2014 A level H2 Economics Review: Microeconomics Qn 25 min read

In 2012 the UK had a very poor harvests for grain and potatoes, which are major ingredients of many of the foods of UK consumers and also Grainsprovide feed for much of Britain’s livestock. At the same time, there was a decline in real incomes of many UK citizens, especially those on low incomes.

Using economic analysis, discuss the impact these events are likely to have had on UK consumers and farmers. [25]

You can always count on A level to come up with at least one Demand and Supply question every year. Despite the concepts being easy to grasp, many tutors (including mine) persuade their students to avoid attempting such questions during exams. The wide array of question types and unfamiliar goods being tested make essays from this topic challenging. However, if you are familiar with the goods or services tested and are able to apply the concepts well, there is no reason to avoid such questions. Here are some steps to help you approach demand and supply questions:

Step 1: Identify the context of the question

The preamble will give you some background information on what’s happening in the market during that specific time frame. In this question, the preamble has provided us with two pieces of key information. First, the poor harvest of grain and potatoes implies that supply has fallen. Second, the real income of UK citizens fell hence the demand will adjust accordingly to its YED.

Step 2: Bring in what you know about the product

Now, before you carry on reading, take a paper and take one minute to think and jot down everything you know about grains and potatoes that can be useful in the essay…

Your one minute is up, here’s what you might have come up with:

Potatoes and grain are necessities. There are few substitutes and they constitute only a small percentage of an individual’s income, thus it has all the traits of a price inelastic demand; PED<1.

Grain and potatoes take approximately 3-4 months (i.e. production time is long) to harvest and they are perishable. So grain and potatoes have a price inelastic supply as well.

They are also normal goods so demand will fall slightly due to a fall in income. The YED value will be more than 0 but less than 1.

Step 3: Draw a Diagram showing the interactions of DD and SS

Based on the information and deductions made above, you will have a diagram where the demand and supply falling, with a greater fall in supply compared to demand.

2014 A level Qn 2

Step 4: Understand what the question wants

The question can ask for many things like impact on the price, output, or the market agents. In this question, the question is asking about the impact on the consumers and farmers. So here you have to discuss the relative changes of consumer surplus and farmer’s revenue. Have they increased or decreased after the following changes in the market? Based on the diagram drawn above, the consumer surplus has decreased. The revenue of the farmers before and after is represented by area ABCD and DEFG. If the fall in supply is smaller, it can cause the revenue collected to have minimal change or even cause a decrease in revenue.

Step 5: How much of it is true?

Here’s the hard part. After you done with the first four steps, ask yourself these questions, to what extent are the above impact on consumers and farmers true? Are there any exceptional cases? This may seem rather intimidating if you are thinking about this for the first time and this is probably the reason teachers do not encourage their students to do such questions. From now to the next A level paper, you have about 11 more months. You can prepare to deal with such questions by playing around with diagrams (i.e. Varying elasticity, the extent of shift, introducing taxes). It will give you an idea of how the impact on the market will vary based on the factors you choose to change. Instead of doodling in class, try playing around with economics diagrams, you may learn something new.

So how will these variances exist? There is a clue in the preamble, try looking for it. The varying income groups. People of lower-income group will tend to have a more elastic demand, thus the revenue collected by the farmers will be lesser than the standard case. If its elastic enough, it can even cause the revenue collected to be lower than the current amount. While the consumer surplus still decrease, but to a smaller extent. Although YED will be more elastic due to a larger proportion of income spent. Demand will fall to a larger extent. I will make the assumption that supply still falls to a larger extent, as grains and potatoes are still necessities.

This is just one example in which this can be done. Elasticity will always vary across a group because of the different scenarios the agents are in. For instance, a millionaire will think a car is a necessity while for average individuals, it is a luxury. Other ways to do this in this question includes comparing between organic (More elastic DD) and normal farmers. Just think of groups or cases where the elasticity can vary and this will help with this step of the essay.

Tips to beef up your essay

Use economic terms like composite demand and derived demand. You are bound to be able to bring in such key terms. For example, here demand for grain and potatoes is a composite demand as it can be consumed directly or used for feeding livestock.

Remember to explain the diagram. Most students tend to forget this part, the diagrams are not self-explanatory. You have to quote the points and show how the new equilibrium is achieved after the following changes in the market.

Demand and supply questions are manageable, hope to see more students take up the challenge and attempt such questions in other papers.

Till next time, dream economics.

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