Edexcel (A) Economics A-level

AS-level Paper 1: Markets and Market

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6a) Explain why ‘the prices farmers received for beef in the UK rose by 3%’ in 2013 (Extract
A, lines 7 and 8). Include a supply and demand diagram in your answer. (5)

The prices farmers received for beef rose from P1 to P2 because of increased demand. Demand is
the ability and willingness to buy a good at a specific price at a specific moment in time. It
increased from D1 to D2 due to the horsemeat scandal. This meant that consumers were more
willing to buy beef from UK farmers rather than overseas farmers as they felt UK farmers were
more reliable and didn’t want horsemeat, which was found in beef from overseas suppliers. This
meant that British beef sold in shops went from 81% of all beef sold in shops to 83%. Also, there is
increased demand due to higher incomes in other countries, like China and so they want more
beef. They may buy it from the UK as there is better quality compared to China.

Teacher’s comments: ​5/5

b) Assess the likely impact of a 3% increase in the price of UK beef on the market for lamb​.
(10)

Firstly, there will be an increase in demand for lamb. Because the price of beef rises and lamb and
beef are substitutes, there will be more people who buy lamb because it is cheaper. This could
lead to a rise in the price of lamb from P1 to P2 as demand grows. However, this depends on the
price elasticity of beef. If beef is relatively price inelastic then people may not swap to lamb, but if it
is price elastic then people will. As there are many substitutes for beef, it is likely to be elastic and
so a change in price will have quite a large effect on quantity demanded. However, it is only a 3%
increase and so it may not have that large of effect on demand for lamb as some consumers may
not even notice the difference

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On top of this, there may be a decrease in supply of lamb. Lamb and beef are in competitive supply
as it is unlikely that farmers rear both cows or sheep. Therefore, if there is an increase in the price
of beef, they may stop rearing sheep and begin rearing cows as they will produce a higher profit.
However, it will depend on the price elasticity of supply for beef. If beef is inelastic then it won’t
have much impact but if it is elastic it could have a large impact. It is likely to be inelastic as there
are large start up costs e.g. buying the cows and so farmers may continue to supply sheep.

Overall, it may increase demand of lamb slightly and decrease supply of lamb slightly but not by
too much.

Teacher’s comments: ​6/10

c) Explain two likely impacts on dairy farmers in the UK of the growth in the middle classes
in emerging markets such as China. (6)

One impact on dairy farmers in the UK is that they will make a higher profit. Demand has increased
from D1 to D2 and as a result price and quantity have both increased. The farmer is selling more
goods at a higher price and so therefore they are making more money.

Moreover, they have higher producer surplus. Because demand has increased, producer surplus
has increased from 0AP1 to 0BP2 and so therefore they are getting more than they wanted.

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Teacher’s comments: ​4/6

e) With reference to Figure 1, Extract 2 and your own knowledge, discuss the reasons for
subsidies being paid to Scottish farmers. (15)

A subsidy is a government grant given to increase production. One reason that subsidies are being
paid to farmers is because it increase the production of farming goods from Q1 to Q2 and

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decreases the price from P1 to P2. It is important to provide subsidies in order to keep production
high as farming is vital to the rural economy. If the farmers were unable to produce their goods,
they would become unemployed and this would have a negative impact on the rural economy. A
large amount of those in rural areas are farmers and if they were unemployed they would stop
spending in local shops etc. so therefore these would be forced to close down causing further
unemployment and so on. This would cause large economic decline in these areas and so the
government would have to put the money in in other ways.

Moreover, another reason for giving subsidies is that it lowers the price of the goods for UK
consumers. This is good as it means that, despite rising prices, lower income families can still
afford the agricultural goods. There is increased consumer surplus.

Another benefit of the lower prices is that it prevents consumers from buying from overseas.
Scottish farmers are competitive with the overseas producers and so people will buy from them
which will help to keep the farms from making a profit. On top of this, it lowers the carbon footprint
as Scottish goods don’t travel as far so these subsidies provide a positive externality.

However, there is an opportunity cost of giving farmers subsidies. Because of this, the government
can’t put this money into the NHS/education etc. which are all merit goods. Some will say this
would help society more than the subsidies.

Moreover, some people may suggest that it is not good as farmers are too reliant on government
subsidies. In 2012, 79% of Scottish farmers’ incomes came from subsidies. People would suggest
that these farmers should just be left to make a living from the free market.

Overall, it is important in order to keep the farms running.

Teacher’s comments: ​14/15

f) Using the concept of external costs, evaluate the possible economic effects of increased
beef production. Use an appropriate diagram in your answer.

Beef is currently produced at P1Q1 where MPC=MPB (marginal private cost equals marginal
private benefit) but should be produced at the social optimum position of P2Q2 where MSC=MSB.
The external costs are the difference between private costs (to the individual) and to society, so are
the costs to a third party not involved in the economic activity, such as the negative effects to those
not eating meat. The effect of this is a social welfare loss of the shaded area.

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One economic effect of increasing production of beef is that it already takes 30% of the world’s
land to raise livestock and so even more would have to be used. This is a negative effect and
would mean it couldn’t be used for other things, such as housing, so there is a large opportunity
cost for producing this extra beef. Another negative economic effect would be the negative
environmental impacts which will lead to global warming, causing loss of land etc. and therefore
loss of money.

One positive effect of increased production is decreased prices for beef. This will lead to an
increase in consumer surplus and mean more consumers can afford beef, which is good as it
means they can afford food. It may affect the producers revenue. If beef is inelastic then it will
decrease producer revenue will if it is elastic it will increase revenue.

The effects will depend on the size of the increase. If there is only a small increase then it will be a
small effect but if there is a large increase then it will have a large effect.

Overall, the short term effects will mainly be positive as there are lower prices but the long term
effects will have a bad impact on the environment and welfare loss, which is negative. The size of
these effects will depend on the size of the increased production.

Teacher’s comments: ​16/20

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