Explain how an increase in the costs of factors of production would affect the market price and output of a good.

Discuss the consequences for different stakeholders in the economy of the government providing subsidies on goods, such as renewable energy.

Answers may include:

• definitions of factors of production, market price
• diagram to show the effect of an increase in costs of factors of production (leftwards shift of supply)
• explanation of why an increase in costs of factors of production will decrease product supply and ceteris paribus increase the price and reduce output
• examples of costs of factors of production increasing.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of subsidies and stakeholders
• diagram to show the full impact of a subsidy, eg cost to government, reduction in price to consumer
• explanation of the potential consequences for consumers, producers, government and society
• examples of the use of subsidies in practice
• synthesis or evaluation (discuss).

Discussion may include: the importance of price elasticity of demand, opportunity cost issues, externality issues, equity issues and efficiency issues.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.