CJC 2021 A-level CSQ1 ANS

A Level H1 2021 Answer CSQ1: Intervention in the market for oil a) (i) With reference to Figure 1, summarise the main changes that occurred in the crude oil price during the period 2014 -2018. 3 General Trend: ● In general, crude oil prices fell from 2014-2018 [1] Refinements: ● There was a steep decline in crude oil prices between middle of 2014 to January of 2015 / second half of 2014 [1] ● Crude oil prices experienced a steady rise between January 2016 to January 2018. [1] (ii) Extract 1 states that ‘If indeed demand for crude oil falls and supply rises, price will be bound to respond in the predicted direction.’ Using a supply and demand diagram, explain the impact of these changes on the price of crude oil. 4 Demand Directional Change + Determinant + Evidence [1] “China’s economic slowdown, together with a slight downturn in Europe” will result in an overall decrease in demand for final goods and services, as the fall in income would lead to decrease in purchasing power and less demand for final goods and services. Since oil is a factor input of many final goods and services, derived demand for oil will decrease, leading to a fall in demand for crude oil. The demand curve for oil will shift to the left. Supply Directional Change + Determinant + Evidence [1] “In June 2018 the OPEC countries agreed to increase oil production by one million barrels a day” is a government policy that will mandate producers to increase the supply of oil. The supply curve for oil will shift to the right. Price adjustment process [1] When the demand curve for oil shifts left from D0 to D1 and the supply curve for oil shifts simultaneously to the right from S0 to S1, there is a surplus of oil at the original price P 0 since Qs > Qd. This causes downward pressure on the price of oil and the price of oil decreases to P 1. Diagram properly labeled and well referenced in answer [1]

Figure 1: Market for crude oil P of crude oil per barrel P0 S0 S1 P1 0 D1 0 Qd Q0Q1 Qs Quantity of barrels of crude oil b) With reference to Extract 2 and Extract 3, explain the different causes of the changes in the price of oil in the US and price of food in Guatemala and comment on the significance of the elasticity of demand or supply in these cases. 6 Demand Directional Change + Determinant + Evidence [1] Extract 2 states that the price of oil has fallen to negative. The fall in demand for oil is ultimately a result of government policy to implement “lockdowns across the world…due to the Covid-19 pandemic”. Lockdowns would decrease the demand for many final goods and services such as travel, hospitality, entertainment etc. Since oil is a factor input of most final goods and services, the derived demand for oil will consequently decrease, leading to a decrease in the price of oil in the US. Application of PES for change in oil prices for the US [1] + significance of PES on change in price [1] Extract 2 mentions that the fall in demand has caused large surplus that “oil producers are paying buyers to take it away… as storage space has run out on land and sea”, implying the oil producers’ have excess stock, i.e. PES is elastic. PES is more than 1. When PES is elastic, a decrease in the demand for oil → limited fall in price of oil. Hence, the PES of oil is not significant in causing the limited fall in the price of oil.

Supply Directional Change + Determinant + Evidence [1] Since biofuels and food are in competitive supply where producers use similar resources for the production of both goods, an “expansion of growing crops for biofuels” due to a government subsidy will lead to a fall in the supply of food crops. This large fall in supply of food crops will cause a shortage at the initial price hence upward pressure on price, leading to increase in price of food . Application of PED for change in food prices for Guatemala [1] + significance of PED on change in price [1] Since food is a necessity as expressed by a spokesperson for the Guatemalan farmers “They need food”, PED for food in elastic. PED value for food is less than one. When PED value for food is less than one, a decrease in the supply for food, which decreases quantity demanded, will lead to significant increase in the price of food. Hence, the PED will significantly change the price of food, causing food prices to increase sharply. Although the global demand for crops for biofuel has caused much land, even those in Guatamala, to be used for bio -fuel causing large fall in supply of crops for food, The inelastic PED is equally significant, if not more, in causing the sharp increase in food. c) Using one example from Extract 3 and one other example of your choice, explain ‘an unintended consequence’ of an economic decision in each case. 4 Economic Decision Identified + Explanation of Unintended consequence 1 [2] The government’s decision to introduce subsidies on production of biofuel is to benefit from the rising demand for biofuel: i.e. to increase exports and hence economic growth and at the same time to increase the farmers’ income. Increase crops for biofuel for export → increase export revenue → increase AD → multiple increase RNY through the multiplier process, hence increase EG. This would also raise incomes for the farmers, as they would have higher profitability. The unintended consequence was the “sharp increases in food prices”. With biofuels becoming more lucrative to producers, more of biofuel crop will be produced and more resources such as land will be dedicated to produce biofuel crop. There will be less land available to produce food crop, which results in the supply of food crop decreasing and the prices of food crop to increase. This worsen equity as ‘Guatemala poor people’ don’t have enough to eat, as they are not able to afford the rise in cost of food. Economic Decision Identified + Explanation of Unintended consequence 2 [2]

Government decision to impose price floor on price of crops for food with the aim to encourage farmers to increase the production of crops for food but raising the TR farmers can earn from sale of crops for food. The unintended consequence would be that the price floor on crops for food will lead to surplus of crops → government will have to buy up the surplus to support the price. This increases government’s spending → strain on government funds → less fund for public healthcare → low quality public healthcare. d) (i) With reference to Extract 4: Explain the meaning of both non -rivalry and non-excludability, and comment on the extent to which a healthy natural environment has these characteristics. 6 Explain what non-rivalry means [1] Non-rivalry in consumption means that consumption of the good by one more person will not leave less for others to consume. As a result, the marginal social cost of providing the good for an additional person is zero. Explain what non-excludability means [1] Non-excludability in consumption means once provided, no one can be excluded from consuming the good, even if they do not pay. As a result, no one will be willing to pay for the good → the price of the good will then be zero. A healthy natural environment has these characteristics [2] From extract 4, a ‘healthy natural environment’ consists of ‘clean air, clean water, unspoilt landscapes and rich biodiversity’. An example of such healthy natural environment is the national park. Assuming clean air is everywhere, and clean water flows from rivers, streams or lakes…etc., when one person enjoys the healthy natural environment, it does not leave less clean air nor less clean water for other people to consume. Hence, it is non-rivalry in consumption. It is impossible to prevent anyone, including non -payers from enjo