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Assessment task 1

Outcome covered 1
Assessment task instructions
Prior to undertaking this assessment you will be allowed to prepare the equivalent
of 250 words of your own summary notes. You are free to consult your prepared
notes during the assessment, but they must be submitted with your answer script.
This assessment will be completed under controlled conditions, which means that
you will work independently in a supervised environment.
Read the following case study and answer the questions which follow.
Case study
WJE is an independent British manufacturer of quality sports cars based in Dumfries.
The company manufactures lightweight sports cars with powerful engines and has
become the only specialised sports car manufacturer in Scotland, offering a select
range of performance cars, built to a high standard. Most vehicles use the WJE
engine which is highly regarded for speed and reliability. WJE performance sports
cars are constructed from tubular steel frames, cloaked in fibreglass or carbon fibre
bodywork.
The company began its life in 1960 in the old Rubber factory, in Dumfries. The
factory though old was of a suitable size to allow for the production of several cars at
any one time. In 1962 the company launched their highly successful WJE Tiger
which quickly gained a strong reputation for power and reliability. Sales for the Tiger
quickly reached 100 units per year, and in 1967 WJE were selling 145 units per year.
By 1970 sales were beginning to drop and the second model to be known as the
Panther was introduced. The Panther saw the company progress well outside its
Scottish roots with around 60% of the sales being exports to Europe and the US.
This strong reliance on foreign exports has stayed with the company throughout its
existence.
The 80s saw the introduction of harsher safety regulations, which meant major reengineering to the Panther and the rushed introduction of the Lynx.
The Lynx unlike the previous two cars was not an instant success and sales
performance for the company dropped by 40% in year one and a further 20% in
subsequent years. In this period the company was running at a loss, with
redundancies and a freeze on investment.
In 1990 the company launched the Tiger2; this was an attempt to get back to their
core customers with a nostalgic harking back to the original Tiger. This strategy
proved to be a great success and sales figures rose well beyond expectations with
sales demand for 300 units per year.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

4
December 2011

Throughout the early part of the millennium sales continued to grow and the
company remained profitable.
Today the company is producing 500 Tiger2s and profits are strong, but the company
is concerned that this will be sustained in the long term.
One option available would be to introduce a new model the Puma which will
take five years to develop, or alternatively the Tiger2 could be upgraded at a modest
cost. The company recognises that they do not have the managerial resources,
physical resources or enough money to pursue both options.
Management is also concerned about the impact the present economic climate might
have on their sales, given that the car is a luxury item.
Research carried out into sport car sales shows that the sector is going through
difficult times. Figures show that sales of rival producer company As car the 370R
are down 34% from the previous year. WJEs other competitor company Bs GX7
has not fared much better with sales down 25%.
WJE have commissioned consultants to look into the potential market for their
proposed new car the Puma. The outcome of this research can be seen in the
following demand and supply schedule in Table 1.
Table 1 Potential demand and supply figures for the Puma
Price

Demand (Sales per year)

Supply (Sales per year)

20000

800

25000

700

200

30000

500

500

35000

400

600

40000

300

700

45000

200

800

50000

100

900

Looking ahead the company is keen to retain their strong export base; however they
are highly aware of factors which might impact on this, such as exchange rates and
political stability.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

5
December 2011

Answer the following questions in relation to WJE


1

Economics revolves around the nature of choice and the availability of


resources. With reference to WJEs current situation, explain what is meant by
the term the basic (central) economic problem.

In relation to WJEs current situation explain what is meant by the term


opportunity cost.

Figure 1 shows the demand and supply curves for performance sports cars
similar to those offered by WJE. The quantity demanded is illustrated by line D,
and the quantity firms are prepared to supply is illustrated by line S.

Figure 1 World Market for Performance Sports Cars


S1

Price
()

S
S2

D1
D2

Quantity Demanded and Supplied


(a) In figure 1 identify which curve would best depict the likely outcome for
each of the following situations.
(i) New legislation significantly increases safety requirements, requiring a
substantial and expensive redesign of sports cars.
(ii) The launch of a successful television programme which features
performance sports cars.
(iii) A significant technological advancement in the manufacture of carbon
fibre as used in WJEs cars, which will reduce material costs by 25%.
(iv) Research uncovers greatly increased risks of serious injury in accidents
involving sports cars.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

6
December 2011

(b) For each situation in part (a), indicate whether your selected curve
represents an increase or decrease in demand, or an increase or decrease in
supply at every possible price in the market.

Using the demand and supply figures for the Puma contained in Table 1,
construct a suitably labelled demand and supply diagram, and clearly identify the
equilibrium price and quantity.

It has been forecast that, in future, insurance costs for sports cars will rise
sharply. This will have an adverse affect on the demand for WJEs Puma car with
an estimated fall in sales of 100 Puma cars per year at each market price.
(a) Draw and label the new Demand Curve on the diagram that you have
constructed in question 4.
(b) Explain how market forces would act to return the market to a state of
equilibrium at the new equilibrium position.
(c) Identify the new equilibrium price and quantity.

Using the demand figures in Table 1 in the case study, calculate the price
elasticity of demand for a Puma sports car if the price changed from 30,000 to
40,000.

Referring to your calculation in Question 6, explain the concept of price elasticity


of demand and its relevance to WJE if market price were to change from
30,000 to 40,000 per car.

The demand for WJE cars has, to date, proven to be relatively income elastic.
With reference to this statement, explain the concept of income elasticity of
demand.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

7
December 2011

Assessment task 1
Outcome covered 1
Suggested solution and making an assessment decision
1

Economics revolves around the nature of choice and the availability of


resources. With reference to WJEs current situation, explain what is meant
by the term the basic (central) economic problem.
The basic economic problem is one of scarcity and choice, in the case study the
example that the candidate should identify concerns whether the company
should develop a new car design or modify its current model. Managerial,
physical and financial resources are limited, with the finance required for the new
design and manufacture being substantial; however it would give them a fresh
new product to offer to their customers. An alternative option which may be more
prudent would be to extend the lifecycle of their current successful model which
requires considerable less financial resources. The candidate should emphasise
the three basic decisions of which (which product to produce), how (how much to
produce) and who (who gets the product).

In relation to WJEs current situation explain what is meant by the term


opportunity cost.
In question one the candidate identified the economic problem of whether to use
its resources to produce a new model or to upgrade their current model. Only one
choice can be made and choosing one will automatically mean rejecting the
other. Opportunity cost is not a financial measure but refers to the missed
opportunity as a result of how scarce resources are used. If WJE opts for the new
design then the opportunity cost is missing out on modification of their current
model.

(a) (i) New legislation significantly increases safety requirements,


requiring a substantial and expensive redesign of sports cars.
The cost of the redesign will mean that the company is less willing to
supply at the current price level so the supply curve will move to the left
at S1.
(ii) The launch of a successful television programme which features
performance sports cars.
The result of this change will be an increase in demand at all price levels
so the demand curve is likely to move to the right, to D1.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

8
December 2011

(iii) A significant technological advancement in the manufacture of


carbon fibre as used in WJEs cars, which will reduce material costs
by 25%.
This reduces the companys overall cost so they are more willing to
supply at all price levels. This will mean that the supply curve will move to
the right, ie S2.
(iv) Research uncovers greatly increased risks of serious injury in
accidents involving sports cars.
This could put consumers off buying a sports car in favour of other cars,
and the demand curve for sports cars will move to the left to D2.
(b) For each situation in part (a), indicate whether your selected curve
represents an increase or decrease in demand, or an increase or
decrease in supply at every possible price in the market.
(i)
(ii)
(iii)
(iv)
4

A decrease in supply
An increase in demand
An increase in supply
A decrease in demand

Using the demand and supply figures for the Puma contained in Table 1,
construct a suitably labelled demand and supply diagram, and clearly
identify the equilibrium price and quantity.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

9
December 2011

It has been forecast that in future, insurance costs for sports cars will rise
sharply. This will have an adverse affect on the demand for WJEs Puma
car with an estimated fall in sales of 100 Puma cars per year at each market
price.
(a) Draw and label the new Demand Curve on the diagram that you have
constructed in question 4.

(b) Explain how market forces would act to return the market to a state of
equilibrium at the new equilibrium position.
The fall in demand at each possible market price would lead to an excess of
supply by 100 Puma cars at what had been the old equilibrium position. The
result would be that market forces would exert downward pressure upon the
market price until eventually the market returned to an equilibrium position at
the new equilibrium position.
(c) Identify the new equilibrium price and quantity.
The new equilibrium price is approximately 28500, and the equilibrium
quantity is approximately 450 Puma cars.
Scottish Qualifications Authority
HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

10
December 2011

Using the demand figures in Table 1 in the case study, calculate the price
elasticity of demand for a Puma sports car if the price changed from
30,000 to 40,000.
Elasticity of demand refers to the behaviour of demand for a product against
changing price conditions. Calculate the price elasticity of demand under the
following condition:
Price rises from 30,000 to 40,000
Price elasticity of demand = % change in quantity demanded
% change in price
%change in quantity demanded = (500 - 300/500) x100 = 40%
%change in price = (3000 - 4000/3000) x100 = 33.3%
Price elasticity of demand = 40%/33.3% = 1.2
The demand for WJE cars is said to be elastic as the price elasticity of demand
(PED) is greater than one. This means that the percentage change in demand is
greater than the percentage change in price.

Referring to your calculation in Question 6, explain the concept of price


elasticity of demand and its relevance to WJE if market price were to
change from 30,000 to 40,000 per car.
Candidates should demonstrate a clear understanding of price elasticity of
demand. A numerical example or just providing the formula would not be
sufficient without an explanation. Candidate evidence should include an
explanation that price elasticity of demand measures the extent to which demand
changes when there is a change in market price.
The response should make reference to WJE. Candidates should recognise that
the situation is elastic, and the rise in price impacts upon revenue. At 30,000
sales are 500 cars per year, giving revenue of 1,500,000. If the market price
rose to 40,000 sales would fall to 300 cars, giving revenue of only 1,200,000. A
good submission should question the validity of this option and consider ways in
which WJE can hold their price down, such as a change of materials or
manufacturing source or process.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

11
December 2011

The demand for WJE cars has, to date, proven to be relatively income
elastic. With reference to this statement, explain the concept of income
elasticity of demand.
Candidates should demonstrate a clear understanding of income elasticity of
demand. A numerical example or just providing the formula would not be
sufficient without an explanation. Candidate evidence should include an
explanation that income elasticity of demand measures the extent to which
demand changes when there is a change in income. A satisfactory explanation of
elasticity versus inelastic situations would be likely to assist in clearly explaining
the concept. An excellent response could include differentiation between normal
and inferior goods, and referring to how these can be identified through the
positive or negative elasticity values.
The response should make reference to WJE. Candidates should recognise that
in WJE case it would appear that demand has been adversely affected by the
reduction in income, in other words the situation is likely to be relatively income
elastic.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

12
December 2011

Assessment task 2
Outcome covered 2
Assessment task instructions
Prior to undertaking this assessment you will be allowed to construct the
equivalent of 250 words of their own summary notes per Outcome. You are free
to consult your prepared notes during the assessment, but they must be
submitted with your answer script.
This assessment will be completed under controlled conditions, which means that
you will work independently in a supervised environment.
Read the following case study and answer the questions which follow.
Case study
WJE is an independent British manufacturer of quality sports cars based in Dumfries.
The company manufactures lightweight sports cars with powerful engines and has
become the only specialised sports car manufacturer in Scotland, offering a select
range of performance cars, built to a high standard. Most vehicles use the WJE
engine which is highly regarded for speed and reliability. WJE performance sports
cars are constructed from tubular steel frames, cloaked in fibreglass or carbon fibre
bodywork.
The company began its life in 1960 in the old Rubber factory, in Dumfries. The
factory though old was of a suitable size to allow for the production of several cars at
any one time. In 1962 the company launched their highly successful WJE Tiger
which quickly gained a strong reputation for power and reliability. Sales for the Tiger
quickly reached 100 units per year, and at its peak in 1967 WJE were selling 145
units per year. By 1970 sales were beginning to drop and the second model to be
known as the Panther was introduced. The Panther saw the company progress well
outside its Scottish roots with around 60% of the sales being exports to Europe and
the US. This strong reliance on foreign exports has stayed with the company
throughout its existence.
The 80s saw the introduction of harsher safety regulations, which meant major
reengineering to the Panther and the rushed introduction of the Lynx.
The Lynx unlike the previous two cars was not an instant success and sales
performance for the company dropped by 40% in year one and a further 20% in
subsequent years. In this period the company was running at a loss, with
redundancies and a freeze on investment.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

13
December 2011

In 1990 the company launched the Tiger2; this was an attempt to get back to their
core customers with a nostalgic look back to the old Tiger. This strategy proved to be
a great success and sales figures rose well beyond expectations with sales demand
for 300 units per year.
Throughout the early part of the millennium sales continued to grow and the
company remained profitable.
Today the company is producing 500 Tiger2s and profits are strong, but the
company is concerned that this will not last forever.
One option available would be to introduce a new model which will take five years to
develop or alternatively they could upgrade the Tiger2 at a modest cost. The
company recognises however that they do not have the managerial resources,
physical resources or enough money to pursue both options.
Management is also concerned about the impact the present economic climate might
have on their sales, given that the car is a luxury item.
Research carried out into sport car sales shows that the sector is going through
difficult times. Figures show that rival producer company As car the 370Z, sales were
down 34% from the previous year. WJEs other competitor company Bs RX7 has not
fared much better with sales down 25%.
WJE have commissioned consultants to look into the potential market for their
proposed new car which they propose to call the Puma. The outcome of this
research can be seen in the following demand and supply schedule in Table 1.
Table 1 Potential demand and supply figures for the Puma
Price

Demand ( Sales per


year)

Supply( Sales per year)

20000

800

25000

700

200

30000

500

500

35000

400

600

40000

300

700

45000

200

800

50000

100

900

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

14
December 2011

Looking ahead the company is keen to retain their strong export base; however they
are highly aware of factors which might impact on this, such as exchange rates and
political stability.
In order to get a better understanding of the economic factors affecting their
business, the management have requested that you provide some guidance on the
workings of the economy. Your report should provide information on how the
economy works which will enable the management to understand the likely impact of
economic changes on the business.
You have been requested to report back to the management answering the following
questions.
1

The management want to understand the circular flow of income and the
principles of withdrawals and injections. Construct a circular flow of income
diagram, with labels showing injections and withdrawals.

With reference to your diagram constructed in question 1:


(a) Explain how the Circular Flow of Income operates making reference to the
injections, withdrawals, and physical and monetary flows.
(b) Describe three injections and three withdrawals, providing a specific
example for each one.

Explain the multiplier principle in relation to the circular flow of income. In your
answer you should explain how the multiplier can substantially raise the level of
national income.

There are many problems in comparing National Income figures between


different countries, identify and explain four such reasons.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

15
December 2011

Assessment task 2
Outcome covered 2
Suggested solution and making an assessment decision
1

The management want to understand the circular flow of income and the
principles of withdrawals and injections. Construct a circular flow of
income diagram, with labels showing injections and withdrawals.
Each candidate is expected to construct a circular flow of income model.
Diagrams may differ in their structure; this will be acceptable provided the
principle elements are accurately portrayed.
Withdrawals/Leakages
Savings S
Taxation T
Imports M

Households
Income Y

Factor Incomes

Factor Services

Wages, Rent, Profit,


Interest

Labour, land,
Entrepreneurship, Capital

Consumption
Expenditure C

Firms
Injections
Investment I
Government Spending G
Exports X

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

16
December 2011

With reference to your diagram constructed in question 1:


(a) Explain how the Circular Flow of Income operates making reference to
the injections, withdrawals, and physical and monetary flows.
Each candidate should explain that the monetary flow goes from the firms to
the households by way of payment for labour and the other factors of
production, whilst consumption expenditure represents a monetary flow from
the household to the firms by way of purchases for goods and services.
Therefore households provide the factors of production whilst firms provide l
goods and services. Withdrawals should be identified in general terms as
factors which take money from the circular flow and include Savings,
Taxation and imports. The candidate should also identify the injections and
explain that they represent new money going into the circular flow by way of
Investment, Government Spending and Exports of goods.
Where injections exceed withdrawals the level of economic activity will
increase, helping to boost the level of national income and employment. The
reverse will happen when withdrawals exceed injections. The economy is
said to be in equilibrium when withdrawals are equal to injections.
(b) Describe three injections and three withdrawals, providing a specific
example for each one.
Each candidate should identify the three injections within the model:
Investments, this will be investments from firms, for example in new capital
equipment, premises or perhaps even in new business creation itself.
Government spending utilises money gained through taxation and
borrowing to improve the general wellbeing of the country, for example
hospitals, schools, the Police service, defence and infrastructure, etc.
Exports are goods and services which are sold abroad, examples could
include physical products such as Tweed or Whisky, or financial services,
etc.
Each candidate should identify the three withdrawals within the model:
Savings represent money which the households hold back for a rainy day,
and are often kept in an interest earning account in a bank or building
society.
Taxation is money withdrawn from the economy by the government and
can be direct taxation such as personal taxation or indirect such as VAT.
Imports are a leakage where we spend money outwith the domestic
market on goods and services produced abroad, examples could include
cars from Germany or Japan, olive oil from Italy, manufactured products
from China.

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

17
December 2011

Explain the multiplier principle in relation to the circular flow of income. In


your answer you should explain how the multiplier can substantially raise
the level of national income.
Each candidate must explain the nature of the multiplier where an injection of
money into the circular flow will have subsequent additional positive affect. For
example a new factory opening up will generate jobs, with jobs comes a salary,
workers have to spend their salary so more money is spent at the local stores,
local stores will need to stock more goods and therefore buy more. The
multiplication affect of the initial new injection therefore leads to a greater impact
on national income. The candidate may use figures to help illustrate the multiplier
effect and they should highlight that moneys pass from one person to another,
some money will tend to leak out of the circular flow through the factors indicated
previously. The sum of all the additions will be greater than the initial investment,
the actual amount with depend on how strong the leakages are from the circle.

There are many problems in comparing National Income figures between


different countries, identify and explain four such reasons.
Each candidate is expected to identify four reasons and explain why they cause
difficulties in making comparisons, acceptable examples could include:
inaccuracies in the data gathering either through human error or
computation.
double counting for example where a product may go through different
processes it may end up being counted twice. Different countries may treat
double counting in different ways
different methods of calculating national income figures may differ from one
country to another
black market economy activity
population size unless the national income figures are given on a per capita
basis it is difficult to make direct comparisons of the wealth of different
countries
unequal distribution of income making it difficult to compare one nation to
another
national income does provide an indication of wealth; however this does not
indicate what the quality of life is in a country

Scottish Qualifications Authority


HN Assessment Exemplar/F7J8 34/AEX002 V1
Business: Economic Issues: An Introduction

18
December 2011

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