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Centre Paper Reference (complete below)

No.
Signature
Candidate No.

Paper Reference(s) Examiner’s use only

6351/01
Edexcel GCE Team Leader’s use only

Economics
Advanced Subsidiary
Unit 1 – Markets: how they work
Question Leave
Number Blank

Section
Monday 14 June 2004 – Morning A

Time: 1 hour 9

10
Materials required for examination Items included with question papers
Answer Book (AB08) Nil

Instructions to Candidates
In the boxes above, write your centre number, candidate number, your surname and initial(s), the paper
reference and your signature.
The paper reference is shown at the top of this page. Check that you have the correct question paper
and write the paper reference for which you have been entered.
Answer ALL the questions in Section A in the spaces provided in this question paper.
• For each question there are four suggested answers: A, B, C or D.
• When you have selected your answer to the question, write the chosen letter in the box provided.
• You can only offer one answer to each question.
• After making your selection you should offer an explanation of why you have made that choice.
Your explanation may include a diagram.
Answer ONE question from Section B in the Answer Book provided. Additional answer sheets may be
used.

Information for Candidates

There are 16 pages in this question paper. All blank pages are indicated. The total mark for this paper
is 40. The marks for the various parts of questions are shown in round brackets: e.g. (2). The paper is
divided into two sections, A and B; both sections are equally weighted, with the total mark on
Section A divided by two.

Advice to Candidates
You are advised to divide your time equally between Section A and Section B. You must ensure that
your answers to parts of questions are clearly numbered. You will be assessed on your ability to
organise and present information, ideas, descriptions and arguments clearly and logically, taking into Total
account your use of grammar, punctuation and spelling.
Printer’s Log. No.

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*N19035A*
W850/S6351/57570 9/7/7/5/3/13,800

This publication may only be reproduced in accordance with London Qualifications Limited copyright policy. ©2004 London Qualifications Limited.
 SECTION A Leave
blank
Answer ALL questions in this Section.

You are advised to spend 30 minutes on this Section.

You are encouraged to use a diagram in your explanation where appropriate.

1. A production possibility frontier can be used to illustrate the concept of

A Opportunity cost.

B Equilibrium price.

C Consumer surplus.

D Producer surplus.

Answer

(1)

Explanation

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Q1
(4)

(Total 5 marks)

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2. Which of the following is the most likely consequence of an increase in the division of labour Leave
in the production of motor vehicles? blank

A Increased cost of producing each car.

B A decrease in the market size.

C Less use of specialised production equipment.

D Reduced cost of producing each car.

Answer

(1)

Explanation

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(4) Q2

(Total 5 marks)

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3. The diagram below shows the UK labour market for building workers. The initial Leave
equilibrium position is indicated by point X. The enlargement of the European Union blank
attracts building workers from Eastern Europe and at the same time an increase occurs in the
demand for housing. What is likely to be the new equilibrium position: A, B, C or D?

Hourly wage (£) S1

S
S2
A
t w
D X B
z y
D2
C D1 D
0
Quantity of building workers

Answer

(1)

Explanation

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(4) Q3

(Total 5 marks)

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4. The following data represent the daily demand and supply schedules for a good. (You may Leave
use the blank column in your explanation). blank

Price per unit Quantity demanded Quantity supplied Quantity supplied

(£) (units) (units) (after subsidy) (units)
16 2000 2800
14 2200 2600
12 2400 2400
10 2600 2200

8 2800 2000

If the government introduces a subsidy of £4 per unit to be paid to the producers of the good,
the new equilibrium price will be

A £8

B £10

C £12

D £14

Answer

(1)

Explanation

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(4) Q4

(Total 5 marks)

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5. Good X has a very low price elasticity of supply. Which of the following is the most likely Leave
to be Good X? blank

A Toothpaste, because it is an essential good with no close substitutes.

B A newspaper, because it forms a relatively insignificant part of the total expenditure of

a household.

C Soap powder, because enormous sums of money are spent on advertising to develop
brand loyalty.

D Fresh peaches, because it takes a long time to grow them and they have a short storage
period.

Answer

(1)

Explanation

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(4) Q5

(Total 5 marks)

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6. The following table shows the income elasticity of demand for UK tourists going on holiday Leave
to selected overseas destinations in 2004. blank

Holiday destination Income elasticity of demand

Ibiza – 0.2
Florida + 0.2

Phuket +1.2

It may be deduced from the data in the table that

A An increase in income will lead to a decrease in UK tourists visiting Ibiza.

B An increase in income will lead to a more than proportionate increase in demand for
UK tourists visiting Florida.

C Holidays in Phuket are an inferior good.

D A decrease in income will cause a fall in the number of UK tourists visiting each
destination.

Answer

(1)

Explanation

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Q6
(4)

(Total 5 marks)

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7. The diagram shows the market for cocoa. Leave
blank
Price per unit
B S
(pence)

X
A

L D
0 Z Quantity per period

Which of the following statements is true?

A The producer surplus is shown by the area 0LXZ.

B The consumer surplus is shown by the area 0BXZ.

C The producer surplus is shown by the area AXL and the consumer surplus is shown by
the area AXB.

D The consumer surplus is shown by the area AXL and the producer surplus is shown by
the area AXB.

Answer
(1)
Explanation

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(4) Q7

(Total 5 marks)

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8. The diagram below shows the foreign exchange market for £ sterling in terms of euros. Leave
blank
Euros per pound S
E /£

Pe

D
0 Qe Quantity of (£) Sterling

Other things being equal, a significant increase in the number of German and French tourists
visiting London is likely to cause

A No change in the value of sterling since it is fixed against the US dollar.

B An increase in the number of euros per pound.

C No change in the value of the pound sterling since it is fixed against the euro.

D A decrease in the number of euros per pound.

Answer

(1)

Explanation

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(4) Q8

(Total 5 marks)
TOTAL FOR SECTION A: 40 MARKS

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 SECTION B

Answer EITHER Question 9 OR Question 10.

You are advised to spend 30 minutes on this Section.

Question 9.

Falling Tea Prices

Tea prices have fallen dramatically over recent years as new and established producers flood the
market with cheap, mass-produced leaves. Vietnam, for example, has joined the ranks of major
tea producers whilst the more established suppliers have embarked upon large expansion
programmes; Uganda has increased its supply by 20% since 1995 whilst India has recorded a
sharp jump in output. Stocks of tea are at record levels. The fall in the price of tea is bad news 5
for producers, particularly since demand for tea is price inelastic.

To make matters worse, sales of tea have steadily declined as many consumers switch to soft
drinks and coffee. Tea suffers from an image problem, particularly with the young generation
who regard it as dull and old-fashioned. There is also concern over the quality of tea, which
varies enormously among producers. In Sri Lanka, tea is produced by expensive traditional 10
methods, where the machines gently rub the tea leaves to release the full flavour. However, in
some countries the tea leaves are crushed and ground, leaving a harsher flavour.

The tea industry is fighting back and has begun to modernise its advertising campaign, promoting
the product as a natural, authentic and healthy drink. Some commentators believe the solution
rests in opening up ‘tea shops’ on High Streets – something already common with coffee. Work 15
also needs to be done on ensuring the quality of tea reaches a minimum standard throughout the
industry. Other issues are concerned with ways of developing new markets and uses for tea.

(Adapted from ‘How to make tea,’ Fran Abrams, The Guardian, 25 June 2002.)

(a) Using a supply and demand diagram, analyse the causes of falling tea prices.
(5)

(b) Examine the impact on the revenue of tea producers of ‘the fall in the price of tea’
(line 5).
(5)

(c) Analyse two factors, other than those referred to in the passage, that could influence the
supply of tea.
(4)

(d) Examine the likely impact on the demand for tea of a change in the price of:

(i) a substitute good

(ii) a complementary good.

(6)

(Total 20 marks)

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Question 10.
Russia – an economy in transition

Selected economic indicators

Year Rate of inflation Economic growth Unemployment rate

(% change in (% change in real (% of workforce
consumer prices) GDP) unemployed)
1992 2318 –19 5.7
1995 145 –4 8
1998 12 – 4.9 12
2002 15 +5 8
(Source: EBRD, Transition Report 1996; IMF World Economic Outlook – Focus on Transition Economies.
October 2000; The Economist January 2003.)

The change from a centrally planned economy to a market-based economy during the 1990s was
difficult for Russia. The transition involved significant disruption to production and consumption
patterns. In a centrally planned economy, each factory was allocated customers and it fulfilled
orders according to the national plan laid down by the government.

However, the transition towards a market economy meant the loss of an automatic customer base. 5
Enterprises had to compete to find customers who suddenly had plenty of choice, often preferring
to buy better quality products from abroad. According to the World Economic Outlook report,
Russia’s national output fell by more than 50% between 1990 and 1998. There should have been
greater government involvement in the transition process rather than simply leaving it to free
market forces. 10

Although the market reforms have increased financial incentives for firms and workers, 35% of
all production occurs in the ‘hidden’ economy, leading to a sharp drop in tax revenues. In the
early 1990s the government responded by printing excessive amounts of money to pay for
services such as education and defence. The outcome was inflation, exceeding 2000% per
annum. Lifetime savings were wiped out overnight and many people plunged into poverty. 15
Inequality greatly increased.

Today the Russian economy is more stable but market reforms still have a long way to go in
creating an efficient allocation of resources.

(Adapted from ‘Putin grapples with his nation’s history, but is he getting anywhere?’
Patrick Cockburn, The Independent, May 2003.)

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 (a) Distinguish between a ‘centrally planned economy’ and a ‘market-based economy’.
(4)

(b) With reference to the second paragraph, identify one positive and one normative
statement. Justify your answer.
(4)

(c) Examine the economic arguments for transforming Russia into a market-based economy.
(6)

(d) With reference to the data, evaluate the significance of any two economic problems
Russia has experienced in the transition to a market-based economy.
(6)

(Total 20 marks)

TOTAL FOR SECTION B: 20 MARKS

END

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