SUGGESTED ANSWERS

EDEXCEL
Economics
Advanced Level
Suggested Answers and
Examiner Commentary for:

PAPER 1
2019
IMPORTANT NOTICE
These suggested answers have been prepared solely to help students
develop their exam technique for future exam sittings. These answers
are not endorsed by Edexcel. These answers were not written under
exam conditions and were prepared with knowledge of the relevant mark
schemes. The examiner commentary provided is written by experienced
examiners but is not endorsed by Edexcel. The answers provide just one
way to approach each question – other equally valid approaches and
responses are possible.
Edexcel Economics A

Paper 1 June 2019

Suggested Answers Examiner

Comments
Section A

Question 1

Part (a) – 2 marks

Showing the formula
PES = % change in Qs / % change in P and workings is
always helpful, in case
% in Qs = +21% (from the data) a mistake is made
with the calculation
Therefore, PES = 21/5.4 = +3.89

Part (b) – 1 mark MCQ It is important to be

able to interpret
Answer: C elasticity figures

Part (c) – 2 marks

One factor would be the length of time needed to build a new hous. New houses can be erected The question asks for
relatively quickly because they are often built at the same time as others on a new building 1 factor – the
development. Therefore, as house prices increases, construction firms can respond relatively candidate clearly
quickly to price changes and supply is price elastic. states it up front
before developing
their answer, using
their wider knowledge
of this sector.

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Question 2

Part (a) – 4 marks

The hurricane will lead to an inward shift of the supply curve. This causes the price of oil to There is no need to
increase and quantity traded to decrease. give any written
explanation for this
answer, but if it helps
candidates to think
clearly then it is
perfectly acceptable.

Marks would be
awarded here for
accurately labelled
axes, accurately
labelled curves, the
original equilibrium,
and the new
equilibrium.

An additional
excellent feature of
this diagram is the
consideration of PED
and PES when
drawing the curves.

Part (b) – 1 mark MCQ

Answer: A A hurricane is likely to

destroy infrastructure
and reduce the
economy’s productive
potential, hence
answer A is correct.

Note that while this

PPF question might
seem very
straightforward to
students at the end of
their Year 12 course of
study, it is easy to
forget this topic by
the end of Year 13 as
it is not revisited as
part of the 2nd year of
the A level course

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Question 3
Knowing the
Part (a) – 1 mark MCQ characteristics of the
main market
Answer: D structures is really
important. In this case,
enough data was
provided in the short
introduction – such a
large increase in the
no. of firms suggests
that barriers to entry
Part (b) – 4 marks are low
A firm in monopolistic competition in the long run earns only normal profit at the profit-max
point i.e. output occurs where AR = AC and where MC = MR

Marks would be
awarded here for
correct labelling of the
axes and the curves,
as well as identifying
the price and quantity
associated with a firm
in LR equilibrium in
monopolistic
competition

Question 4

The best way to tackle

Part (a) – 1 mark MCQ
this MCQ is to
Answer: C
eliminate the incorrect
answers in turn
Part (b) – 4 marks

Profit for GoCompare in 2016 was 17.5m / 1.215 = 14.40329m

There are several
steps required here in
Revenue for GoCompare in 2016 was 75.8m / 1.041 = 72.81460m
terms of quantitative
skills
Therefore, costs for GoCompare in 2016 were 72.81460 – 14.40329 = £58.41131m

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Question 5

Part (a) – 2 marks

In the free market, resources are allocated by the price mechanism. An increase in demand Reference to the price
raises the price, which is a signal to producers to use more resources in the production of that mechanism is ideal,
particular good or service. along with 1 of the
functions of prices (in
this case, signalling)
Part (b) – 1 mark MCQ
Answer: D This is a good
example of a
knowledge-based
MCQ testing a tiny
part of the
Part (c) – 2 marks specification
Division of labour should increase the productivity per worker. Every worker is assigned a job
that suits her skills, training and experience and so – instead of each worker trying to do all the
different parts of production – each task is performed by a highly-skilled worker. As a result, the The advantage is
productive capacity of the firm has greatly increased. clearly stated, and
then developed.

Section B

Question 6 (a) – 5 marks

A positive statement can be tested, amended or rejected by referring to the available evidence.
Positive statements deal with objective explanation. In Extract A, lines 4-5 are positive: “the
energy bills of 11m households will be capped for as long as 5 years”. All of this can be tested:
number of households affected, time duration, price cap. This answer shows
understanding of both
A normative statement is a value judgement. It is a subjective statement of opinion rather than a positive and
fact that can be tested by looking at available evidence. In Extract A, the very first sentence normative statements,
regarding the PM’s recent statement – “Ofgem should limit electricity and gas suppliers’ most and gives examples of
expensive tariffs” – is a normative statement. It expresses the PM’s opinion: should. each from Extract A

Question 6 (b) – 8 marks

A takeover is an example of external growth. BT’s takeover of EE is likely to result in many Good KAA is shown
internal economies of scale and unit cost savings. For example, BT can now share EE’s R&D by using appropriate
resources and they may be able to squeeze suppliers even more (due to monopsony powers) to economic technical
gain even more bulk buying discounts. This can only be passed onto consumers in the form of terms, and direct
lower prices and offer consumer “great value bundles of services”. use/quotation of the
data.

On the other hand, the takeover is likely to have cost BT a large sum of money and so the price This is a brief but
reductions may not be passed on until the cost of the takeover has been regained. effective evaluation
point, directly
addressing the
Another benefit of BT’s takeover will be the different products on offer to consumers. BT is able previous KAA point
to rebrand and market EE’s old products as its own. It can saturate the market with different
types of bundles on offer so that consumers have an abundance of choice. The “multi-brand Making a 2nd KAA is
strategy” advocated by the CEO will be a large point of differentiation from other competitors like crucial in 8-mark
Virgin. questions. Again, the
direct quotation helps
with application.

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On the other hand, BT only has 35% of the market (even after the takeover) and other
competitors like Virgin and Vodafone may respond with their own ‘new’ bundles. They may even Another brief
merge themselves in order to combat the gains of BT/EE. evaluation point
ensures this answer
would get full marks.
Question 6 (c) – 10 marks
One of the reasons why consumers may not switch to a cheaper provider is information gaps.
That is, they may not know about the cheaper cost options. Many consumers’ bills automatically The first sentence
renew without any additional information being provided about their service or about better clearly identifies one
deals. For example, Extract C suggests many of these consumers are elderly and so it could be reason, which is then
assumed that that don’t know as much about the differences between landline services and developed / explained
broadband access. Furthermore, they have started their contracts “decades ago” and have just along with effective
assumed that they are still paying for the same service when actually they are paying for a lot data use.
more that they don’t need.

On the other hand, Ofcom is now looking at introducing measures to help people shop around The evaluation is
for better deals with more confidence. In addition, price comparison sites like GoCompare have targeted directly at
emerged in recent years and now provide consumers with information and prices about rival the KAA point made
firms. If consumers visit these websites they will have full / better information of the cheaper cost previously, and again
options. uses relevant data.

A second reason could be consumer inertia. The difference here is that the consumers know that Making a second, very
there are better deals around (there is no information gap) but they are unwilling/ slow to switch clear point is an
to a cheaper alternative. This happens because many people have busy working lives and see excellent way to
the process of ‘switching providers’ to be time-consuming and effortful. In economic terms, structure an answer.
however, this is irrational behaviour.

On the other hand, this could be considered rational behaviour in the sense that many people The evaluation directly
just value their leisure time more than the (time and effort) cost saving of switching providers. addresses the KAA
Price comparison sites like GoCompare and websites like MoneySavingExpert have made point, using a
switching much easier then before. And recent regulations also mean that firms like BT have had combination of sound
to make switching easier so this should motivate more people to switch more often than before – economic theory and
but, for some people, they may still just not want to bother. evidence from the
case study.

Question 6 (d) – 12 marks

In Extract B, we are told that BT’s profit Q2 2017 profit rose by £566m. This is likely to have been This is a strong
caused a huge increase in sales revenue. BT’s takeover of EE means it is now the market leader paragraph, in which
and has 35% market share. In addition, there are fewer substitute goods in the market and more the data is quoted
people are willing and able to buy from BT. This is represented by the demand curve – or and used, and the
average revenue curve - for BT’s service shifting to the right. When AR shifts to the right, MR nature of the
follows and so the profit-maximising level of output (MC=MR) shifts too from Q to Q1. Assuming relationship between
that costs are unchanged, the level of supernormal profit has now increased – this is represented BT and EE really
by the larger shaded area in the diagram below: considered. The
accompanying
diagram is explained –
this is important for
picking up analysis
marks.

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 The question
specifically requests a
costs and revenue
diagram. For this
question, candidates
had to think on their
feet and adapt a
diagram rather than
merely repeat one –
this is an important
skill to practice.

On the other hand, this is unlikely to be the only reason for the profit increase. During the same
period, Figure 2 shows that prices have been rising steadily since 2008 (small dip in 2013). In Following the KAA
2008 the monthly rental cost was just £12, in 2016 it is £19. This is rise of 58.3% in just 8 years. immediately with
Landline telephones must be price inelastic in demand because a large increase in price has led evaluation is an
to a large rise in revenue for the business. So, the price rise is responsible too. In addition, it is excellent structure to
likely that technology costs and the “significant cuts in the wholsesale line rental of providing the follow. In this case, the
service” has contributed to a fall in costs. When costs fall, profits rise ceteris paribus. candidate identifies
other reasons why
Therefore, whilst the merger of BT and EE has undoubtedly led to greater profits because of the profits have risen
increased demand for BT goods and services, it should also be noted that the increase in price
and the decrease in costs over the same period will have had a significant effect too.

Question 6 (e) – 15 marks

Price capping is one method of protecting consumers because it effectively sets a maximum price Candidates were able
on the sale of a particular good to consumers. In the case of energy, it is vitally important to to choose any
make sure that people don’t pay too high a price for energy because it is a critical for things like appropriate policy to
heating and cooking. Low-income families run a real risk of freezing to death if the price of gas discuss. In this case, it
is too high. The diagram below shows how the imposition of maximum price will drive the price is clear that the policy
below the market equilibrium and make it more affordable to consumers. being discussed is
price capping.

The candidate’s link to

the real-world (i.e.
freezing to death) is
helpful for
demonstrating that
they have applied
their theory to the
specific context given.
The labels on the
diagram also help
with this.

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However, price-capping is undesirable from a firm’s point of view. Firms like EON believe that it The link to the context
may reduce innovation. This is because the new ‘maximum price’ will be unable to cover the of energy companies
firm’s marginal costs beyond Q2. As a result, the firm sees fewer sales and lower profit, which in the evaluation is
can be reinvested into R&D. Furthermore, gas companies will often claim that price-capping will very good.
lead to shortages as the price no longer covers production to its former level (Qe) and only Q2
and be produced – thereby leading to a shortage. Ultimately, the shortage and the lack of
investment could worsen utility provision for consumers, and potentially be an example of
government failure.

Another method of Government intervention is to prevent monopolies from emerging and Structurally, this is an
encouraging competition. In the case of gas, there is the established Big Six (an oligopoly) and, easy answer to mark –
in the case of telecoms, BT has 35% market share, and so has monopoly power. Therefore, the the candidate clearly
Government should be looking at ways to reduce barriers to entry and increase the number of identifies a second
firms in the market. This will reduce the price setting power that dominant firms have and should policy here. The link
increase dynamic efficiency within the market. This can reduce prices for consumers and improve to the data and
the quality of the service that they receive. The Government could have rejected BT’s planned context is excellent, as
takeover of EE. Similarly, they could be giving tax breaks (or subsidies) to smaller suppliers such is the focus on
as First Utility to help them compete. protecting consumer
interests.
On the other hand, many utility markets are natural monopolies. This means that the market is
best served by one firm – often because the economies of scale are so large that only one firm
could feasibly achieve them all (or get close). The gas market, where there is only one gas-pipe
delivery system, is a good example. Having too many firms in this market will mean that no firm
can achieve large-scale economies of scale which means that consumers won’t actually benefit
from the lower prices that a natural monopoly could give them

Section C
Question 7 – 25 marks
In the free market, wages are determined by the market forces of supply and demand. Demand
is defined as the willingness and ability of an employer to pay worker(s) at each given wage.
Supply is defined as the willingness and ability of employees to provide their labour at any given
wage. Labour markets are also highly sensitive to the elasticities of both demand and supply.
In the football industry, different footballers get very different wages. For example, Harry Kane
might earn £200,000 a week at Tottenham Hotspur FC whilst Harry Winks might earn just £20,000
(a tenth of Kane’s earnings) at the same football club. In terms of demand, the club may consider The question asks
the value that Kane brings to them as much greater than Winks. Kane is the club captain (as well candidates to apply
as England captain), he scores many goals per season, contributes heavily to the team’s play and theory to an industry
is an influential player. It is often said that when Kane plays well, Tottenham play well. Kane, as a of their choice – the
worker, therefore, contributes heavily to the club’s success and its earning potential. If they win use of football here is
matches, leagues and cups then the club makes more money. In addition, Kane is an important a good example.
figure for branding and brings in a lot of revenue for the club through shirt sales and other
merchandise. As a result, the club is willing to pay Harry Kane a lot more money than Harry
Winks, who is relatively young, isn’t good enough to be a regular first-team player and does not
sell a lot of replica shirts.

In terms of supply, footballers good enough to play in the Premier League for Tottenham are Many candidates can
scarce. However, a player like Harry Kane is more scarce than Harry Winks. Winks is a young forget to consider
academy prospect who has yet to reach his potential. There are a great number of those sorts of wage elasticities –
footballers in the industry. If Winks gets injured, it will easy for Tottenham to replace him. Kane, showing awareness of
on the other hand, is a world-class player who is coveted by all the top teams in the world. If a broad and deep
Kane gets injured, there are relatively few players in the world who could stand in for him. Kane range of theory is
could command high wages at other firms (like Real Madrid or Bayern Munich) and so his always helpful.
individual supply curve is much more inelastic than Winks’.

Wages for footballers though are a source of great controversy. Wages are often ‘locked’ by a Good, applied
contract for a set period of time and have no bearing on current performance (or productivity). evaluation.

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Therefore, Harry Kane might have a miserable season and not score any goals, or he might get
injured for the season; he still picks up his wage despite contributing very little. There are
countless examples of players ‘sitting on the bench’ for years and still picking up huge wages (e.g.
Alexis Sanchez). Harry Winks, on the other hand, may end up as the player of the season and
become a valuable marketing tool for the club (much like Dele Alli a few seasons back). His wage
will eventually rise to reflect this but there will be a time lag.

Tottenham also has a women’s team. The female players earn nothing like the male players,
despite arguably being more successful. The firm is willing and able to spend more money on Consideration of the
the wages for a squad player in the men’s team than a world-class player for the women’s team. debate between the
Some critics may consider this to be discrimination; that certain employees (women) are unfairly market working well
perceived to contribute less valuable output. In the traditional sense of industry this belief is (D&S) and the impact
clearly untrue but, in the case of the football industry, the simple difference here is just money. of discrimination
The men’s game is awash with money and TV rights for male leagues / matches regularly sell for means that this
billions of pounds. Every point in the Premier League and every win in the Champions League paragraph can be
earns huge amounts of revenue for the club. Therefore, the club is willing to spend a lot of awarded both KAA
money to secure the players (workers) who are likely to help it achieve its aims. The women’s and evaluation marks.
team might win more games but, due to a lack of money (less advertising, less sponsorship, less
valuable merchandise sales) in the women’s game, that ‘part of the business’ does not bring in as
much revenue. Therefore, the club is less willing to spend high amounts of money on female
players. The demand curve for female players is further to the left than in the market for male
players.

In the future, this may change. The promotion of the Women’s World Cup this year and the Consideration of how
increasing focus of major broadcasters, like the BBC, on the women’s game may mean that more a market might
money from gate receipts, sponsorship deals, TV rights and merchandising may increase in the change over time is
future. If it does, then the demand for good, marketable players will also increase and wages will often a good way to
then follow. gain evaluation marks.

In conclusion, wage differences exist in the football industry due to demand and supply. In
particular, the demand for labour – the willingness to pay players – is very dependent on the
amount of money that they themselves bring in, in terms of contributing to team success and Inclusion of a
also merchandising. This explains why Harry Kane earns more than Harry Winks and why male judgement is vital in
footballers, in general, earn more than female footballers. It also explains why, if the revenue for 25 mark essays.
the women’s game increases in the future, female players may earn as much as the men in the
future, if the revenue in the industry. That said, this is unlikely in the near future and it also
doesn’t explain why the wages for all players is prone to ‘misallocation’ – where the best (most
valuable) players don’t always earn the highest wages.

Question 8
In December 2016, a group of UK model agencies were found guilty of price-fixing. The UK It is clear up-front that
competition regulator, the CMA, fined FM Models, Models 1, Premier, Storm and Viva, along with the candidate has
industry trade body the Association of Model Agents (AMA), for price-fixing modelling services responded to the
for at least two years from March 2013. The total fines added up to £1.5m demands of the
question in terms of
The CMA alleged that the agencies “systematically exchanged information and discussed prices” referring to an
and - in some cases - actually fixed minimum prices or agreed a common approach to pricing. industry of their
Modelling assignments can range from fashion magazine shoots offering models fees of a few choice.
hundred pounds to ad campaigns offering more than £10,000. The CMA said that the collusion
extended across all types of assignment and that it was not limited to the very top models. The
great benefit of such collusion is that the consumers (which, in this case, are high street chains
and online fashion retailers) spend on using models to advertise their products and appear in ad Good application
campaigns. Because all the agencies are charging the same price, the consumer have nowhere
else to go and so the modelling agencies, consequently, see increased sales revenue and profit.

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Not all firms engage in collusive behaviour though. Firms actually have an incentive to cheat
others by either increasing their share of the (restricted) output or by lowering the price below
the fixed price. In either of these two methods, the ‘cheating’ members should see an increase in
sales, revenue and abnormal profit. This means that the industry is no longer at the profit-
maximising point and so industry profits – as a whole – go down. This means one firm is getting
richer but at the expense of the other firms being much worse off. The fact that the incentive to
cheat is so great means that cartels are inherently unstable. This could be illustrated using a
Prisoners Dilemma payoff matrix.

However, it is easy to see why modelling agency were keen to collude in 2013 when seen in the
context of the market structure in 2013. In the US, the concentration ratio has been falling since Consideration of the
the start of the 21st century. In addition, the rise of digital/social media means that barriers are context in which
coming down all of the time. Ultimately, the service of providing a model for an assignment is certain actions took
fairly homogeneous but there are so many ways to differentiate the service (through customer place is a great way to
service all the way through to the model him/herself) it is likely to be considered by most as a embed theory with
heterogeneous good with low barriers to entry. As a result, collusion have been the last chance practice
for the main players to hold on to the market power and make supernormal profit.
Monopolistically competitive markets only make normal profit in the long run.

Of course, new entrants in the markets are intent on disruption. They try to break the dominance
of main players and to undercut their prices. Therefore, it is fair to say that not all firms engage This shows a good,
in collusive behaviour; some consider the collusive behaviour of others to be a source of practical
inefficiency that they can disrupt. A similar thing has happened with Uber in the taxi and private understanding of how
hire car market; Uber has offered a rival product at a much lower price, thereby undercutting the firms interact in
established players. Cheap prices can be a huge source of competitiveness. competitive markets.

In conclusion, it is easy to see why modelling agencies in the UK colluded: it will have led to larger
revenues and profit, reduced the risk of costly of price wars and may well have been the last
chance to exert market dominance before the market was disrupted. That said, non-collusive
behaviour is probably more profitable if you can ‘reduce’ your prices below your competitors and
sustain that price fall for a long time. In fact, undercutting the market price can actually be a
long-term growth strategy for new-entrants.

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