Edexcel A Level Economics A Theme 1: Introduction to Markets and Market Failure Exam Questions

About Edexcel A Level Economics A Theme 1: Introduction to Markets and Market Failure

Theme 1 is the starting point of Edexcel A Level Economics A and gives you the microeconomic toolkit used across the whole course. You study how economists think, how markets set prices through demand and supply, why markets sometimes fail and how governments try to correct that failure. It is assessed in Paper 1 (Markets and business behaviour) alongside Theme 3, and it can also appear in the synoptic Paper 3. Examiners like data-response questions that ask you to draw and explain a supply and demand or externality diagram, calculate an elasticity, and then evaluate a policy such as a tax, subsidy or maximum price.

What you need to know

• 1.1 Nature of Economics Economics as a social science, positive and normative statements, the basic economic problem of scarcity and opportunity cost. Production possibility frontiers show opportunity cost, efficiency and growth, and you need specialisation, division of labour and the functions of money.
• 1.2 How Markets Work Rational decision making, demand and supply curves and their shifts, price, income and cross elasticities of demand, price elasticity of supply, and how equilibrium price is set. Learn consumer and producer surplus and the rationing, incentive and signalling functions of the price mechanism.
• 1.2 Behavioural economics Limits to rational decision making: bounded rationality, bounded self-control, biases (rule of thumb, anchoring, availability, social norms) and the importance of fairness. Policy tools include choice architecture, framing, default choices and nudges.
• 1.3 Market Failure Market failure is a misallocation of resources. Know negative and positive externalities in production and consumption with diagrams showing the welfare loss, public goods (non-rival and non-excludable) and the free rider problem, and information gaps (symmetric and asymmetric).
• 1.4 Government Intervention Indirect taxes, subsidies, maximum and minimum prices, tradable pollution permits, state provision of public goods, provision of information and regulation. You must also explain government failure, for example distortion of price signals, unintended consequences, excessive administrative costs and information gaps.

Common mistakes in Theme 1: Introduction to Markets and Market Failure

• Confusing a movement along a demand curve with a shift. A change in the good's own price causes a movement along the curve; a change in any other factor, such as income, shifts the curve.
• Drawing an externality diagram with the welfare loss triangle in the wrong place. The triangle sits between marginal social cost and marginal social benefit, pointing towards the social optimum, between the market output and the socially optimal output.
• Saying a good with a negative PED is elastic. Look at the absolute value: a PED of -0.4 is inelastic and a PED of -1.8 is elastic.
• Calling a merit good a public good. Education and healthcare are rival and excludable, so they are merit goods (under-consumed due to information gaps), not public goods.
• Evaluating a policy with only 'it depends'. Say what it depends on, such as the PED of the product, the size of the tax compared with the external cost, or the risk of government failure.

Try three Theme 1: Introduction to Markets and Market Failure exam-style questions