Practise Unit 1 market analysis through scarcity, demand and supply, price diagrams, market failure, taxes and policy evaluation.
In April 2020 electricity prices increased on average by 10% in the UK. In the same month, a record number of 668371 consumers switched to cheaper electricity suppliers.
Which one of the following can explain the behaviour of those consumers who switched to cheaper electricity suppliers?
Consumers experienced habitual behaviour
Consumers aimed to maximise their utility
Consumers had poor computational skills
Consumers aimed to minimise their utility
Sources for use with Section C. The global market for palm oil. Figure 1 records 2018 percentage price changes: palm −25.94%, rapeseed −12.71%, soybean −17.75% and sunflower −12.81%. Figure 2 shows 2017 global palm-oil production in million tonnes: Indonesia 36, Malaysia 21, Thailand 2.2, Colombia 1.3 and other countries 6.3. Extract A: The equilibrium price of palm oil decreased in 2018. Competing vegetable-oil prices also fell. Palm oil is used in biodiesel, a substitute for crude oil, and lower crude-oil prices reduced biodiesel demand. Production exceeded consumption, creating a three-million-tonne stockpile. Palm trees can take up to 30 months to produce fruit; fruit can be harvested twice a year. Extract B: Palm-oil production more than tripled between 1998 and 2018 and is used in processed foods, cosmetics, detergents, chocolate and biodiesel. It uses one-tenth of the land, one-seventh of the fertiliser and one-sixth of the energy needed for soybean oil. In Indonesia and Malaysia, more than 4.7 million workers are directly employed and 11 million indirectly. Rapid, poorly managed expansion has caused deforestation, greenhouse-gas emissions, habitat and biodiversity loss. Orangutan numbers fell by 100,000 between 2001 and 2017; 69% of elephant habitats in western Indonesia have been lost and only 100 rhinos remain in the wild.
Figures 1 and 2 from the original Source Booklet
Extracts A and B from the original Source Booklet
Define the term equilibrium.
Explain the impact of substitutes on the price elasticity of demand for palm oil.
Analyse two reasons why the price of palm oil decreased in 2018. Illustrate with a supply-and-demand diagram.
With reference to Figure 2 and Extract A, examine the likely price elasticity of supply for palm oil.
Discuss the externalities associated with palm-oil production. Illustrate with an appropriate diagram.
Sources for use with Section C
New Zealand’s housing market and national parks
Figure 1 Percentage change in house prices between March 2020 and March 2021, by region
Extract A Rapid increase in house prices
House prices in New Zealand increased by 15.7% between March 2020 and March 2021. The average house price had risen to NZ$925 000. This increase in house prices was caused by increasing real incomes, low interest rates and a rise in immigration following the global health crisis. Real incomes increased as a result of an above average rate of economic growth. Between March 2020 and March 2021 the base interest rate in New Zealand was just 0.25%, making it relatively cheap to borrow to purchase houses.
Research showed that house prices in New Zealand were about 40% overvalued relative to income. House prices were rising faster than real incomes and were 8.6 times median income in 2020 and 10 times median income in 2021. In Auckland, the average property-price increased to NZ$1.4 million in 2021. This was 35 times median income.
According to New Zealand’s Prime Minister, Jacinda Ardern, many buyers are speculators. In 2020 approximately 15 000 people buying houses owned five or more. She is worried that the speculators could cause a dangerous housing bubble and market failure. She is also concerned that 1% of the population are homeless, the highest rate of homelessness among developed countries.
Between 2000 and 2021 house prices increased by 256% in New Zealand. By comparison, house prices in the USA increased by 68% and in the UK by 110.
Extract B House building in New Zealand
In 2017 the Government promised to build 100 000 new homes. Between June 2018 and July 2020 the Government built just 6 000 homes. It is expensive to build houses and there is much paperwork needed to obtain planning permission. Many local authorities limit the land on which houses can be built in order to protect the environment. There is a shortage of over 55 000 construction workers.
Between 2011 and 2020 the average annual growth rate in housebuilding was 13%. However, in 2021, the significant increase in house prices created an incentive to build new houses. Consequently, the number of new houses under construction increased by 26.
Extract C New Zealand’s national parks
New Zealand has 13 national parks covering 30 000 km2 that the public can explore on foot, by boat, car or air. For much of the year there is so much space that an individual will rarely meet another person. However, in the summer season the national parks are very popular. This means that the national parks become more crowded and car parking spaces are hard to find.
Some activities within the national parks, such as skiing and kayaking, have to be paid for. However, individuals can walk, run or cycle across the national parks without charge.
Define the term 'market failure' (Extract A, line 14).
With reference to paragraph 1 of Extract A, analyse two reasons why house prices increased between March 2020 and March 2021.
Illustrate your answer with a supply and demand diagram.
With reference to Extract B, explain why the supply of new houses is likely to be price inelastic.
With reference to Extract C, examine whether national parks in New Zealand are public goods.
With reference to Figure 1, Extract A and Extract B, discuss the likely microeconomic effects of a housing market bubble in New Zealand.
In the USA 96 million consumers have never switched banks. 39% of consumers had accounts at the same bank as their parents. 13\% of consumers said that the process of switching involved too much time and effort.
With reference to switching banks, explain the difference between 'herding' and 'inertia'.
