Principles of Economics

New UK car sales in September hit their highest monthly total for five and a half years as the latest 63-plate attracted buyers. The Society for Motor Manufacturers

and Traders (SMMT) said 403,136 new cars were registered in the UK, a rise of 12.1% on the same month in .

The SMMT said the growth also reflected the fact buyers were returning to the market after a period of holding off. Buyers typically tend to replace new cars after

three years, but because of economic conditions in recent years may have left that longer. It is three years since the ending of the vehicle scrappage scheme, which

gave people incentives to trade in their old cars. Cars bought under that scheme would now be around three years old.

Another factor boosting sales was the type of financing deals available, which can lump together payments with servicing and even vehicle excise duty. Richard Lowe, an

analyst at Barclays, said: “Attractive finance packages are offering consumers more clarity on running costs, which even with a more promising economic outlook is an

important factor for those on a budget.”

Ford’s Fiesta remains the UK’s top selling car, with 20,600 sold in September. Vauxhall’s Corsa was in second place with 14,500 vehicles sold. Car sales have now risen

for 19 months in a row. The SMMT’s chief executive, Mike Hawes, said: “The UK market is reflecting growing economic confidence. Robust private demand has played a

major role in this growth, with customers attracted by exciting, increasingly fuel-efficient new models which offer savings in the cost of ownership.” But he added

that the UK car market was likely to remain strong.

“As we head into the quieter months, I suspect we’ll see sales hold firm, keeping the UK market zooming ahead of our European counterparts,”. The UK car market is the

second biggest in Europe after Germany. So far this year, UK buyers have bought 1.79 million new cars, compared with Germany’s 2.22 million. The gap between the two

has shrunk 6% since this time last year.

Meanwhile, a package of measures aimed at bringing down motoring costs, including insurance premiums, has been announced by the government. It was reported that there

are plans to pilot fuel price comparison signs on major roads and freeze the cost of the MoT test. The statutory maximum price of the MoT test for a car will be pegged

at £54.85 until 2015.

The inflated cost of fuel on major roads is among the most common complaints among drivers. In some areas petrol and diesel can cost 10p per litre more at motorway

service stations. The government wants to install a series of price comparison signs which will show the cost of fuel at all petrol stations along any given route.

Ministers are also promising to save motorists money by tackling what they call the compensation culture.

Section AQuestions

In total there are 50 marks available for this question. The marks for each question are given at the end. It is important to answer as fully as possible. Marks will

also be awarded for clarity and for the use of correctly labelled diagrams where appropriate.

1. Using appropriate diagrams, explain why car sales in Britain have increased in recent times. (8 marks)

2. Describe how the vehicle scrappage scheme influenced the market equilibrium for older cars. Justify and explain your answer using appropriate diagrams where

necessary. (10 marks)

3. What factors are likely to influence the price elasticity of Ford’s Fiesta car? (12 marks)

4. Outline the package of measures mentioned in the article designed to bring down costs and stimulate demand. (8 marks)

5. Explain the likely effect upon price competition of installing fuel price comparison signs on major roads. Make reference to the market structure of petrol