Approaching the Edexcel A Level Economics Paper 3

The Edexcel Economics Paper 3 covers both microeconomic and macroeconomic themes.

Structure of the Paper

The paper is 2 hours long and is split into two sections, A and B, each worth 50 marks. Both sections are based on a case study (the context).

For each section you must answer all the 5-mark, 8-mark and 12-mark questions, and one 25-mark essay from a choice of two.

It is important to follow the command word.

For the shorter data questions:

The 5-mark questions typically asks you to ‘explain’, with marks allocated for knowledge (2); Application (2); and Analysis (1).

The 8-mark questions typically asks you to ‘examine’, with marks allocated for knowledge (2); Application (2); Analysis (2); and Evaluation (2).

The 12-mark question asks you to ‘discuss’, with marks allocated for knowledge (2); Application (2); Analysis (4); and Evaluation (4). In the 5-mark, 8-mark and 12-mark questions, the examiner’s advice is that you should approach these from either a macroeconomic or microeconomic perspective, unless asked to consider both (this is unlikely).

For the essay question:

The 25-mark essay asks you to ‘evaluate’, with marks allocated for knowledge (4); Application (4); Analysis (8); and Evaluation (9).

You are required to evaluate from both a microeconomic and macroeconomic perspective, by making one fully supported and reasoned point for each perspective, typically supported by relevant and fully integrated microeconomic and macroeconomics diagrams.

The examiner’s advice is that you do not try to weave the microeconomic and macroeconomic points together but keep them separate. However, the ‘final judgment’ is likely to weigh-up the significance of these separate points.

Essay questions – key points

1. Economics is a social science which considers the ‘causes’ of economic ‘events’ and their consequences, and this shapes how essay questions are constructed.
2. The focus of essays will be on one economic event and, most commonly, how it impacts economic agents. Common economic events include changes in interest rates, exchange rates, tax rates, inflation, and the introduction of new technologies, to name a few.
3. The impact can be either positive or negative, small or large, short lived or long lasting.
4. Events may arise in a gradual and predictable way, such as increases in migration, and other events are sudden and more unpredictable, such as an oil price shock or a pandemic.
5. Events may arise from the changing behaviour of consumers, such as an increased preference overseas holidays, or from the behaviour of producers, such as an increase in corporate mergers. They may also arise from policy decisions by governments and from decisions by financial and other organisations.
6. Essays asking you to consider the ‘effects’ of an event require you to consider who is impacted, how they are impacted, and how they might respond. ‘Effects’ questions commonly use the trigger words ‘impact’ and ‘consequences’.
7. Less commonly, essays may ask you to consider the ‘causes’ of an event and are often expressed in terms of the requiring an evaluation of the factors affecting or leading to an event. Examples of cause-type essays include questions on globalisation and inequality.
8. However, for Edexcel, essay questions tend to focus on the effects and impacts of an event, rather than ‘factors leading to’, which are typically in the 8 and 12-mark questions.

What is a microeconomic impact? Key points

A microeconomic impact refers to how the economic event affects consumers and producers and the markets they interact in.

For consumers

From the consumer’s point of view, analysis typically considers how consumers are affected in terms of changes in their standards of living, their quality of life, and how they make decisions in response to the event in question. How is purchasing power affected? Do they purchase more or less? Do they look to substitute one thing for another?

Concepts used here will come from ‘consumer theory’, including utility theory, income and substitution effects, and whether consumer’s react rationally (or not) to economic events.

The significance of ‘demand elasticities’ is often important when considering the reaction of consumers to events, such as changes in price, income or the price of other goods and services.

Also important in this is the consideration of the ‘welfare impacts’ of decisions, including changes in consumer and producer surplus – and the deadweight loss associated with decisions and events.

For producers

From a firm’s perspective, microeconomic analysis looks at how firms make decisions in the face of uncertainty.

These decisions may concern how to produce, how to compete to gain sales, how to increase revenue and how to control costs to increase profits. This calls upon concepts from ‘producer theory’ and includes those related to market structures, competition, barriers to entry, contestability and price and non-price competition. Game theory can also be applied to understand how firms might react to events, such as a price-war between suppliers. Almost all economic events will have some impact on producers.

Putting it together

How you structure the microeconomic element of your essay depends on what the nature of the event is, and how it is transmitted to producers and consumers.

For example, if the event is an oil shock, the initial impact is most likely to be felt by producers. Analysing this is likely to focus on the impact on energy and transport costs, profits and other consequences such as those affecting staffing and wages, factor substitution, and changes in the use of technology.

Given that an oil shock will affect the prices of many products, and possibly their availability, the analysis will then move on to the negative impact on consumers, and how they might respond. So, what is the end-point of the analysis of the microeconomic impact?

It is clearly that consumer’s may suffer as a consequence of an oil shock – so, while your analysis may start with how producers are affected is simply the first stage in your chain of reasoning to arrive at that point. Your main point must be established in the first place to set your direction of travel, and to help you decide your chain of reasoning (your steppingstones) to get to this point.

In simple terms, when dealing with an ‘open’ effects-type question, your main argument should arrive at a point which puts the consumer at center stage. Of course, if you are directed to evaluate the impact of an oil shock exclusively on firms, then there is no point in going beyond this.

For an oil shock, the chain of reasoning for the microeconomic impact might go as follows:

1. A rise in energy prices and transport costs (with a time tag);
2. Introduction of a cost-revenue diagram for firm ‘X’;
3. Impact on producers in terms of rising costs;
4. Shift in the MC and AC curves;
5. Increase in price and a reduction in profits;
6. Consumers may reduce demand (negative income and substitution effect) – how much depends upon PED (gradient of AR curve). 7. Real income of consumers fall, assuming no increase in money wages, with falling standards of living.
7. Hence a combined negative effect – falling profits and falling real consumer incomes.

What is a macroeconomic perspective? Key points

Looking at an event from a macroeconomic perspective, an ‘effects-type’ essay will consider the effect of an event on aspects of the economy as a whole, such as the impact of a rise in interest rates on economic growth, on trade, on jobs and the price level. This may require you to consider the impact on achieving macroeconomic objectives or failing to achieve them, or to consider how a single event can have a variety of different impacts on the economy.

A cause-type essay from a macroeconomic perspective will mean identifying and then analysing the possible causes of the event, such as the causes of inflation.

Again, cause-type questions are much more likely in the 5, 8 and 12 mark questions.

Example

Taking the event of an oil shock, the macroeconomic effects are best analysed through AD-AS analysis. Which component of AD will be affected? Will the effect be mainly on short run AS, and will AD be affected as a result of the impact on short run AS?

A chain of reasoning for the macroeconomic impact might run as follows:

1. The initial oil shock;
2. An increase in aggregate short run production costs, shown with a shift in short run AS to the left;
3. A rise in the price level (the average level of prices);
4. A likely contraction of AD, through a reduction in spending by households on consumer goods, and on capital goods by firms as a result of the fall in the value of money, and households and firms readjust to the new higher price level;
5. A fall in real national income (Y) or a fall in the rate of growth of real national income;
6. A continued fall, via a downward multiplier effect, and lost jobs.
7. Result – economic downturn and a possible recession. Each step will need to be explained, with relevant data from the context fully integrated.