Cambridge A Level Economics 9708 — 2017 May/June Paper 4 · Variant 1

1 Changes in the world oil market and their effects Founded in 1960, the Organisation of Petroleum Exporting Countries (OPEC), consisted of five countries all of whom produced oil. OPEC’s success, with Saudi Arabia as its market leader, encouraged other oil exporting countries to join. There are now 12 OPEC member countries, including Iran, Nigeria and Venezuela. OPEC is responsible for over 35% of world oil production, working together to fix prices and control output. OPEC has faced various external shocks. In recent years, the financial crisis 2008–2011 reduced global demand for oil. Also, since 2012, non-OPEC oil supplies have increased, as shown in Fig. 1, mainly due to the use of fracking – a process of extracting oil from rock using very expensive drilling equipment. This has happened in spite of opposition to fracking by environmentalists who accuse the fracking companies of causing minor earthquakes and polluting underground water sources. The main oil producer using fracking is the United States (US) which has become almost self-sufficient in oil and consequently does not need to rely on OPEC. In 2014, the US even began to export its oil, especially to Europe as a rival to OPEC and Russia. This had an effect on the price of oil as shown on the chart in Fig. 2. There have been both winners and losers from this change in production of oil. While all oil importing countries have become winners as the price of oil declines, undoubtedly the US has strengthened its economy the most. The fracking boom has increased consumer spending in the US, which has been a key element in the recovery of the US economy from the financial crisis. The losers are OPEC’s members that are dependent on oil as the main source of revenue. Nigeria greatly overestimated the price of oil and, as a result, it had to devalue its currency in November 2014, raise taxes on luxury items and cut government spending by 6%. Fig. 1 Supply of oil 2012–2015 Fig. 2 World price of oil 2013–2014 100 120 Total world production 80 110 million 100 barrels 60 Non-OPEC production US$ per per day barrel 90 OPEC production 40 80 20 J FM AM J J AS OND J FM AM J J AS ON 2012 2013 2014 2015 2013 2014 Despite the fall in oil prices, in January 2015 Saudi Arabia refused to agree to demands from other OPEC members to cut oil supplies in order to keep prices high. Saudi Arabia was happy to allow oil prices to fall further in order to put US fracking companies out of business. Source: The Times, 5 December 2014 and 7 January 2015 (a) Define what is meant by a cartel and explain why a cartel might be formed. [3] (b) What evidence is there in the information that OPEC is a cartel? [4] (c) Given the information above, analyse with the help of an appropriate diagram whether the overall price change shown in Fig. 2 is consistent with what would be expected in the market for oil. [5] (d) Is there any evidence in the information that might lead to the conclusion that the US economy is a winner in the short run but could become a loser in the long run? [8]

Mark scheme: Question Answer Marks Section A: Data Response 1(a) • group of companies/countries 3 • acting together to fix output • and prices • selling the same good Any 3 1(b) • It is not obviously a cartel but there is a market leader (Saudi Arabia) 4 • over 35% world supply • output constant • with evidence from Fig.1 1(c) • comment on Fig.2 5 • output has increased in 2013/14 (from text) • on D/S diagram S curve would move out • price would fall • information consistent with theory 1(d) Winner in the short-run: 8 • It has reduced the dependence on OPEC’s oil supplies – reduces imports – and has begun to export resulting in an improved balance of trade / BOP. • Increased earnings in the USA leading to increased consumption – multiplier effect – recovery from financial crisis. (Maximum 4 marks) Loser in the long-run: • Cost of fracking may become higher (very expensive equipment) so costs become greater than world oil price – hence Saudi Arabia wants to allow the price to fall further. • Opposition to fracking (negative externalities) environmental lobby tries to curb supplies. • US$ may become too strong if its economy strengthens leading to more expensive oil for importing countries and a possible loss of markets to rival suppliers in OPEC and Russia. (Maximum 4 marks)

More questions on Private costs and benefits, externalities and social costs and benefits

2 (a) Compare the derivation of a demand curve for a product using the marginal utility theory with the derivation using indifference curve theory. [12] (b) Discuss whether the existence of (i) inferior goods and (ii) advertising invalidates the underlying assumptions of those theories of demand. [13]

Mark scheme: 2(a) Indifference curve theory shows the quantities of two goods bought as price changes; 12 it requires a separate diagram for each good to show the quantity bought at each price. Utility theory compares the total and marginal utility to the price, the quantity bought can be shown on the same diagram. Level 4 (9–12 marks): for a sound explanation of both budget lines and indifference curves and a clear link to the separate demand curve, sound explanation of link between utility, price and demand, with accurate clear diagrams and a clear understanding of the principles involved. Level 3 (7–8 marks): for an accurate reference to the question but with a more limited explanation, perhaps omitting a clear explanation of utility or a clear link to the demand curve, or with minor errors in the analysis or in the diagrams. Level 2 (5–6 marks): for a briefer explanation of the equilibrium position but with no link to the demand curve; or with inaccurate diagrams and weak explanation. Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory. 2(b) Inferior goods would result in a different outcome when prices change from the 13 outcome of a normal good, but they do not invalidate the underlying assumptions of the theory. Indifference curve theory can show more precisely why the difference occurs using income and substitution effects. Advertising does not necessarily invalidate the theory but it could be that persuasive advertising results in more being purchased at a higher price – this could still be explained using the theory as either utility is perceived as changing, or can be shown using the indifference curve diagrams. The assumptions have not changed. Level 4 (9–13 marks): for a reasoned and clear discussion, logically presented dealing with income, substitution, inferior and advertising. Level 3 (7–8 marks): for a fair but undeveloped discussion probably concentrating on income, substitution of inferior goods or persuasive advertising, but still with a conclusion. Level 2 (5–6 marks): for a briefer discussion of both inferior and advertising. Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Indifference curves and budget lines

3 (a) Explain the reasons why people demand money according to the liquidity preference theory. Consider which reason is the most important. [12] (b) In 2015, after a period of low inflation and low interest rates a commentator wrote, ‘If inflation suddenly increases it could result in a faster than expected rise in interest rates. The consumer spending boom will end.’ (Source: London Evening Standard, 26 January 2015) Discuss the possible reasons behind this suggested result. [13]

Mark scheme: 3(a) Description of transactions, precautionary and speculative with a suggestion as to the 12 most important. It is likely that transactions would be the most important, but expect a reason for the choice. Level 4 (9–12 marks): for a sound description and a clear understanding of the principles involved together with a reasoned conclusion for the choice of most important. Level 3 (7–8 marks): for a competent comment with limited development of 3 reasons – up to 7. Competent comment with a choice of most important but no explanation of why – 8. Level 2 (5–6 marks): for a correct description but undeveloped comment with no attempt to decide on the most important. Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory. 3(b) Discussion of the theory that low interest rates encourages borrowing and spending, 13 production and employment, higher interest rates deter borrowing, Higher than expected inflation could result in a rise in interest rates to stop prices rising further because of pressure from demand. Level 4 (9–13 marks): for a sound discussion and a clear understanding of the principles involved and a reasoned conclusion. Level 3 (7–8 marks): for a competent comment with limited development, probably a brief mention of the possible link between inflation and interest rates. max 7 without a conclusion. Level 2 (5–6 marks): for a limited but acceptable attempt to consider the links. Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Links between macroeconomic problems and their interrelatedness

4 Economic theory produces a precise equilibrium outcome, often in an idealised market situation, but in reality things are much less certain. Discuss whether this opinion can be applied to the determination of wage rates. [25]

Mark scheme: 4 Candidates should comment on the fact that in the factor market there may be a 25 precise outcome in perfect competition but that wages are not solely determined by supply and demand when there is imperfect competition. They should then discuss how the outcome may be changed in the imperfectly competitive model to accommodate trade unions and the government. Level 4 (18–25 marks): for a critique of the statement and a thorough explanation of the analysis of wage determination with a clear comparison of perfect and imperfect markets, mentioning trade unions and the government. There should be a conclusion and a well-structured answer. Must have MRP to reach L4. Level 3 (14–17 marks): for a weaker critique of the statement but a competent explanation of imperfect market wage determination together with a conclusion. Level 2 (10–13 marks): for a correct but undeveloped analysis with only a brief comparison and no real conclusion. Level 1 (1–9 marks): for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant.

More questions on Labour market forces and government intervention

5 (a) Explain why some countries are referred to as developing. Suggest why the expected increase in population in developing economies is thought to be a source for concern. [12] (b) Discuss what the government of a developing country might do to enable its economy to become more developed. [13]

Mark scheme: 5(a) Explanation of characteristics of developing countries with comment on GDP, 12 industrial/agricultural structures, infrastructure, distribution of income, trading position, role of exports/imports, social indicators such as housing, health, education and a comment on the likely increase in population, population structure and use of resources. Level 4 (9–12 marks): for a sound explanation with good illustrations and a clear understanding of the principles involved and a reasoned conclusion. Level 3 (7–8 marks): for a competent comment on both development and population. Level 2 (5–6 marks): for a correct explanation but undeveloped comment with only a brief mention of the problem of population growth. Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory. 5(b) Discussion of health programmes, education programmes, income re-distribution, 13 and structural change achieved through government spending, borrowing, taxation, multinational development, aid. Level 4 (9–13 marks): for a reasoned and clearly structured answer covering a range of policies. Level 3 (7–8 marks): for a fair but undeveloped answer with limited number of policies considered. Level 2 (5–6 marks): for a limited but acceptable attempt to consider policies. Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Economic development

6 Governments have a range of macroeconomic aims apart from economic growth. (a) Explain the other main macroeconomic aims a government might have apart from economic growth. [12] (b) Discuss whether there is always a consistent link between investment and economic growth. [13]

Mark scheme: 6(a) Description of macroeconomic aims with relation to price stability, balance of 12 payments, employment, income distribution. Level 4 (9–12 marks): for a sound description with good illustration and a clear understanding of all four aims. Level 3 (7–8 marks): for an accurate but less developed description of four aims or a fuller description of three aims. Level 2 (5–6 marks): for a correct but very brief description of the aims of a fuller description of two of the aims. Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory. 6(b) Discussion of link between investment and national income via multiplier, but also 13 between income, demand and investment by the accelerator. Comment on possible differences due to differing injections, leakages, possible effect on prices rather than output of changes in investment. Level 4 (9–13 marks): for a reasoned and clear discussion with accurate explanation of the theory with possible different outcomes together with a conclusion. Level 3 (7–8 marks): for a fair but limited discussion with less recognition of the possible different outcomes. Level 2 (5–6 marks): for a limited but acceptable attempt to consider part of the question, probably the multiplier effect, and with poor recognition of different outcomes. Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

More questions on Economic growth

7 ‘Lack of efficiency in the use of resources is not due to the market’s inability to function. It is due to government intervention in a system that is best left to its own workings.’ (Source: RSA Journal, Issue 4, 2013) Consider this opinion. [25]

Mark scheme: 7 Explanation of meaning of efficient allocation and explanation of the analysis which 25 ensures an efficient optimum may be reached. Distinction between productive and allocative efficiency. Discussion of reasons for market failure and necessity/desirability of government intervention to achieve efficiency. This could be by persuasion (nudge theory) rather than by enforcement. Nudge theory, originally an ethical idea not a government manipulative tool, involves designing choices to encourage decision making in wider positive interests of society. But it can be used in government context. Government intervention itself sometimes creates inefficiency. Level 4 (18–25 marks): for a thorough explanation and a reasoned discussion dealing with both aspects of efficiency and possible reasons for government intervention. A conclusion should be drawn. Level 3 (14–17 marks): for a competent explanation of the terms with accurate but limited discussion. Level 2 (10–13 marks): for a correct but undeveloped explanation with some attempt at analysis but only brief discussion with no conclusion. Level 1 (1–9 marks): for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant.

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