Cambridge A Level Economics 9708 — 2013 Oct/Nov Paper 4 · Variant 3

This document consists of 4 printed pages. DC (NH) 65434/2 © UCLES 2013 [Turn over UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS General Certificate of Education Advanced Level * 3 1 1 9 0 5 4 0 4 8 * ECONOMICS 9708/43 Paper 4 Data Response and Essays (Supplement) October/November 2013 2 hours 15 minutes Additional Materials: Answer Booklet/Paper READ THESE INSTRUCTIONS FIRST If you have been given an Answer Booklet, follow the instructions on the front cover of the Booklet. Write your Centre number, candidate number and name on all the work you hand in. Write in dark blue or black pen. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer Question 1. Section B Answer any two questions. You may answer with reference to your own economy or other economies that you have studied where relevant to the question. At the end of the examination, fasten all your work securely together. The number of marks is given in brackets [ ] at the end of each question or part question.

2 9708/43/O/N/13 © UCLES 2013 Section A Answer this question. 1 The effect of oil price rises In 2011, there were big increases in oil prices which led to comparisons with a period in the 1970s when oil prices also rose steeply. In the 1970s, the macroeconomic policy used in the UK was to increase budget deficits. By contrast, in 2011, the macroeconomic policy was to try to reduce the budget deficit. In the 1970s some thought the effect of oil price increases would be inflationary while others thought the effect would be deflationary. The following points were made. In the 1970s • consumers would have to spend more on oil but they would spend less on other things. • consumers would not spend their savings. • firms could pass on the increased cost of production, caused by higher oil prices, to consumers. • oil prices were an important item used in the construction of the consumer price index. • oil producers and suppliers would not necessarily spend their increased revenues. Table 1 below shows the rate of inflation in the UK in the 1970s. Table 1: UK inflation rates in the 1970s Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 Inflation rate % 6.40 9.40 7.10 9.20 16.00 24.20 16.50 15.80 8.30 13.40 (Source for Table 1: http://www.whatsthecost.com) In 2011, oil prices increased again. The question then was whether the outcome would be the same as in the 1970s. Again some said there would be deflationary effects, while others predicted inflationary effects. In addition to the points that were made about the 1970s price increase, these further points connected with the economic context of 2011 were considered. In 2011 • oil prices rose by 50% compared with 240% in the early 1970s. • consumers faced potential unemployment in the private sector from low growth rates as economies tried to recover from a world banking crisis and recession. • consumer spending on oil as a percentage of GDP was about 40% lower than its 1970s level. • economies were less dependent on oil than in the 1970s. • workers in the public sector were worried about possible unemployment as the public sector was reduced in size. • reduced government spending had a downward effect on employment in all sectors. (Source: The Daily Telegraph)

3 9708/43/O/N/13 © UCLES 2013 [Turn over (a) The information mentions that some thought the effect of oil price increases would be deflationary. Explain what economists mean by ‘deflationary’. [2] (b) Refer to what actually happened to the rate of inflation in the UK as shown in Table 1: (i) Explain which, if any, of the points made about the 1970s could have caused what is shown in Table 1. [4] (ii) In the 1970s the UK government had a macroeconomic policy of increasing the budget deficit. Explain how this policy might have contributed to what is shown in Table 1. [6] (c) From the information given consider whether the effect of the rise in oil prices in 2011 was more likely or less likely to have been inflationary compared with the 1970s. [8] Section B Answer two questions. 2 (a) Explain how, according to marginal utility theory, consumers reallocate their expenditure between different products as prices change. [12] (b) In reality perfect competition is seldom found, and firms use advertising to persuade consumers to buy their products. Discuss whether imperfect competition means that markets are controlled only by producers and the traditional idea that the consumer determines what happens in the market based upon utility theory is no longer valid. [13] 3 (a) Do you agree with the view that in a perfectly competitive labour market wages are higher in some occupations than others only because of the differences in the supply of labour? [12] (b) A country has a minimum wage rate fixed by law. Discuss whether this can be included in the economic analysis of the theory of wages in an imperfectly competitive labour market. [13] 4 Some companies claim that restrictive regulation by governments is the biggest threat to business growth. (Source: The Independent) (a) Explain what is meant by: (i) a deadweight loss, and (ii) price discrimination. [12] (b) Discuss which is more beneficial, firms that remain small or firms that grow in size. [13] 5 Governments of developing countries often argue that the economy has improved while they have been in power. Explain what economic indicators might be used to support their argument and discuss the usefulness of that data in illustrating an improvement in a developing economy. [25]

4 9708/43/O/N/13 © UCLES 2013 6 Some governments place great emphasis on the aims of economic growth and keeping the level of unemployment low. How far do you agree that these aims should be the most important of a government? [25] 7 It is said that the market does not allocate resources efficiently and that market failures occur. However, there need be no concern about market failure. All types of market failure can easily be overcome if the government intervened in the price system. Discuss this argument. [25] Copyright Acknowledgements: Section A Question 1 © ADAPTED: Roger Bootle; Comment: A continued high oil price will bring ups and downs … ; Business Section; The Daily Telegraph; Section A Question 1 © ADAPTED: http://www.whatsthecost.com/historic.cpi; 27 July 2011. Section B Question 4 © ADAPTED: Business Section; The Independent; 4 April 2011. Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the publisher will be pleased to make amends at the earliest possible opportunity. University of Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

CAMBRIDGE INTERNATIONAL EXAMINATIONS GCE Advanced Subsidiary Level and GCE Advanced Level MARK SCHEME for the October/November 2013 series 9708 ECONOMICS 9708/43 Paper 4 (Data Response and Essays – Supplement), maximum raw mark 70 This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners’ meeting before marking began, which would have considered the acceptability of alternative answers. Mark schemes should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge will not enter into discussions about these mark schemes. Cambridge is publishing the mark schemes for the October/November 2013 series for most IGCSE, GCE Advanced Level and Advanced Subsidiary Level components and some Ordinary Level components.

Page 2 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9708 43 © Cambridge International Examinations 2013 Section A 1 (a) A fall in the general level of prices: candidates could explain it in terms of an excess of national income over expenditure, or withdrawals over injections at the full employment level of national income which causes a potential reduction in national income. [2] (b) (i) Candidates would need to refer to the table to comment upon the rate of inflation in the 1970s (1 mark). Candidates should also refer to the reactions of firms and the importance of oil in the construction of the price index (2 marks). Identifying one reason to dismiss the view that oil price rises might cause inflation (1 mark). [4] (ii) Explanation of a budget deficit as an increase in expenditure over revenue. It could be achieved through fiscal or monetary policy. There could be a decrease in T, an increase in G, reduced i. This should encourage borrowing and spending. Extra demand could put pressure on resources which might result in rising prices. Table 1 shows rising prices. [6] (c) Less likely to be inflationary – smaller % oil price rise than in 1970s which was inflationary; – country less dependent on oil – oil to GDP now 60% of that in 1970s + government reductions in expenditure; also there was a smaller public sector; banking crisis – reduced employment in private sector (6 marks). Some reference to factors that would not support the view that oil prices in 2011 would be less inflationary (1 mark). A conclusion (1 mark). [8]

Page 3 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9708 43 © Cambridge International Examinations 2013 Section B General Comments The essay questions carry a maximum mark of 25. Try not to ‘bunch’ marks, but use the whole mark range. If there is any doubt in your mind, give the benefit of doubt to the candidate. The difference in grades should be assessed on the ability of the candidate to demonstrate the various objectives of the examination listed in the syllabus and not purely on the ability to itemise further facts from the content of the syllabus. Marks should be awarded for the ability to demonstrate that aim (b) of the syllabus has been achieved as well as aim (a) – which refers to content knowledge. It is the objective of the examination, as listed in the syllabus, to assess both these aims. An overall guide for marks for individual questions is given below; these are from a total of 25. They may be applied proportionally of course to parts of questions where the total is less than 25: Mark 1–9 (Linked to Level 1 in individual question notes). 1–5 where the answer is mostly irrelevant and only contains a few valid points made incidentally in an irrelevant context. There will also be substantial omissions of analysis. 6–9 where the answer shows some knowledge but does not indicate that the meaning of the question has been properly grasped. Basic errors of theory or an inadequate development of analysis may be evident. Mark 10–13 (Linked to Level 2 in individual question notes). 10–11 where there is evidence of an ability to identify facts or some ability at graphs and/or a fair ability to apply known laws to new situations. There should be an accurate although undeveloped explanation of the facts relating to the question together with an explanation of the theory, and evidence of some ability to discriminate and form elementary judgements. Do not expect a clear logical presentation. There will not be much evidence of the ability to recognise unstated assumptions, nor to examine the implications of a hypothesis, nor of the ability to organise ideas into a new unity. 12–13 where the answer has a more thorough relevance to the question but where the theory is incompletely explained. Mark 14–17 (Linked to Level 3 in individual question notes). 14–15 where there is a good knowledge of the facts and theory of the question, clear evidence of the ability to use the facts and theory with accurate reference to the question that may have presented the candidate with a novel application. There should also be evidence, where appropriate, of the ability to examine the implications of the question and an attempt to distinguish between facts and value judgements. Clear statements, supported by reasoned arguments should be given and there should be some attempt at a conclusion to the question. There should be a reasoned structure to the whole answer. Do not expect too many extra illustrative points which are not explicitly referred to in the question, do not expect too much critical comment on unstated assumptions. 16–17 for an answer showing a well reasoned understanding of the question's requirements and of the relevant theory: the analysis should be sound though the illustration and development may not be very full.

Page 4 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9708 43 © Cambridge International Examinations 2013 Mark 18–25 (Linked to Level 4 in individual question notes). 18–20 where there is a thorough knowledge of the facts and theory with an excellent ability to describe, explain or analyse this in a precise, logical, reasoned manner. There should be an ability to query some of the assumptions in the question and clear evidence of an ability to distinguish between fact and value judgements and to draw some conclusions on the matter being discussed. Conclusions should be formed and expressed within a sound structured answer so that the whole is well presented. New illustrations and apposite examples should be introduced as further evidence of an ability to recognise the principles of the question and their application to relevant current situations. 21–25 for an answer which, given the time constraint, could not be improved significantly: it will have clear analysis, ample illustration and a good attempt at considered evaluation. Be positive in your marking, awarding marks for what is there without being too much influenced by omissions. Marks should not be deleted for inaccuracies. Corresponding marks for sub-sections. Total Mark 12 1–4 5–6 7–8 9–12 Total Mark 13 1–4+ 5–6+ 7–8+ 9–13

Page 5 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9708 43 © Cambridge International Examinations 2013 2 (a) Explanation of principle of allocation with equi-marginal utility as prices change. L4 For a good explanation linked to more than one good and clearly structured answer with a conclusion about what happens as prices change. [9–12] L3 For a fair explanation but undeveloped answer but still with some comment about what happens when prices change. [7–8] L2 For a limited attempt which does not clearly determine the equilibrium position for more than one good or which does determine that but expresses it as a static model and does not consider price changes. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] (b) There are two parts to the question: whether the market is controlled by the producer and not the consumer, and whether utility theory is valid. The balance between producer and consumer sovereignty may vary between goods and markets but the producer is not the only determinant of market price and output. Utility theory has practical difficulties in measurement and comparison between products but these are the same in perfect and imperfect competition. Imperfect competition does not make the use of utility theory any more problematic. L4 For a reasoned discussion dealing with both parts of the question. The answer should be clearly structured with a conclusion. [9–13] L3 For a fair discussion but undeveloped answer which may concentrate on one part of the question or deal with both parts but briefly. There should still be a conclusion. [7–8] L2 For a limited attempt which deals with only one part of the question and which does not have a conclusion. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4]

Page 6 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9708 43 © Cambridge International Examinations 2013 3 (a) Explanation of the theory of wages which deals with both supply and demand factors. Given a similar demand, (mrp), the wage level would change if supply was different in different occupations but it is not the sole factor. L4 For a sound explanation of the analysis and a clear understanding of the principles involved in perfect markets. [9–12] (D/S only, no mrp, 7–8) L3 For a competent comment in a perfect market but with a limited development of the analysis. [7–8] (D/S only, no mrp, 4–5) L2 For a correct explanation of a limited part of the analysis – perhaps concentrating on supply. [5–6] (D/S only, no mrp, 3–4) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] (D/S only 1–2) (b) Analysis of marginal revenue productivity theory in imperfectly competitive labour market. The fixing of a minimum wage can be incorporated into the imperfect market model. It would depend where the minimum wage was as to whether it was effective. L4 For a sound explanation of the analysis and a clear discussion and understanding of the principles involved in imperfect markets. [9–13] (D/S only, no mrp, 7–8) L3 For a competent comment of an imperfect market but with a limited development and discussion of the analysis. [7–8] (D/S only, no mrp, 5–6) L2 For a correct explanation of a limited part of the analysis – perhaps concentrating on supply. [5–6] (D/S only, no mrp, 3–4) L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] (D/S only 1–2)

Page 7 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9708 43 © Cambridge International Examinations 2013 4 (a) Explanation of both terms. Deadweight loss – loss of consumer and producer surplus in imperfect competition compared with perfect competition. Price discrimination – charging different prices for the same product requires separation of markets to occur and different elasticities to be profitable. L4 For a sound explanation with clear understanding of the principles involved. Up to 6 for each term. [9–12] L3 For a competent explanation but with limited development. Up to 4 for each term. [7–8] L2 For a brief explanation not clearly explaining the change in surplus nor the criteria required for price discrimination. Up to 3 for each term. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] (b) Discussion of the benefits of small firms and the advantages of large firms. Candidates could recognise that each has a place, that personal service and individual products may be best suited to small firms but that economies of scale and reductions in cost, and possibly price, might be achieved by larger firms. L4 For a sound discussion with clear understanding of the principles involved with a conclusion. [9–13] L3 For a competent discussion but with limited development but still with a conclusion. [7–8] L2 For a brief discussion concentrating on one aspect only. [5–6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4]

Page 8 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9708 43 © Cambridge International Examinations 2013 5 Candidates should distinguish between quantitative and qualitative data and suggest different data which might be useful. They could mention the data used for measuring standards of living – GDP, HDI; they could mention data related to government policy – rate of interest changes, inflation, unemployment, balance of payments, crime; they could mention data that companies might be interested in – profits, growth, market share, consumer perception of products sold; they could mention information consumers might be interested in – income levels, assets, house prices, differences in rates of pay between jobs. L4 For a thorough explanation of the terms, a competent coverage of data, and a discussion of usefulness and a reasoned conclusion. [18–25] L3 For a competent explanation but with a more limited range of data and less developed discussion. [14–17] L2 For an accurate though undeveloped explanation with some attempt at analysis but only limited evaluation. [10–13] L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer contains irrelevancies and errors of theory. [1–9] 6 Discussion of the general macro aims of government policy with a comment on whether the two mentioned should be regarded as the most crucial. The effect on economic growth and low unemployment can be developed. Reasons should be given for either choosing or not choosing these aims as the most important. L4 For a thorough explanation of the aims, a clear analysis of the link between them, a discussion of the possible outcome of a choosing either those aims or alternatives with a reasoned conclusion. [18–25] L3 For a competent explanation of the aims but where there is only limited attempt to consider the significance of the importance of the aims. There will be some discussion but the evaluation will not be fully developed or extensive. There should still be a conclusion. [14–17] L2 For an accurate though undeveloped explanation with some attempt at analysis but only limited evaluation with no conclusion. [10–13] L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies, errors of theory or omissions of analysis. [1–9]

Page 9 Mark Scheme Syllabus Paper GCE AS/A LEVEL – October/November 2013 9708 43 © Cambridge International Examinations 2013 7 The answer should identify and describe the necessary conditions for efficient resource allocation and consider what is meant by market failure. It should then consider if these market failures can be overcome by government intervention, and if so by what means. L4 For a reasoned and clear discussion with accurate development of theory and good links to the statement together with a reasoned conclusion. [18–25] L3 For a competent comment together with limited elaboration of the analysis or imprecise links to the statement. There will be some discussion but the evaluation will not be fully developed or extensive. There should still be a conclusion. [14–17] L2 For a brief explanation but weak or ill-explained links to the statement. The explanation will be undeveloped with some attempt at analysis but only limited evaluation. [10–13] L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–9]