Economics · Oct / Nov 2021 · Paper 21 · Question 3

0455

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The island of Borneo is famous internationally for its rainforests which can bring many benefits, both private and external. However, the economy is heavily dependent on a finite resource, oil. The discovery of oil reserves in other parts of the world led to a significant fall in the world price of oil. This affected producers of oil in Borneo.

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3(a)[2]
Define finite resource.
A resource is an aid to production (1) which is limited in supply (1) it cannot be replaced over time / fast enough / will run out (1) to keep pace with consumption (1).
3(b)[4]
Explain the difference between private and external benefits. Logical explanation which might include:
Private benefits are enjoyed by the producer (1) and consumer (1) first and second parties (1) of a product, example e.g. revenue for the producer / satisfaction for the consumer (1).
External benefits are enjoyed by a third party (1) not directly involved in the production (1) or consumption process (1) example (1)
3(c)[6]
Analyse, using a demand and supply diagram, the effects on the world price of oil of the discovery of new reserves of oil. (6) Up to 4 marks for the diagram:
Axes correctly labelled – price and quantity or P and Q (1).
Original demand and supply curves correctly labelled (1).
New supply curve shifted to the right (1).
Equilibriums – shown by lines P1, P2 / Q1, Q2: or marking the equilibrium points E1 and E2 (1).
Up to 2 marks for written comments:
Discovery of new oil will enable an increase in supply (1) price will be lower (1).
3(d)[8]
Discuss whether or not the fall in the price of a product is a disadvantage to an economy.
In assessing each answer, use the table opposite.
Why it might be a disadvantage:
It depends on size of fall in price and elasticity of demand for the product
It depends upon the importance of the product to the economy / how dependent on it
If demand is price inelastic, decrease in total revenue e.g. basic items / necessity, cannot cover the costs, firms may go out of business, less employment opportunities
Less profits, discourages investment, reduces economic growth
Less export revenue, may increase current account deficit
Fall in price may be due to cheaper imports, domestic firms lose out.
The product may be a demerit good which previously was overconsumed.
If the product is part of a deflationary situation, there could be recession / unemployment
Why it might not be a disadvantage:
Depends on size of fall and whether it is short or long term
If demand is elastic, increase in total revenue e.g. luxury goods / many substitutes
Increase choices and affordability of product – better living standards
Fall in the price of a raw material may lower cost of production, reducing inflation and increasing economic growth
The product may be a merit good which previously was under- consumed
It may make a basic necessity more affordable – low income groups may be better off
It may be the result of an increase in productivity / a government subsidy
It may make the product more internationally competitive, improving the current account position.

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