Theme 1 Real World Knowledge

Question 1

1.1 Nature of economics real-life examples.

Answer 1

Certainly! Here are some specific figures illustrating the opportunity costs and resource allocation challenges faced by the NHS during the COVID-19 pandemic:

1. Increased NHS Expenditure Due to COVID-19:
   
   • Between March 2020 and June 2022, the UK government allocated £89 billion to support health and social care services in response to the pandemic. citeturn0search5
2. Additional Annual Operating Costs:
   
   • The pandemic has permanently increased the NHS’s annual operating costs by an estimated £4–5 billion, accounting for ongoing expenses such as infection control measures and addressing care backlogs. citeturn0search0
3. Elective Care Backlog:
   
   • As of 2020, approximately 4.7 million fewer patients were referred for consultant-led routine hospital care compared to the same period in 2019, leading to a significant backlog in elective procedures. citeturn0search4
4. Projected Waiting List Growth:
   
   • If 75% of these ‘missing’ patients are referred by the end of 2020/21, the waiting list could grow to 9.7 million by 2023/24, significantly impacting the NHS’s capacity to provide timely care. citeturn0search4
5. Mental Health Service Demand:
   
   • The pandemic is projected to increase mental health service referrals by 11% annually over the next three years, necessitating an additional £1.1 to £1.4 billion each year to meet this demand. citeturn0search4

These figures highlight the substantial financial and operational pressures on the NHS during the pandemic, leading to difficult decisions about resource allocation and the postponement of non-urgent treatments, thereby exemplifying the concept of opportunity cost in healthcare.

Question 2

describe a real-life situation to demonstrate demand and supply and elasticities.

Answer 2

Example: Oil Prices and the Ukraine War (2022-Present)

Global Oil Price Surge: Following Russia’s invasion of Ukraine in February 2022, the international benchmark Brent crude oil price spiked, averaging $80.20 per barrel in 2024.
THE GUARDIAN
Russia’s “Shadow Fleet”: To circumvent Western sanctions, Russia has employed a “shadow fleet” of over 600 aging tankers, enabling continued oil exports despite restrictions.
THE TIMES
Impact on Tanker Prices: The demand for these vessels has driven up the price of 15-year-old crude tankers from $32.5 million pre-war to $54 million.
THE TIMES
Sanctions Evasion: Despite sanctions, Russia’s oil revenue remains substantial, with the “shadow fleet” facilitating exports and undermining the intended economic impact of Western restrictions.
AP NEWS
Market Adaptations: Countries like India and China have increased imports of Russian oil, benefiting from discounted prices and altering global trade flows.

Question 3

describe a real-life situation to demonstrate indirect taxes

Answer 3

Example: UK Sugar Tax (2018)

Reduction in Sugar Consumption: One year post-implementation, children’s sugar intake from soft drinks decreased by 3g per day, while adults saw a reduction of 5g per day.
THE TELEGRAPH
Industry Reformulation: Between 2015 and 2019, the total sugar sold in soft drinks by retailers and manufacturers decreased by 35.4%, from 135,500 tonnes to 87,600 tonnes, largely due to product reformulation.
INSTITUTE FOR GOVERNMENT
Stable Sales Volumes: Despite the reduction in sugar content, the overall volume of soft drinks purchased remained consistent, indicating that consumers did not significantly alter their purchasing behavior.
THE TELEGRAPH
Public Support for Extended Measures: Approximately 69% of consumers believe that the sugar tax should be extended to other high-sugar products, such as confectionery and biscuits.
BEVERAGE DAILY
Calls for Additional Taxes: Health campaigners advocate for new levies on foods high in salt and sugar to further combat obesity, suggesting that such measures could incentivize manufacturers to produce healthier options.

Question 4

describe a real-life situation to demonstrate consumer and producer surplus.

Answer 4

Certainly! Here’s an analysis of how Black Friday sales impact consumer and producer surplus in the context of Apple’s iPhone pricing strategy, supported by specific data:

1. Apple’s Premium Pricing and Producer Surplus:
   
   • Apple maintains high prices for its flagship iPhones to uphold its premium brand image. For instance, the newly introduced iPhone 16e is priced at $599, higher than its predecessor, the iPhone SE, which was $429. This strategy ensures substantial producer surplus for Apple. citeturn0news20
2. Gross Profit Margins Reflecting Producer Surplus:
   
   • As of the fourth quarter of 2024, Apple’s gross profit margin stood at approximately 43.88%, indicating that nearly 44% of its revenue is retained after accounting for the cost of goods sold. This high margin reflects the significant producer surplus Apple captures through its pricing strategies. citeturn0search11
3. Black Friday Discounts Enhancing Consumer Surplus:
   
   • During Black Friday 2024, retailers offered notable discounts on various iPhone models. For example, the iPhone 15 Pro was discounted from $999 to $899 at certain retailers, providing consumers with a $100 saving. Such discounts increase consumer surplus by allowing buyers to purchase at prices lower than their maximum willingness to pay. citeturn0search10
4. Record-Breaking Black Friday Sales Indicating Increased Consumer Surplus:
   
   • Black Friday 2024 saw U.S. online sales reach $10.8 billion, a 10.2% increase from the previous year. This surge suggests that consumers capitalized on discounted prices, thereby increasing their consumer surplus during the event. citeturn0search0
5. Mobile Shopping’s Contribution to Consumer Surplus:
   
   • In 2024, 69% of Black Friday purchases were made on mobile devices, reflecting the growing trend of convenient shopping experiences. This accessibility likely contributed to the increased consumer surplus, as more consumers could easily take advantage of Black Friday deals. citeturn0search0
6. Apple’s Strategic Discounts Balancing Surpluses:
   
   • While Apple offers discounts during events like Black Friday, it carefully calibrates these reductions to maintain its premium brand image and substantial producer surplus. For instance, the iPhone 16e, despite being a budget model, is priced only 31% lower than other iPhones, compared to a 52% discount previously offered by the SE model. This approach ensures that while consumers gain additional surplus during sales events, Apple’s producer surplus remains robust. citeturn0news20

These data points illustrate the dynamic interplay between consumer and producer surplus in the context of Apple’s pricing strategies and promotional events like Black Friday. By maintaining premium pricing and offering strategic discounts, Apple effectively balances maximizing its producer surplus while enhancing consumer surplus during key sales periods.

Question 5

describe a real-life situation to demonstrate externalities and market failure

Answer 5

Certainly! Let’s delve into the concepts of negative externalities in production and positive externalities in consumption, using the examples of air pollution in London and COVID-19 vaccination programmes, respectively. Here are key points supported by data:

1. Air Pollution in London (Negative Externality in Production)

• Health Impact of Air Pollution: Air pollution in London has been linked to significant health issues. A study estimated that in 2010, air pollution contributed to approximately 9,400 premature deaths in the city. citeturn0search22
• Economic Cost of Health Impacts: The health effects of air pollution impose a substantial economic burden. In 2010, the estimated cost of air pollution to the UK economy was around £16 billion, considering healthcare costs and lost productivity. citeturn0search22
• ULEZ Implementation and Compliance: The Ultra Low Emission Zone (ULEZ) was introduced to mitigate these externalities. Following its expansion in August 2023, the proportion of compliant vehicles in outer London increased from 85% to 95.2% by September 2023. citeturn0search19
• Reduction in Polluting Vehicles: The ULEZ expansion led to a significant decrease in the number of non-compliant vehicles entering the zone. The number dropped from 35,578 in March 2019 to 26,195 in April 2019, and further to 23,054 in July 2019. citeturn0search19
• Improvement in Air Quality: The ULEZ has contributed to improved air quality. Between 2019 and 2022, nitrogen oxide emissions in London decreased by 13,500 tonnes, which is equivalent to all emissions from landings and takeoffs at Heathrow Airport and London City Airport during the same period. citeturn0search19

2. COVID-19 Vaccination Programmes (Positive Externality in Consumption)

• Herd Immunity Threshold: Achieving herd immunity against COVID-19 requires a substantial portion of the population to be vaccinated. For SARS-CoV-2, studies suggest that vaccination coverage should be between 70% and 90% to establish herd immunity, depending on the virus’s transmissibility. citeturn0search3
• Global Vaccination Coverage: As of early 2025, approximately 81% of the U.S. population has received at least one dose of the COVID-19 vaccine, and 70% are considered fully vaccinated. citeturn0search15
• Impact on Infection Rates: High vaccination rates have been associated with a decline in infection rates. In countries where vaccination coverage reached certain thresholds, infection rates began to decline, indicating the effectiveness of vaccines in reducing transmission. citeturn0search5
• Economic Benefits of Vaccination: Vaccination programmes not only reduce healthcare costs but also prevent productivity losses due to illness. For example, the U.S. CDC reports that COVID-19 vaccination coverage among adults aged 18 and older is 23.1%, which contributes to reducing the economic burden of the disease. citeturn0search17
• Global Vaccination Efforts: International vaccination campaigns have aimed to achieve high coverage to prevent the spread of COVID-19. For instance, the World Health Organization has emphasized the need for substantial vaccination coverage to achieve herd immunity and protect vulnerable populations. citeturn0search1

These data points illustrate how government interventions, such as the ULEZ in London and COVID-19 vaccination programmes, aim to correct market failures by addressing externalities—both negative and positive—to improve public health and economic outcomes.

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Question 6

describe a real-life situation to demonstrate government intervention failure

Answer 6

Certainly! Let’s explore the concepts of Government Intervention and Failure through two examples: UK Rent Controls and the EU Emissions Trading Scheme (ETS). Here are key points supported by data:

1. UK Rent Controls (Potential Government Failure)

• Impact on Housing Supply: Implementing rent controls can lead to a reduction in the supply of rental properties. A study by the Institute of Economic Affairs found that rent controls “reduce the supply and quality of rental housing, reduce housing construction, reduce mobility among private tenants, and lead to a misallocation of the existing rental housing stock.” citeturn0search0
• Landlord Responses: Landlords may respond to rent controls by selling properties or converting them to other uses, further decreasing the availability of rental housing. Research indicates that “almost 60% [of landlords] would sell some of their properties as a result of rent stabilisation measures.” citeturn0search4
• Quality of Housing: Rent controls can lead to decreased investment in property maintenance, resulting in a decline in the quality of rental housing. The same study notes that rent controls “reduce the supply and quality of rental housing.” citeturn0search0
• Market Distortions: Rent controls can cause mismatches between supply and demand, leading to housing shortages and long waiting lists for rent-controlled properties. This distortion can exacerbate the housing crisis. citeturn0search13
• Alternative Solutions: To address housing affordability, experts suggest increasing the supply of available housing through policies that encourage investment in building affordable homes, rather than implementing rent controls. citeturn0search6

2. EU Emissions Trading Scheme (ETS)

• Over-Allocation of Permits: In the initial phase of the EU ETS (2005–2007), there was an oversupply of emissions allowances, leading to a carbon price collapse. This over-allocation resulted in a carbon price that “drove the carbon price down to zero in 2007.” citeturn0search24
• Windfall Profits: The free allocation of permits to certain industries led to windfall profits, as companies received allowances without incurring costs. This situation resulted in “massive windfall gain” for some sectors. citeturn0search24
• Price Volatility: The EU ETS has experienced significant price volatility, with carbon prices tripling in the first six months of Phase I, then collapsing by half in a single week in 2006. Such volatility raised questions about the system’s ability to provide stable incentives for emission reductions. citeturn0search24
• Limited Impact on Emissions: Some analyses suggest that the EU ETS has not substantially reduced emissions, with critics arguing that it “has not substantially reduced emissions.” citeturn0search9
• Challenges in Policy Design: The EU ETS has faced challenges in its design and implementation, including issues with flexibility and the inability to adjust to altered economic conditions, which have threatened its efficacy in providing incentives for abatement. citeturn0search1

These examples illustrate how government interventions, such as rent controls and emissions trading schemes, can lead to unintended consequences and market distortions, highlighting the complexities and potential failures associated with such policies.

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Question 7

Describe a real life situation to demonstrate subsidies.

Answer 7

Certainly! Here are specific figures illustrating the impact of UK government subsidies on electric vehicle (EV) adoption:

1. Plug-in Car Grant (PiCG) Impact:
   
   • Since its inception in 2011, the PiCG has disbursed approximately £191 million to support EV purchases in the UK. citeturn0news9
2. Tesla’s Share of PiCG:
   
   • Tesla, a prominent EV manufacturer, has received about £188 million from the PiCG, highlighting the scheme’s role in promoting high-end EV adoption. citeturn0news9
3. Electric Vehicle Homecharge Scheme (EVHS):
   
   • From September 2014 to June 2022, the EVHS facilitated the installation of 340,222 domestic charging devices, with total grants amounting to £140.8 million. citeturn0search0
4. Growth in Battery Electric Vehicle (BEV) Registrations:
   
   • BEVs accounted for 16% of all new car registrations in 2023, a significant rise from 1% in 2018, indicating the positive influence of subsidies on consumer choices. citeturn0search3
5. Financial Benefits of EV Ownership:
   
   • On average, driving an electric car in the UK saves approximately £700 annually compared to petrol or diesel vehicles, due to lower fuel and maintenance costs. citeturn0search4

These figures underscore the substantial role that government subsidies have played in accelerating EV adoption in the UK, making electric vehicles more accessible and financially attractive to consumers.