Answers to exam-style questions (data response)

01 Imperfect information is when either a supplier or a buyer lacks sufficient information about a transaction to make an informed efficient choice. In everyday markets economic agents frequently make decisions based on imperfect information but as information becomes more limited the probability of a poor decision increases. (5 out of 5 marks)

This is a correct answer. The question does not require an example but it is often useful to include one as it will pick up a mark (provided it is correct) if the definition is a little imprecise or fuzzy.

02 First, the percentage of obese and overweight men and women increased steadily throughout the period. In 1994 14% of men and 18% of women were obese yet by 2008 levels of obesity for both men and women had reached 25%. Likewise, in 1994 49% of women and 58% of men were overweight. By 2008 these figures had risen to 57% and 66% respectively.

Second, the gap between overweight men and women remained relatively stable over the 12-year period. In both 1994 and 2008 approximately 9% more men are overweight than women. By contrast, the gap between obese men and obese women closes over the period. In 1994 there is a gap of about 4% but by 2008 both genders have levels of obesity at roughly 25%. (8 out of 8 marks)

This answer meets all the requirements of part 02 or 06 questions and earns full marks. There is sufficient comparison across the different data series, all the comparative points are significant, and accurate statistical back-up is provided.

03 The central problem in this situation is that consumers are not being provided with sufficient information to make an informed choice. The food packets that customers are buying do not provide sufficient information about the number of calories contained. As a result individuals are making choices based on imperfect information, which leads to overeating and raised levels of obesity. As can be seen from the trends in Extract A, overeating and obesity have been steadily increasing in the last 20 years in the UK.

This is a market failure because consumers cannot make an informed choice and therefore behave in a manner that does not maximise their welfare. The figure above includes two curves, each showing the marginal benefits enjoyed by a person as a result of eating food. The inner curve is labelled marginal benefits (with full information). Full or perfect information includes information about the adverse health consequences of overeating, and/or eating the wrong kinds of foods. Given full information, the person chooses to eat Q₂ food. But in real life, the problem is that many people ignore or downplay the long-term adverse consequences of overeating and/or consuming the wrong kinds of foods. The level of food consumption of a person whose eating habits are shown in the figure are determined where the curve labelled marginal benefits (with imperfect information) intersects the MPC curve. Q₁ food is eaten, and overeating is shown by Q₁ minus Q₂. (12 out of 12 marks)

Pay special attention to the ‘appropriate diagram’ in this answer. Exam questions that focus on perfect and imperfect information are increasingly appearing in the ECON1 exam, but not all exam candidates seem to be familiar with the meanings of, and the difference between, the two concepts.

04 The debate about the role of government in an economic system is central to the study of economics. At present the UK has a mixed economy which is tilted in favour of markets. The dominant view among policy makers since 1979 is that markets are more efficient at allocating scarce resources than governments. Nevertheless, in 2012 the British state still accounts for 44% of GDP and large command structures, such as the NHS, still allocate billions of pounds of resources every year.

In terms of food markets, most economists believe food should be provided by markets because the profit incentive drives farmers to produce higher crop yields. However, the balance of market power between producers (farmers) and buyers (large supermarket firms) is tilted very much on the side of the supermarkets. Arguably, supermarkets use the market power that their size gives them to force farmers, who individually possess very little market power, to accept very low prices for the foods they are selling. At the moment, the UK government does very little, apart from trying to persuade the supermarkets to be fairer in their dealings with farmers, to alter this asymmetry in market power. Some people believe that the government should intervene in food markets in other ways to correct this market failure, for example by introducing and then enforcing minimum legal prices, or price floors, for agricultural produce. Others disagree, arguing that such intervention will lead to government failure, for example by creating excess supply which in a free market is corrected automatically by a fall in market prices. However, price floors would allow farmers to make sufficient profit to invest in new production techniques that might increase domestic supply of foods in the long run.

When it comes to the issue of food labelling rather than replacing the market mechanism for setting prices, economists are more divided. As Extract B explains, a government agency, the FSA, believes that food labels provide consumers with too little information about additives in processed foods. The FSA would like to correct the problem by introducing better food labels which will properly inform consumers about the qualities of the food that they buy. However, if food labels better inform customers about the food that they buy then demand for certain types of processed food will decrease because consumers will better understand the consequences of eating high fat and high salt foods. However, many free-market economists reject the call for further regulation on food labelling, arguing that it is unnecessary regulation that will increase food costs. In their view, self-regulation by the food industry is preferable to external regulation. On balance, the case for further external regulation is stronger, for the simple reason that self-regulation has simply not provided consumers with sufficient accurate information about the foods they buy. (21 out of 25 marks)

Very often, the preamble to a part 04 or 08 question is: Making use of the data and your economic knowledge … This answer makes use of both, but misses the opportunity to draw on characteristics of food markets, other than those set out in the Extracts, which might call for intervention by governments. While it is not vital to do this, these could include the health and safety aspects of food markets, and the monopoly power that food processing companies and large supermarket chains my exercise at the expense of small farmers (and/or consumers).

This answer has been placed at the top of Level 4, though a lack of formal analysis and use of diagrams, may mean the answer has been over-marked. Either way, the answer does not reach Level 5, for which the grade descriptor is:

AS LEVELS OF RESPONSE	AO1 KNOWLEDGE and UNDERSTANDING of theories, concepts and terminology	AO2 APPLICATION of theories, concepts and terminology	AO3 ANALYSIS of economic problems and issues	AO4 EVALUATION of economic arguments and evidence, making informed judgements
Level 5 22–25 marks (mid-point 24) Good analysis and good evaluation	Good throughout the answer with few errors and weaknesses	Good application to issues Good use of data to support answer	Relevant and precise with a clear and logical chain of reasoning	Good with a clear final judgement

AQA AS Economics Unit 1 Markets and Market Failure 2

Philip Allan, an imprint of Hodder Education © Ray Powell, James Powell