Analysis Practice

Build strong chains of reasoning (KAA). Read each prompt, write your analysis, then reveal the model answer to compare.

What makes good analysis?

A strong chain of analysis links an initial cause to its effects through clear, logical steps. Use connective phrases like "this leads to…", "as a result…", "consequently…", and "therefore…". Always refer to relevant diagrams and economic concepts. Aim for at least 3–4 linked steps in your chain.

Theme 1 — Microeconomics

Analyse the impact of a significant increase in the national minimum wage on the market for low-skilled labour.

8 marks (KAA)

Model Analysis

Step 1: A significant increase in the national minimum wage raises the price of labour above the free-market equilibrium wage rate in the low-skilled labour market.

Step 2: At this higher wage (above equilibrium), the quantity of labour supplied by workers increases, as the higher pay incentivises more people to seek employment — there is an extension along the labour supply curve.

Step 3: However, the quantity of labour demanded by firms falls, as the higher wage increases firms' costs of production. Firms operating on thin margins (e.g. hospitality, retail) may reduce hiring or cut hours to maintain profitability — a contraction along the labour demand curve.

Step 4: Consequently, a surplus of labour (excess supply) emerges in the market, manifesting as higher unemployment among low-skilled workers. The diagram would show the minimum wage set above P*, with Qs > Qd, creating a gap representing the number of unemployed workers.

Step 5: Furthermore, the increased costs of production may be passed on to consumers in the form of higher prices (cost-push inflation), reducing consumer purchasing power and potentially lowering real incomes for those the policy was designed to help.

Theme 2 — Macroeconomics

Analyse the likely effects of a significant cut in the Bank of England's base interest rate on the UK economy.

8 marks (KAA)

Model Analysis

Step 1: A cut in the base interest rate reduces the cost of borrowing for both consumers and firms, while also reducing the return on savings.

Step 2: Lower borrowing costs incentivise consumers to take on more credit for big-ticket purchases (e.g. cars, housing), increasing consumption (C). Simultaneously, the reduced return on savings discourages saving, further boosting spending.

Step 3: For firms, lower interest rates reduce the cost of investment borrowing, making previously marginal projects now viable. Investment (I) is therefore likely to increase, particularly in capital-intensive sectors.

Step 4: Since AD = C + I + G + (X − M), the rise in both C and I shifts the AD curve to the right. On an AD/AS diagram, this leads to a higher level of real GDP and a higher price level in the short run — demand-pull inflationary pressure.

Step 5: The multiplier effect amplifies this initial increase — increased spending by one agent becomes income for another, generating further rounds of spending and a larger overall increase in national income than the initial stimulus.

Theme 3 — Business Economics

Analyse why a profit-maximising monopolist is likely to produce at a level of output that is allocatively inefficient.

8 marks (KAA)

Model Analysis

Step 1: A monopolist faces a downward-sloping demand (AR) curve, meaning that to sell additional units, the price must be reduced on all units — so MR lies below AR.

Step 2: The profit-maximising condition is MC = MR. Since MR < AR at all output levels (beyond the first unit), the monopolist produces at a quantity (Qm) where price (Pm) is greater than marginal cost.

Step 3: Allocative efficiency requires P = MC, meaning the value consumers place on the last unit (reflected in the price they pay) equals the cost of producing it. Since Pm > MC at Qm, the monopolist under-produces relative to the allocatively efficient output level.

Step 4: This under-production creates a deadweight welfare loss — there are units of output where the benefit to consumers (shown by the demand curve) exceeds the cost of production (shown by MC), but these units are not produced. Society loses the net welfare that would have been gained.

Theme 4 — Global Economics

Analyse the impact of a depreciation of the pound sterling on the UK's current account balance.

8 marks (KAA)

Model Analysis

Step 1: A depreciation of sterling means the pound falls in value relative to other currencies. This makes UK exports cheaper in foreign currency terms and imports more expensive in pound terms (SPICED: Strong Pound Imports Cheap, Exports Dear).

Step 2: Cheaper exports increase the quantity demanded of UK goods and services abroad, as they become more price competitive. UK firms should see rising export revenues if demand is price elastic.

Step 3: More expensive imports reduce the quantity demanded of foreign goods domestically, as UK consumers switch to relatively cheaper domestic substitutes — import expenditure falls if demand for imports is price elastic.

Step 4: The combined effect — rising export revenue and falling import expenditure — should improve the current account balance (reduce a deficit or increase a surplus), provided the Marshall-Lerner condition holds (PED exports + PED imports > 1).

Step 5: However, the J-curve effect suggests that in the short run, the current account may initially worsen because existing trade contracts are fixed and volumes take time to adjust. The improvement materialises in the medium to long run as firms and consumers respond to the new relative prices.