were familiar with the theory relating to subsidies; hence the majority achieved the maximum 4 marks for the diagram. Some students included relevant definitions, such as subsidy, demand and supply. Students who were able to apply the theory to the context, and link the markets for soya etc (ingredients) and processed food achieved the full marks. Some students, however, misinterpreted the relationship between the ingredients and processed food, or referred erroneously to the markets for fruit and vegetables. To avoid such occurrences, it is vital that students take the time to read the data properly. The answer was constrained to 8 marks if students failed to answer the question and make a valid link between the two markets. As an additional point, it is good practice to provide a title for diagrams, particularly when more than one market is referred to in the question. The mean mark for this question was 8.7. Question 08 This question required students to discuss the arguments for and against government intervention in the markets for food and drink. A common approach was to start and end their answers with why a government should intervene, whilst the majority of the answers dealt with the pros and cons of various policies. Others focused only on policies, eg a tax on junk food, and subsidising healthy food, while answers often did not consider the arguments for and against. Those who explored market failure, in terms of demerit/merit goods, and who presented arguments for government failure and then market forces tended to score highly. They were able to use the data to justify why intervention was needed. Some drew on their own knowledge of recent developments in these markets, and the subsequent analysis was well-supported by diagrams as in Question 04. The best answers contained evaluation and offered a clear final judgement. Weaker answers lacked economic content, and tended to copy the data rather than use it effectively, similar to the responses in Question 04. The mean mark for Question 08 was 12.7, which was very similar to that for Question 04. Mark Ranges and Award of Grades Grade boundaries and cumulative percentage grades are available on the Results statistics page of the AQA Website. UMS conversion calculator 8