may 2010

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May 2010
(a) With reference to Extract 1 and Figure 1, explain the causes of the increase in the
price of food. Use a supply and demand diagram in your answer.
(8)
DIAGRAM SHOWING A SHIFT IN SUPPLY TO LEFT (DECREASE) AND A SHIFT IN D TO
THE RIGHT (INCREASE)
From the data we can assume that an increase in demand occurred due to a
population rise and increase in incomes in developing countries. This increase in
demand caused the demand curve to shift to the right, which increased the price.
Moreover, supply has increased causing the increase in the price of food. This is
due to limited land being available for agricultural used. This causes the supply
curve to shift to the left and thus increases the price of food further.
In the long run, prices should stabilise as the data states that intensive farming
methods are being discussed meaning that supply should increase leading to a
more elastic price elasticity of supply.
However, due to uncertainty of weather conditions this may not be true. This is a
particular problem for the UK that produces just 48% of the food it consumes.
(b) To what extent are households on low incomes `hit the hardest by rising food
prices' (Extract 1, line 18)?
(6)
Price elasticity of demand is the responsiveness of demand a change in price.
Since PED for food is inelastic this will mean that they will be hit hardest by the
increasing prices due to having less income to spend on food. This will force them
to spend more of their income on food, potentially forcing them into poverty.
However, this is not entirely true as they can make up for the rising food prices by
buying less luxury goods.
In addition, in the UK there is a possibility that intensive farming methods will be
used so in the long run the prices of food may decrease so they will be only
suffering in the short run.
Moreover, the government could give subsidies to decrease food prices or could
increase welfare benefits to enable the households on low incomes to continue to
purchase food.
(c) Assess whether the demand for food is likely to be price elastic or price inelastic.

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Price elasticity of demand is the responsiveness of demand a change in price.
PED for food is likely to be inelastic (when a change in price leads to a less than
proportionate change in demand). This is because food is a necessity and there
are no substitutes to food. Therefore, regardless of a change in price, there will
still be demand for it as it is essential for survival.…read more

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With reference to the concepts of private costs and external costs, assess the
possible economic effects of `using intensive farming methods and genetically
modified crops' (Extract 1, lines 11 and 12). Use an appropriate diagram in your
answer.
(12)
DIAGRAM SHOWING MSC, MPC, MSB AND TRIANGLE OF WELFARE LOSS
The private costs of using intensive farming methods and genetically modified crops are
the costs of production that this involves. Such as land,labour,capital and enterprise.…read more

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