PRACTICE EXAM PAPER

Edexcel
Economics (AS)
Practice Paper

Paper 1: Number 1
Instructions
• Use black ink or ball-point pen
• Fill in the boxes at the top of the page
• There are two sections to this paper
• Answer ALL the questions in Section A
• In Section B, answer all of questions 6(a) to 6(e) and one question from
6(f) or 6(g)
• Answer the questions in the space provided

Information
• The total mark for this paper is 80
• The marks for each question are shown in brackets

Advice
•Read each question carefully before you start to answer it
•Try to answer every question
•Check your answers at the end
 Section A
ANSWER ALL QUESTIONS IN THIS SECTION

Write your answers in the spaces provided.

Use the data to support your answers where relevant. You may annotate and include diagrams
in your answers.

1. Adam Smith famously described the concept of the division of labour using the example of a pin
factory in Glasgow, in which the division of labour allowed production of pins per person to rise
24,000%.

(a) Explain the term “division of labour”. [3 marks]

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(b) The division of labour in an economy requires the use of money so that goods and service can be
traded. Which of the following is not a function of money? [1 marks]

A A store of value
B A standard of deferred payment
C A method of barter
D A measure of value

Answer

(Total for Question 1 = 4 marks)

Page 2 Edexcel Economics (AS) – Paper 1: Number 1

2. The diagram below shows a production possibility frontier for an economy.

Diagram A

200

Y
160
Capital goods
X
100

130 150 200

Consumer goods

(a) Define the term “opportunity cost”. [2 marks]

Price of electric cars

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(b) The opportunity cost of a movement from point X to point Y is: [1 mark]

A 60 units of capital goods

B 70 units of consumer goods
C 20 units of consumer goods
D 100 units of capital goods

Answer

(c) Indicate an inefficient point of production on Diagram A above, using the letter Z. [1 mark]

(Total for Question 2 = 4 marks)

Edexcel Economics (AS) – Paper: Number 1 Page 3

 3. In April 2015, Barack Obama (President of the USA) and Raul Castro (President of Cuba) shook hands
at a meeting, the first hand-shaking between an American president and a Cuban president since the
early 1960s, when Cuba became a command economy.

(a) Explain the term “command economy”. [3 marks]

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(b) Which of the following is not a characteristic of a free market economy? [1 mark]

A Prices are determined through the market mechanism of demand and supply
B Nearly all of the factors of production are owned by the government
C Firms aim to maximise profit
D The degree of competition can be very high

Answer

(Total for Question 3 = 4 marks)

Page 4 Edexcel Economics (AS) – Paper 1: Number 1

4. Global oil prices fell from $100 per barrel in 2014 to $50 per barrel by summer 2015. One reason is that
demand for oil in China fell as the Chinese economy started to slow down. Another reason is that more
sources of oil were discovered, using techniques such as fracking and extraction of oil from oil sands.
The Scottish government had to downgrade its estimate of revenue from North Sea oil in 2015 by
£40bn.

(a) Which of the following statements can be correctly inferred from the information above: [1 mark]

A Oil is an inferior good

B The Demand for Oil is a derived demand
C Oil has income elastic demand
D Oil has price inelastic supply

Answer

(b) State and explain one factor that might influence the price elasticity of supply of oil. [3 marks]

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(Total for Question 4 = 4 marks)

Edexcel Economics (AS) – Paper: Number 1 Page 5

 5. Many homes in the UK now have a broadband internet connection, which allows them to get high-
speed internet. However, only 10% of broadband customers actually receive the broadband speed that
is advertised by broadband providers, and many people living in rural areas get no broadband coverage
at all, as providers say that it is too expensive for them to lay the broadband cables. As a result, some
households in rural communities are pooling their money together to pay for community broadband,
which they regard as a public good.

(a) Explain how the concept of “information asymmetry” could be applied to the relationship between
broadband providers and households wanting broadband internet. [3 marks]

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(b) Which of the following combinations of characteristics correctly describes a public good? [1 mark]

A Non-rival Excludable
B Rival Excludable
C Rival Non-excludable
D Non-rival Non-excludable

Answer

(Total for Question 5 = 4 marks)

TOTAL FOR SECTION A = 20 MARKS

Page 6 Edexcel Economics (AS) – Paper 1: Number 1

Section B

(Answer ALL Questions 6(a) to 6 (e), and EITHER Question 6(f) OR Question 6(g)

Question 6: Chinese Car Market

Extract A
China’s car factory slowdown
China’s car factories were, for many years, the busiest in the world. However, the growth in sales volumes has
slowed dramatically throughout 2015, with Barclays Bank predicting that growth in sales of cars in China will
slow from 8.5% in 2014 to just 1.7% in 2015.

During the boom years, car manufacturers frantically expanded the scale of their factories and supply chain
networks. At times, the “utilisation rate” (effectively how close factories are to reaching full capacity) reached
107.4%, which meant that factories were producing more than their factories were designed for, by adding in
extra shifts and asking workers to work overtime. The utilisation rate in 2015 is now estimated to be around
94.3%, with workers getting 10 days off per month, as compared with just 2 days per month in 2014. Car
manufacturers are still profitable as it is only when the utilisation rate gets close to 80% that they are likely to
make a loss.

The revenue earned by foreign companies such as Volkswagen and BMW has taken a big hit, falling by 1.5% in
the first half of 2015. These companies had been relying on Chinese growth to keep their global revenues high.
Instead, these companies now have to offer big discounts to encourage sales, with cars being sold for at least
a 10% discount.

In America and Europe, car dealerships (the shops where cars are actually bought) offer a range of services,
from services and spare parts, through to car insurance and trading second-hand cars. Chinese dealerships
for big global car brands, however, have only focused on the sales of brand new cars. Sales of second-hand
cars account for 14% of the profits in American dealerships, but only 2% in China, where car dealers have little
experience of buying and selling used cars. As the Chinese economy slows down, fewer people want to buy
new, expensive cars. This is exacerbated by Chinese manufacturers, such as Great Wall (a Chinese sports utility
vehicle manufacturer), offering cheaper “copycat” versions of well-known global brands, which are proving
really appealing to Chinese consumers.

Edexcel Economics (AS) – Paper: Number 1 Page 7

 5

4
2006 2008

2200000

2000000

1800000

1600000

1400000

1200000

1000000
2012 2013 2013 2014 2014 2015 2015

Adapted from “Driven to the Brink”, The Economist, 22.08.15, “Foreign car factories curb output”, The Wall Street Journal, 23.8.2015 and
“Chinese auto sales fall to 17-month low despite price cuts”, Bloomberg Business, 11.8.2015

1.2

Extract B 1.0

Pollution problems in China 0.8

Whilst growth in the Chinese car industry has been great news for car manufacturers in recent years, the additional
% change

0.6
pollution and environmental damage is taking its toll. Roads in Beijing and Shanghai regularly come to a complete
standstill, effectively becoming car parks while vehicle fumes cause health problems for local residents – many
0.4
people are describing the situation as an “airpocalypse”. China is the world’s largest emitter of carbon, and is
home to some of the world’s most polluted cities. A recent report from the World Health Organisation (WHO) found
that air pollution is 0.2
a major cause of both lung cancer and bladder cancer. In Beijing, the Chinese Environmental
Protection Agency estimate that over 31% of the air pollution is caused by vehicle emissions.
0.
Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015
The Chinese government is starting to act. In 2014, 5 key manufacturing regions of China, including Beijing and
Shanghai, started -0.2
to introduce vehicle quotas – there are now lotteries for licence plates (number plates) to help
stem the influx of new drivers. In Shanghai, for example, there are only 50 000 new licence plates available each
year. Shanghai is also considering introducing a daily congestion charge for its business district, having already
introduced a charge
40 for its motorways and trunk roads.

Another, more30 controversial scheme being implemented by the Chinese government is the plan to remove 6 million
high-emission cars from the roads by the end of 2015. The State Council, a key group of officials in the Chinese
government, said
20 that “strengthening controls on vehicle emissions will be a major agenda item for the country’s
energy savings, emissions reductions, and low-carbon development during the next two years”.
10

Whilst pollution problems are clearly an issue, the restrictions are regarded by many car manufacturers as being
a major cause0 of the slowdown in vehicle sales, which could hit growth and employment figures hard over the
%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
coming year. 2010 2011 2012 2013 2014 2015

-10

Sources: “China to scrap millions of cars to ease pollution”, The Guardian, 27.5.2014 and “Chinese vehicle sales seen slowing on pollution
controls”, Bloomberg
-20 Business, 9.1.2014

-30

Page 8 Edexcel
-40 Economics (AS) – Paper 1: Number 1
 14

12
2010 2012 2014

Extract C
The Chinese electric car market
Whilst sales of regular cars are slowing in China, one market seems to be entering a boom – sales of electric
cars are rocketing. In December 2014, monthly sales of electric cars at 27,000 were 30 times higher than in
January 2014, and this trend has continued.

Market analysts have identified a number of possible reasons for the upswing in demand for electric cars in
China. One reason is that the licence plate restrictions referred to in Extract B do not apply to electric cars. The
10% sales tax on electric vehicles was also abolished in 2014. In addition, the Chinese government has also
switched to buying electric cars for its official fleet. Finally, Chinese manufacturers of electric cars, such as
Kandi and Chery Zotye, have really worked on improving the quality of their electric car models, which are now
cheaper and of comparable quality, than the main international competitor, Tesla.

Source: “China’s electric car boom: should Tesla Motors worry?”, Fortune Magazine, 19.2.2015

(a) Explain why the expansion of factories by Chinese car manufacturers has contributed towards a fall in the
price of cars in China. Include a demand and supply diagram in your answer. [5 marks]

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Edexcel Economics (AS) – Paper: Number 1 Page 9

 (b) Assess the likely impact of falling incomes due to slower economic growth on both the market for
expensive, imported cars and cheaper Chinese ‘copycat’ cars. [10 marks]

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Page 10 Edexcel Economics (AS) – Paper 1: Number 1

(c) Using Extract A, explain two reasons why demand in China for foreign-branded cars appears to be price
inelastic. [6 marks]

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(d) With reference to Figure 1, calculate the percentage change in the number of monthly car sales
from January 2015 to July 2015. [4 marks]

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Edexcel Economics (AS) – Paper: Number 1 Page 11

 (e) (With reference to Extract B, discuss the reasons why the Chinese government has taken action to reduce
the amount of pollution caused by vehicles. [15 marks]

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Page 12 Edexcel Economics (AS) – Paper 1: Number 1

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Edexcel Economics (AS) – Paper: Number 1 Page 13

 EITHER
(f) Evaluate the impact on the market for electric cars in China of the removal of the 10% sales tax on electric
cars. [20 marks]

OR

(g) Evaluate the likely impact on congestion in Shanghai if a daily congestion charge for the business district
is introduced. [20 marks]

Indicate which question you are answering by marking a cross in the box. X
If you change your mind, put a line through the box X and indicate your new question with a cross.

Chosen question number: Question 6(f) Question 6(g)

Write your answer here:

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Page 14 Edexcel Economics (AS) – Paper 1: Number 1

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Edexcel Economics (AS) – Paper: Number 1 Page 15

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TOTAL FOR SECTION B = 60 MARKS

TOTAL FOR PAPER = 80 MARKS

Page 16 Edexcel Economics (AS) – Paper 1: Number 1