Jan 2013- #ECON1
Question 7:
Extract E (lines 12-14) states that in ‘the US, subsidies on corn, soya beans and rice have made
the main ingredients used to make processed food cheap compared to fruit and vegetables’.
With the help of an appropriate diagram, explain how subsidies on ingredients such as corn, soya
beans and rice will affect the market for processed food. (12 marks)
There are two marks available for definitions in the 12 mark question. Those definitions must be
relevant to the question, but ‘relevance’ is a relatively broad term. In this case, according to the
mark scheme, the following definitions are valid:
Demand - Assuming you are using a supply and demand diagram, these terms are relevant
Supply - See above
Subsidy - In the question, so clearly relevant
Market - See above
Derived Demand - The subsidies are for the ingredients for processed food. More demand for
processed food sees more demand for these products, hence derived
demand
Remember, there is one mark for each definition, up to a maximum of two. Don’t do too many, you
won’t be rewarded for more than two.
Phil Hensman
[Type text]
@PhilsEconomics
Supply and demand diagrams are the most frequently asked for by AQA, so make sure you learn
these definitions.
Next comes the diagram, up to four marks for this. Subsidies affect supply, so an increase in
supply is the appropriate diagram.
If you read all of the extract, it talks about “increased demand for fast food”. Don’t be fooled by this,
the question specifically asks what affect subsidies have on the market… Don’t answer a different
question, you won’t be rewarded.
The 4 marks allocated for the diagram are as follows:
Labelling of S, D, axes and original equilibrium (P1, Q1) = 1 mark in total
Shifting the supply curve to the right = 2 marks
New Equilibrium (P2, Q2) = 1 mark
Excess Supply = 1 mark
It is possible to get all four marks without labelling the excess demand, but it is also easy to lose a
mark for missing a label, so better to be safe than sorry…
Make sure the diagram is big, so the examiner can see exactly what you have shown.
Phil Hensman
[Type text]
@PhilsEconomics
We have now achieved six out of the twelve marks by doing two definitions and a diagram. Now
we must explain what has happened on the diagram, linking it back to the question, in order to gain
the rest of the marks.
Here is a full answer which will gain all twelve marks:
Demand is the amount of a good or service that consumers are willing and able to buy at each and
every price at a point in time (1 mark). Supply is the amount of a good or service that producers
are willing to offer for sale at each and every price at a point in time (1 mark).
(4 marks)
Ingredient such as corn, soya beans and rice can all be used to make processed food. The effects
of a subsidy for these agricultural products will mean that their price will reduce and therefore, as
they are used in the production of processed food, the costs of producing processed food, ceteris
paribus, will reduce. This will mean that producers are now able to make bigger profits for
producers and more of them will move their factors of production into the processed food market,
causing the supply of processed food to increase. At the original price level (P1 in the diagram)
more is now supplied than there is demand for (excess supply), as a result, in order to sell all of
their stock, producers have to lower the price (to P2) so that the market clears. This lower price will
mean an extension of demand and the quantity produced and consumed will rise from Q1 to Q2.
The key to gaining the marks came from relating my economic theory, not only to the diagram, but
also to the case study. Combining these three elements meant that I easily gain up to ten marks for
my explanation.
The real key, however, is knowing the theory. There are no short cuts
Phil Hensman
[Type text]
@PhilsEconomics