Cambridge A Level Economics 9708 — 2019 May/June Paper 4 · Variant 2

1 India’s grocery market Amar Singh explained why he sells ‘exotic’ produce, such as broccoli and iceberg lettuce, at his vegetable stall in Mumbai. “I have to keep the customer in my grasp,” he said. Mr Singh has traded for 20 years, and is not worried by the supermarkets whose stores have recently opened nearby. “They are cheaper,” he said, “but they cannot match me on quality.” In India, the 11 million small traders like Mr Singh are protected. India’s complex rules have made it difficult for supermarkets from developed countries to enter the Indian grocery market. Also, India’s domestic supermarkets account for only 2% of food and grocery sales and are struggling to make a profit. Revenues have not kept pace with rising rents. Reliance Fresh, one of India’s big supermarket companies, has recently closed some shops around Mumbai. The companies had hoped that as India became richer, its consumers would abandon kiranas (small family-owned shops) and stalls such as Mr Singh’s for modern supermarkets. This has not happened. This may be because 70% of India’s population are rural dwellers so a localised strategy is vital to accommodate the variation in languages and cultures. India’s kiranas are often described as neighbourhood stores, embedded in their local communities. Many have been run by the same families for generations. They have a deep understanding of the local market and a good relationship with their customers, some of whom are loyal to the shop that their parents used. Today’s kirana and stall owners make product recommendations, offer credit to help shoppers balance their budgets, and can even obtain products not normally stocked. They will also deliver shopping to customers free of charge − something that the supermarkets struggle to match. Long-established kirana retailers often also benefit from prime store locations, leaving modern supermarkets struggling to find space in existing shopping areas. Instead, supermarkets are forced to look for new places to develop larger stores. Fig. 1.1 shows the results of a survey of customers in the largest cities in India to find their preferred place to purchase groceries and vegetables. Store type Key Stalls and kiranas with home delivery Groceries and Online grocers vegetables Vegetables only Stalls and kiranas Groceries only Supermarkets 0% 25% 50% Percentage of customers Fig. 1.1: Survey results Sources: adapted from The Economist, October 2014, Laura May, academia.edu, April 2014 and Market Express India, September 2016 (a) Identify two ways in which kiranas compete for customers. [2] (b) What can be concluded about the groceries and vegetables trade in India from Fig. 1.1? [5] (c) Use economic analysis to suggest the market structure in which kiranas operate and explain how equilibrium is reached by a firm in such a market. [6] (d) Discuss how it might be possible for supermarkets in India to compete with the stalls and kiranas. [7]

Mark scheme: Question Answer Marks 1(a) Identify two ways in which kiranas compete for customers. 2 Must be distinct points: • exotic / fresh produce / quality • government intervention • prime locations • credit facilities • home delivery • sourcing products not normally stocked • local knowledge 2 × 1 marks 1(b) What can be concluded about the groceries and vegetables trade in 5 India from Fig. 1.1? Candidates can write about the type of store and / or the composition of the grocery / vegetable trade. For example: • Online grocers least used, more for groceries than vegetables • Stalls and kiranas most used, vegetables the most common closely followed by grocery and vegetable sales, relatively few groceries-only customers • Supermarkets the second most-used with limited vegetables sales • Home delivery kirana customers more grocery-heavy, in contrast to those who visit the shops and stalls. 5 × 1 mark, based on Fig. 1.1 1(c) Use economic analysis to suggest the market structure in which kiranas 6 operate and explain how equilibrium is reached by a firm in such a market. 1 mark for identification of Monopolistic Competition Up to 2 marks for explanation / characteristics Up to 3 marks for analysis of Monopolistic Competition short run or long run equilibrium. If wrong market structure identified allow up to 3 marks for analysis of short run or long run equilibrium of the market chosen. Diagrams are not essential. 1(d) Discuss how it might be possible for supermarkets in India to compete 7 with the stalls and kiranas. Up to 4 marks for analysing why it might be possible: • Supermarkets can enjoy economies of scale, reduces LRAC and therefore prices allowing them to compete. • For example can spread the cost of advertising across multiple stores to increase their demand, can buy products in bulk and so enjoy lower unit costs, can use specialisation of labour. • Credit facilities, delivery quality. Up to 4 marks for analysing why it might not be possible: • Many good sites already occupied by kiranas, therefore a barrier to location. • Small shops compete on knowledge, convenience and personal relationships, hence still attract consumers. • Large proportion of India’s population lives in rural villages and may be many kilometres from supermarkets. • Average incomes for many are low therefore idea of weekly / monthly shop is limited and therefore limits supermarket demand. 1 mark for a conclusion. NOTE: max. 7 marks

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2 Explain what is meant by ‘market failure’ and consider how far government intervention can reduce market failure. [25]

Mark scheme: 2 Explain what is meant by ‘market failure’ and consider how far 25 government intervention can reduce market failure. Market failure explained in terms of lack of knowledge, externalities and inefficiency, (productive and allocative) public goods and their effect on price and output produced. A discussion of the forms of government intervention regulation, state provision and taxation / subsidies and the degree to which they can reduce market failure. The limits of government knowledge limiting the beneficial outcome. Note: merit and / or demerit goods are one form of market failure; positive and / or negative externalities are one form of market failure. L4 (18–25 marks) For a thorough explanation of 2 forms of market failure. A discussion of 2 forms of government intervention and how successful that intervention might be. A conclusion is drawn (Max. 21 no conclusion) . L3 (14–17 marks) For a thorough explanation of 1 form of market failure and 1 form of government intervention and how successful that intervention might be. Or A limited explanation of 2 forms of market failure and 2 forms of government intervention L2 (10–13 marks) For a limited explanation of 1 form of market failure and 1 form of government intervention or which focusses only on market failure. Or An answer which is largely descriptive. L1 (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 contains irrelevancies and errors of theory.

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3 A recent newspaper article commented on the fact that a pharmaceutical company charged customers in the United States (US) US$800 per treatment whilst it charged customers in Egypt US$80 for the same treatment. (a) Explain why the company might follow this policy and what conditions are necessary to allow the policy to be successful. [12] (b) Discuss whether oligopolistic industries always operate against the interests of consumers. [13]

Mark scheme: 3(a) A recent newspaper article commented on the fact that a pharmaceutical 12 company charged customers in the United States (US) US $800 per treatment whilst it charged customers in Egypt US $80 for the same treatment. Explain why the company might follow this policy and what conditions are necessary to allow the policy to be successful. An explanation of price discrimination – marginal revenue (MR) differs between markets with the same marginal cost (MC). Explanation of the conditions necessary for its successful implementation, price maker, barriers between markets and differing price elasticity of demand. L4 (9–12 marks) For an explanation of how the firm benefits from charging differing prices in different markets and the 3 conditions necessary for price discrimination. L3 (7–8 marks) For an answer which explains how a firm benefits from charging differing prices in different markets and a limited explanation of the necessary conditions. L2 (5–6 marks) For a limited description of both aspects of the question. Or An answer that explains price differences rather than Price Discrimination. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. 3(b) Discuss whether oligopolistic industries always operate against the 13 interests of consumers. Oligopoly behaviours e.g. collusion, price fixing, barriers to entry preventing competition. But benefits for consumers, e.g. new product development, economies of scale, price discrimination, price wars. L4 (9–13 marks) For a comprehensive discussion of at least 2 factors in favour and 2 factors against the consumers’ interest. Max. 11 if no conclusion. L3 (7–8 marks) For a largely one-sided discussion of factors for or against. Or A limited two sided discussion. L2 (5–6 marks) For a limited discussion of oligopoly. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.

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4 (a) Analyse how an individual consumer’s demand curve for a product is derived and consider how this may be linked to its market demand. [12] (b) Use indifference curve analysis to distinguish between the effect of an increase in income on a consumer’s demand for a normal good and an inferior good. [13]

Mark scheme: 4(a) Analyse how an individual consumer’s demand curve for a product is 12 derived and consider how this may be linked to its market demand. Candidates can use either a marginal utility or an indifference curve approach. Marginal Utility: explanation of marginal and total utility, the equi-marginal equilibrium, the change in price of one good and the resultant establishment of the new equilibrium and its consequence for demand. Indifference Curve: explanation of the shape of an indifference curve and a budget line, the point of tangency to establish demand, followed by a change in price and change in quantity, linked to an individual’s demand curve. The aggregation of individual’s demand curves to make the market demand curve. L4 (9–12 marks) For a sound explanation of marginal utility, and the link to equi-marginal equilibrium. The effect of a change in price on demand for a good linked to an individual demand curve and hence the aggregation of individual demand to construct a market demand curve. Or For an accurate analysis of an indifference curve map and budget line tangency. Change in price shifting budget line and impact on individual demand curve and hence the aggregation of individual demand to construct a market demand curve. L3 (7–8 marks) For a sound explanation of marginal utility, and the link to equi- marginal equilibrium. The effect of a change in price on individual demand. Or For an accurate analysis of an indifference curve map and budget line tangency. Change in price shifting budget line and impact on individual demand curve. L2 (5–6 marks) For a limited explanation of equilibrium. Or For an explanation of an indifference curve map and budget line tangency. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. 4(b) Use indifference curve analysis to distinguish between the effect of an 13 increase in income on a consumer’s demand for a normal good and an inferior good. Analysis to show the effect of an outward shift in the budget line on the demand for a normal (positive) good and inferior (negative) good. L4 (9–13 marks) For a thorough analysis of the effect of an increase in income on both normal and inferior goods. L3 (7–8 marks) For a thorough analysis of the effect of an increase in income on either a normal or an inferior good. (This may be shown indirectly through a change in real income following a price fall.) L2 (5–6 marks) For an explanation of a normal good and an inferior good with some link to indifference curves. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.

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5 Cyclical and structural unemployment are the most common types of unemployment. Explain the causes of these types of unemployment and assess the effectiveness of government policies to reduce them. [25]

Mark scheme: 5 Cyclical and structural unemployment are the most common types of 25 unemployment. Explain the causes of these types of unemployment and assess the effectiveness of government policies to reduce them. An analysis of the cause of cyclical unemployment – lack of aggregate demand and structural unemployment – a lack of demand for a particular good or service. Fiscal, monetary and supply-side policies need to be identified and analysed and linked to the structural or cyclical unemployment. L4 (18–25 marks) For a thorough explanation of the causes of both types of unemployment. Two policies chosen need to be analysed and explicitly linked to these types of unemployment with an assessment of their effectiveness. A conclusion is required. (Max. 21 no conclusion.) L3 (14–17 marks) For a limited explanation of the causes of two types of unemployment and a limited analysis of two policies. L2 (10–13 marks) For an accurate description of the two types of unemployment and a description of government policies. L1 (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 contains irrelevancies and errors of theory.

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6 (a) The US Federal Reserve (the country’s central bank) has pursued a policy of quantitative easing (QE) for several years. Explain how quantitative easing affects the level of economic activity in a country. [12] (b) Discuss how far (i) an increase in wages and (ii) a loss of business confidence might affect the rate of interest. [13]

Mark scheme: 6(a) The US Federal Reserve pursued a policy of quantitative easing (QE) for 12 several years. Explain how the quantitative easing affects the level of economic activity in a country. The injection of money into the economy to boost spending. The central bank creates new money electronically to buy financial assets like government bonds. This cash injection lowers the rate of interest and boosts asset prices, which increases wealth and supports spending, increasing AD and stimulating employment and growth. L4 (9–12 marks) For a thorough explanation of QE and the effects on the money supply and interest rates and the consequences of lower interest rates or the wealth effect of higher bond prices and its effect on 2 forms of economic activity (e.g. unemployment, investment, econ growth, exchange rates / balance of payments or inflation). L3 (7–8 marks) For a sound explanation of QE. The effect on the money supply and interest rates and the consequence of lower interest rates on 1 form of economic activity. L2 (5–6 marks) For a limited description of QE and a brief link to economic activity. Or A good description of QE but no clear link to economic activity. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. 6(b) Discuss how far (i) an increase in wages and (ii) a loss of business 13 confidence might affect the rate of interest. Identification of the relevance of increases in wages on the transaction and precautionary for money (liquidity preference (LP)) and the effect on interest rates. The effect of a fall in confidence on the demand for money. L4 (9–13 marks) For a thorough discussion of the effect of an increase in wages on the different components of LP and the effect of a decrease in business confidence on the LP curve and the effect on the rate of interest. The changes may be considered individually or simultaneously. Max. 11 if no conclusion. L3 (7–8 marks) For a good explanation of either wages or business confidence on the LP curve and on the rate of interest. Or A limited explanation of both wages and business confidence. L2 (5–6 marks) For a limited explanation of wages or deteriorating business confidence on LP. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. Max. L2 for a good explanation based on other approaches.

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7 (a) Explain what is meant by actual economic growth and potential economic growth. [12] (b) ‘Health, education and savings are the most important factors in determining long-term development in developing countries.’ Comment on this statement. [13]

Mark scheme: 7(a) Explain what is meant by actual economic growth and potential 12 economic growth. A definition of actual economic growth (SR) in terms of an increase in real gross domestic product per annum. Potential economic growth (LR) as the change in economic capacity which may or may not be immediately utilised. Use of the production possibility frontier (PPF) to explain actual and potential economic growth. An appropriate AS & AD analysis is acceptable. Keynesian 45° diagram. L4 (9–12 marks) For a thorough explanation of both terms. L3 (7–8 marks) For a thorough explanation of one term and a description of the other. L2 (5–6 marks) For a limited description of both terms. Max 5 marks for an accurate explanation but the terms and explanations are mismatched. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. 7(b) ‘Health, education and savings are the most important factors in 13 determining long-term development in developing countries.’ Comment on this statement. Links between the 3 factors and development. Relevance of other factors in developing countries. For example foreign trade, trade substitution, FDI, infrastructure, technology, social and environmental elements. It is the interplay between the factors which leads to greater or lesser success. L4 (9–13 marks) For a good discussion of the contribution of the three factors health, education and savings to economic development and a discussion of the role played by other factors in promoting economic development. The links between the factors e.g. which leads to reinforcement of the individual effect. Max. 11 if no conclusion. L3 (7–8 marks) For a discussion of the contribution of the three factors health, education and savings mentioned above to economic development. and / or a limited discussion of other factors. L2 (5–6 marks) For a limited description of 2 of the 3 factors affecting economic development. Or A limited description of other factors. L1 (1–4 marks) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.

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