Economics 2009 Past Paper Jamie Halvorson

SECTION A Read the passage below and then answer the questions which follow. In the spring of 2007, citizens were warned to delay mending their garden fences as the price of imported timber (wood) had soared. The UK imports about 80% of its timber, and timber importers warned consumers to brace themselves for considerable price rises. The prices of other garden products such as decking and sheds were also affected by the increase in timber prices. A spokesman for the Timber Traders Federation said that a combination of factors had caused the price to rise. Poor timber-harvesting conditions, and adverse weather conditions in Scandinavia and Eastern Europe, meant that UK sawmills were having to pay up to 50 per cent extra for their timber. In addition, there were a lot of building projects going on in China, and some developing countries, which required vast amounts of timber. Germany and South America offered to make up some of the shortfall in the supply of timber. However, timber importers were warned not to make the problem worse by panicking the prices up. Adapted from Daily Telegraph, 31 May 2007 ITEM A (a) Using an example from the passage, explain what is meant by derived demand. 2

A derived demand, is the demand of a primary product due to an increase in demand of a secondary product. In the passage the derived demand would be timber and this has been derived from the demand of wooden goods for peoples gardens. Perfect answer. 2 marks. (b) Using the information in paragraph 2, draw a diagram to show why the price of timber has increased. 3
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(c) Explain how an increase in the price of timber can lead to an increase in the supply of timber in the short run. 2 This may happen, as firms will be more willing to sell their timber at a higher price. Firms may also use up any back up stocks or cut down more trees due to the large amount of profit that can be made. Could also have said suppliers will switch from say channeling towards paper production to the relatively more profitable timber. I would say cutting down more trees may be considered long run as they would have to be grown in the first place. 1 mark (d) Explain how the price of a product can be panicked up. 2 The price may be price may be panicked up due to panic buying by the consumers. The consumers demand for timber may rise if they know that there will be a shortage in the future, for this reason

supply will decrease and the price will rise. Yip. 2 marks. (e) (i) Explain how an increase in the price of timber is likely to affect: the UK balance of trade;

Since the UK imports most of its timber it may offset the balance of trade in a negative way as we may be spending much more on our imports than we are exporting. This may cause the balance of trade to go into negative figures. (Could have said the following but I think what you say deserves max marks) Would depend on how elastic demand is, eg another material might be used, say metal sheds? If there is a suitable substitute available domestically, demand for timber may fall, meaning imports fall. (ii) the exchange rate of sterling. 4

The exchange rate of sterling would fall due to the UK spending more on imports. The value of sterling would fall due there being a large supply of the currency in the world money market, due to the UK purchasing a large amount of expensive timber from abroad. Max marks - 4 (f) Describe 2 ways sawmills could avoid passing all of the increase in the price of timber on to consumers. 4 The sawmills could try and purchase timber from the UK as it may be cheaper that way than to import it. The sawmills could also increase how much they buy at one time as this would take advantage of economies of scale, making it cheaper in the long-run. They could increase their efficiency so reduce costs of production. They could accept less profit. Oops no marks this time! (g) If the demand for garden sheds is price elastic, explain how the total revenue of garden shed producers will be affected by the increase in the price of timber. 3 Revenue would fall due to there being a decrease in demand due to the increase in the costs of production. Timber is needed for almost the entire shed, therefore if the price of timber was to increase then we would see an increase in the cost of resources needed, increasing production costs and these increased costs would need to be passed onto the consumers. If the price of the shed got too high then demand for it would fall. V good! 3 marks. (h) (i)Explain one reason for the increase in the number of building projects in some developing countries. There may be an increase in building projects for developing countries due to their fast paced population growth. To cater for this extreme growth in population more houses, buildings, schools, hospitals will need to be built. Also, companies will be expanding as well as the trained workforce increases, adding to the amount of extra building projects needed to commence. V good! full marks. (ii) Explain how the increase in building projects in China and developing countries will affect the price of garden sheds in the UK. 5 The building projects in China and developing countries will take up a large percentage of the timber resources in the world. Because these countries will be consuming large quantities of timber,

it will be dampening supply and therefore increasing the price. (Really to do with increased demand) This increase in price will be felt by other countries around the world, and will be felt by such markets as the market for garden sheds. 4 out of 5. (25)