Examiner report for Unit 1 (Jan 2008)

Unit 1 In January 2008 :

Question (a) : Using an example in each case, identify two different factors of production which may be needed for the production of pizzas that are delivered to homes
Comments of examiners: A small number of candidates gave land as an example of a factor of production but then gave a wrong example that did not refer to the site or raw materials characteristics.


Question (b) : State and explain two possible determinants of the increase in demand for high quality pizzas
Comments of examiners : The best answers usually referred to a change in income/disposable income as a possible determinant. A lot of candidates drew extensively on the first five lines of the case study. The majority of these answers, however, did not recognise the reasons given as being the taste / fashion determinant of demand. Another weakness was that this same so-called determinant was used for a second time.


Question (c) i : With reference to the data, use a supply and demand diagram to show how the global price of mozzarella cheese has increased.
Comments of Examiners : The original intention of this question was to award a mark for answers that explicitly recorded $1940 and $3000 on the vertical axis, hence the line reference.

Question (c) ii : Explain how the global market of cheese might change with the release of US stock piles
Comments of Examiners : This question caused problems for many candidates for the reason stated above. Given the context, it is difficult to see candidates confusing ‘stockpile’ with ‘stocks’, as used to describe a synonym for shares. So not as many candidates as might have been expected gained four marks for some simple market analysis of the sudden release of the additional supply of US cheese onto the market. Although not required, a diagram could achieve three marks.

Question (d) ii : Explain the significance of the price elasticity for mozzarella cheese producers

Comments : There was considerable confusion between revenue and profits when referring to the effects of an increase or decrease in price. Only a handful of candidates stated that the 0.2 estimate indicates that there are seemingly few close substitutes for mozzarella cheese. Rather more candidates explained that the statistic was an estimate and that producers should bear this in mind when making pricing decisions.

Question (e) : Using evidence provided, comment on the extent to which the market for high quality pizzas may be considered to be one of monopolistic competition

Comments : To obtain marks though, it was essential that the written answer was applied to the high quality pizza market.
As in previous examinations, there were some weak answers from candidates who wrote about ‘monopolistic’ and not ‘monopolistic competition’. These answers did not gain marks due to the confusion with monopoly. Two marks were most typical for commenting that the market was most likely an oligopoly due to the dominance of well known brands. Rather more comment was needed for full marks; for example, that data was needed to make a proper assessment or further information was needed on some of the other characteristics of an oligopoly

Question (f) : Discuss the extent to which the increase in the global price of mozzarella cheese is really of serious concern to all pizza producers

Comments : The main way that most candidates used to reach Level 4 was to distinguish between large and small pizza producers. This was usually done by considering how larger firms could benefit from economies of scale, particularly through the bulk purchasing of mozzarella cheese. Other possibilities were to make assumptions about the price elasticity of demand for pizzas or to discuss how other variable costs might be reduced. Some answers recognised correctly that all producers would have to bear the costs and that the market structure could have a bearing on pricing decisions. A high mark on this part required a discussion of more than one of these aspects.

Why does the aggregate demand has the downward slope ?

I found out on internet and I ll summarise it as 3 main explainations :

- Interest Rates :
In the economy, we have a fix amount of money. The price level representing for the amount of currency we have to spend to purchase something. If the price level is high, therefore we have to have a large amount of currency to purchase. And with low price level, the quantity of currency we have to purchase is less. Suppose that some of these money that we do not spend, will go to bank as a saving. It will lead to the rising in bank loans and therefore it will drive down the interest rate.
With lower interest rates, firms are easier to borrow and therefore the investment will increase, which leads to the increase in aggregate demand ( because Investment is one of factors determine the aggregate demand).

- Exchange rates :
When the price level falls, the interest rates is driven down and therefore it more likely to decrease the exchange rates. Lowering exchange rate can increase the net export because the price of export become cheaper. Price level falls, exchange rates fall, increase in net exports which contribute to aggregate demand >> therefore AD increase.

- Wealth :
The lower price level is, the more you can afford to buy >> therefore it increases the consumption and leads to the increase in aggregate demand.