Price determination — Paper 2 · IGCSE Economics 0455

1 Low-cost airlines For several decades, low-cost airlines have been competing on short-distance flights not just with established airlines, but also with train travel and car travel. Now they are starting to compete with established airlines on long-distance flights. In response to this increased competition there have been some horizontal mergers occurring between the established airlines. It is predicted that by 2030 China will become the world’s largest domestic air travel market, with 20% of all global air travel. The USA is currently the dominant market and it is predicted that between 2015 and 2030 the country will order 6160 of the 28 000 passenger aircraft that will be produced. India, which has both state-owned and private-sector airlines, is experiencing a great increase in both internal flights and flights to other countries. More airports are being built in India, with more facilities being provided inside and around the airports. For example, more taxi firms are being set up to take passengers to and from the airports. The rapid expansion of air travel in India and other countries is having an impact on the market for pilots, as shown in Fig. 1. S price of pilots P2 P1 D2 D1 O Q1 Q2 quantity / number of pilots Fig. 1 The market for pilots How rapidly the Indian air travel market will grow will be influenced by a number of factors. These include the extent to which business travel will grow and how rapidly demand for foreign holidays will increase. Demand for these forms of air travel is, in turn, influenced by changes in price. The price elasticity of demand for air travel has been estimated at −1.2. One factor that influences prices, and so the inflation rate, is changes in taxation. (a) Identify, using information from the extract: (i) a substitute for air travel [1] (ii) a complement to air travel. [1] (b) Explain two advantages that firms may gain from a horizontal merger. [4] (c) Calculate, using information from the extract: (i) the percentage of the new passenger aircraft that the USA is predicted to purchase between 2015 and 2030 [2] (ii) the percentage change in demand for air travel if the price of air travel falls by 15%. [2] (d) Analyse why demand for a luxury holiday may be price elastic. [5] (e) Discuss whether airlines should be state-owned or operated by the private sector. [5] (f) Explain, using information from the extract and Fig. 1, what happened to the market for pilots in India in 2015. [4] (g) Discuss whether a cut in taxation will reduce inflation. [6]

30 marks

Mark scheme: 1(a) Using information from the extract, identify (i) a substitute and (ii) a complement to air travel. substitute: train travel/car travel (1) complement: taxi travel/foreign holidays (1). 2 1(b) Explain two advantages that firms may gain from a horizontal merger. 1 mark each for each of two advantages identified: • able to take advantage of economies of scale • increased market share/market power • rationalisation • exchange ideas/technology 1 mark each for each of two explanations: • larger firms may be able to reduce average costs/become more efficient/increase productivity • a direct competitor is eliminated • savings may be made by e.g. operating only one warehouse • increase innovation/better quality • higher profit 4 Not sufficient just to have higher demand on its own. 1(c)(i) Calculate the percentage of the new passenger aircraft that the USA are predicted to purchase between 2015 and 2030. 22% (2) Correct working i.e. 6160/28 000 × 100 (1). 2 1 mark if the final answer is different but 22% is given part way through the answer. 1(c)(ii) Calculate the percentage change in demand for air travel if the price of air travel falls by 15%. 18%/18 (2) Correct working i.e. – 1.2 × 15% or 0.18 (%). Or 1.8 (%) (1). 2 Question Answer Marks Guidance 1(d) Analyse why demand for a luxury holiday may be price-elastic. Price-elastic means a percentage change in price creates a greater percentage change in demand (1). A luxury holiday may have a substitute (1) in the form of another holiday (1) a rise in price will make substitutes relatively cheaper (1) demand will be more elastic the closer the substitute (1). Taking a luxury holiday can be postponed/does not have to be purchased (1) it is not a necessity (1). The purchase of a luxury holiday takes up a large proportion of people’s income (1) this would make the change in price more noticeable/more significant (1) a fall in price may make it affordable to many more people (1). 5 1(e) Discuss whether airlines should be state-owned or operated by the private sector. Up to 3 marks for why they should be state-owned: The government will base decisions on social costs and benefits (1) may try to cut down on pollution (1) may be less chance of market failure occurring (1) may carry out a CBA (1). The government may act in the public interest/aim may be to promote welfare (1) may be safer (1). The government may keep prices low (1) to ensure access to flights (1). The government may have more funds available (1) may be able to operate them on a large scale (1) enjoy economies of scale (1). The government may employ more workers (1) to keep unemployment low (1). If profitable can provide funds for the government (1) increase ability of government to spend on e.g. education (1). Up to 3 marks for why they should be operated by the private sector: Profit motive (1) may make the firm/s more responsive to consumer demand (1) may provide better quality (1). Will not require tax revenue/allow government to concentrate on other areas (1) tax revenue can be used for other purposes/example of what revenue could be spent on (1). State-owned may be a monopoly/may be more competition in the private sector (1) competition may drive down price (1) may provide more choice (1). 5 Question Answer Marks Guidance 1(f) Using information from the extract including Fig. 1, explain what happened to the market for pilots in India in 2015. The diagram shows demand increasing (1) inelastic demand (1) wages / prices rising (1) supply extending / more pilots (1) inelastic supply (1) due to countries wanting to recruit more pilots/increased demand for flights (1). 4 1(g) Discuss whether a cut in taxation will reduce inflation. Up to 4 marks for why it might: A cut in indirect taxes/corporation tax (1) will reduce firms’ costs of production (1) reduce cost-push inflation (1). A cut in tariffs (1) will lower cost of imports (1) reduce price of products consumers buy (1). Lower taxes may increase incentives (1) increase supply (1) reduce costs (1) lower cost-push inflation (1). Up to 4 marks for why it might not: A cut in income tax (1) will increase disposable income/increase purchasing power (1) increase demand (1) firms raise prices to increase profits (1) increase demand-pull inflation (1). Lower indirect taxes (1) may not be passed on to consumers in lower prices (1). 6 Note: maximum of 2 if no link to inflation,

This question in 0455/22 Feb/March 2017

2 Sales of bottled water in China doubled between 2010 and 2015. In 2013 China overtook the USA as the biggest market for water by volume, but not value as the price of a bottle was higher in the USA. The increase in global consumption of bottled water has increased the size of firms producing bottled water but has also increased pollution. (a) Why is pollution an example of market failure? [2] (b) Explain two causes of a shift of a supply curve to the right. [4] (c) Analyse why the price of a product may be higher in the USA than China. [6] (d) Discuss whether large firms or small firms benefit consumers more. [8]

20 marks

Mark scheme: 2(a) Why is pollution an example of market failure? It is a cost/harmful effect/external cost (1) on a third party (1) not taken into account by the market (1) will cause social costs to exceed private costs (1) may result in the inefficient use of resources (1). 2 2(b) Explain two causes of a shift of a supply curve to the right. 1 mark each for each of two causes identified: • a reduction in the costs of production • advances in technology • increase in labour productivity • cuts in indirect taxes • government subsidies • good weather • reduction in diseases affecting livestock and crops • fall in price of other products produced by the firms 1 mark each for each of two explanations given: • lower costs of production will make firms more willing and able to supply/raise profits • advances in technology makes it cheaper to produce • cuts in taxation effectively lower costs of production • government subsidies provide a financial incentive to produce more • good weather increases fertility of land/increases crop yields • reduction in diseases increase crop yields and the number of livestock that can be sold • fall in price of other products produced by firms may lower their profitability, encouraging firms to switch resources 4 Do not accept a change in the price of the product. Question Answer Marks Guidance 2(c) Analyse why the price of a product may be higher in the USA than China. • Demand may be higher in the USA (1) due to e.g. higher incomes (1) • The product may be advertised more in the USA (1) the product may have fewer substitutes in the USA (1) • Difference in markets (1) monopoly in USA (1) lower output/higher prices (1) greater competition in China (1) greater output and lower prices (1) • Good may be imported from china (1) higher transportation costs raises price (1) • Supply may be lower in the USA (1) due to e.g. higher costs of production (1) • The tax on the product may be higher in the USA (1) • The Chinese government may subsidise the product (1) • Demand may be more inelastic in USA (1) hence producers can charge higher price (1) • Diseconomies of scale in the USA (1) lead to higher average costs and higher prices(1) economies of scale in China (1) lead lower average costs and lower prices (1) • Chinese exchange rate has fallen (1) will mean difference in the price of goods imported (1) resulting in higher costs of importing into the USA (1) 6 Maximum of 3 marks for a list-like approach. 2(d) Discuss whether larger firms or smaller firms may benefit consumers more Up to 5 marks for why larger firms* might: They may be able to benefit from economies of scale (1) example/s of economies of scale (1) lower average costs (1) lower prices for consumers (1). They may have more funds to invest (1) increase innovation / research (1) improve the quality of products (1). Large firms may offer greater variety to consumers (1). Up to 5 marks for why larger firms* might not: They may experience diseconomies of scale (1) example/s of diseconomies of scale (1) higher average costs (1) higher prices for consumers (1). They may provide less of a personal service (1) they may be less responsive to changes in consumer demand (1) as may be less in touch with consumers (1). A larger firm may be a monopolist (1) can restrict output and charge a higher price (1) lack innovation (1). Smaller firm may have monopoly power (1) in a niche market (1). 8 *Opposite wording of the argument is acceptable, i.e. why smaller firms may benefit consumers more than larger firms. A response may develop a mixture of relevant points to achieve up to 5 marks on either side. Maximum of 2 marks on each side of the discussion for a list-like approach.

This question in 0455/21 May/June 2017

2 In 2015, the global equilibrium price of milk fell. As a result, the number of farms producing milk declined. Farms tried to cut costs by becoming larger and employing fewer but more specialised workers. The reduction in the number of farms has led to less competition because some large farms have gained monopoly powers in local areas. A number of farm workers switched to other jobs, but some who remained accepted a cut in pay. (a) Define ‘equilibrium price’. [2] (b) Explain two reasons why a worker may continue in a job despite a cut in pay. [4] (c) Analyse how employing specialised workers may reduce a firm’s average costs of production. [6] (d) Discuss whether consumers would benefit if a firm became a monopoly. [8]

20 marks

Mark scheme: 2(a) Define ‘equilibrium price’. 2 The price where demand and supply are equal (2). Market clearing price (1) which ensures no surplus or shortage (1). The price which will not change (1) unless market conditions change (1). Note: award 2 marks for correctly drawn diagram. 2(b) Explain two reasons why a worker may continue in a job despite a cut 4 in pay. 1 mark each for each of two reasons identified: • pay may be lower elsewhere • no alternative employment is available / high local unemployment • job satisfaction • promotion chances • working conditions may be good • working hours may be low • fringe benefits may be good • job security • location • qualifications / specific skills • pension scheme. 1 mark each for each of two explanations given: • the pay gap may be smaller but the worker may still earn more in the job • the firm the only one employing locally / it is a monopoly employer • workers find the work interesting / challenging / rewarding • higher pay in the future • the job may provide an attractive working environment • the job may allow the workers to enjoy a lot of leisure time • fringe benefits, such as subsidised meals • maybe greater risk of losing job elsewhere • the job may be close to home – convenient and low transport costs • may not have the qualifications needed to get another job • the job may provide a good pension scheme / may have paid into the pension scheme. 2(c) Analyse how employing specialised workers may reduce a firm’s 6 average costs of production. Workers can concentrate on the task they are best at (1) gain practice in performing the task (1) higher productivity / better efficiency (1). May contribute ideas (1) on, e.g. production methods (1). Fewer mistakes may be made (1) leading to less waste / greater productivity (1). It can be quicker (1) and cheaper to train workers (1) as only learning one task/function (1). Less equipment may be needed per worker (1) reduce capital costs (1). Time can be saved (1) with the worker having to move less from one production point to another (1). 2(d) Discuss whether consumers would benefit if a firm became a 8 monopoly. Up to 5 marks for why they might: A monopoly may enjoy economies of scale (1) lower average costs of production (1) example (1) lower prices (1). A monopoly may reduce wasteful duplication of resources (1) e.g. water pipes (1). A monopoly may have more funds to invest (1) innovate more / spend on R&D (1) better quality products (1). Security of supply (1) if the government runs / regulates the monopoly (1). Monopolies may compete internationally (1) keeping prices down (1). Up to 5 marks for why they might not: Lack of competition / too much market power (1) inelastic demand (1) may mean it will charge a higher price (1) price maker (1) reduce supply (1) innovate less (1) lower quality products (1) lack of choice for consumers (1). May experience diseconomies of scale (1) example/s (1) higher average costs (1) higher prices (1).

This question in 0455/21 Oct/Nov 2017

4 In August 2015, China devalued its currency, the yuan. The Chinese Government was trying to increase output, including the output of food. It had experienced a slow-down in its economic growth. However, some other countries had actually experienced a decrease in output. One of the causes of the decline in economic growth in some countries was problems connected with their commercial banks. Some commercial banks were at risk of going out of business. (a) Define ‘devaluation’. [2] (b) Explain two disadvantages of a decrease in a country’s output. [4] (c) Analyse the effect on the market for food of an increase in population combined with a prolonged period of bad weather. [6] (d) Discuss whether a central bank should lend to commercial banks which get into financial difficulties. [8]

20 marks

Mark scheme: 4(a) Define ‘devaluation’. A fall in the value (1) of the currency (1) in the case of a fixed exchange rate/caused by government decision / against other currencies (1). 2 Question Answer Marks Guidance 4(b) Explain two disadvantages of a decrease in a country’s output. 1 mark each for each of two benefits identified: • rise in unemployment / recession / less exports • reduction in living standards • reduction in tax revenue. 1 mark each for each of two explanations given: • fewer workers will be needed if output falls/cyclical unemployment • negative impact on balance of payments • there will be fewer goods and services for people to consume • lower incomes and spending to tax • lower GDP. 4 4(c) Analyse the effect on the market for food of an increase in population combined with a prolonged period of bad weather. There will be more people to buy food (1) demand would increase – written or shown by a shift to the right of a demand curve (1). Bad weather will reduce crop yields (1) supply will decrease – written or shown by a shift to the left of the supply curve (1). Price will increase (1) but the effect on quantity is unclear (1) – can both be shown by change in equilibrium price and quantity on a diagram. 6 Question Answer Marks Guidance 4(d) Discuss whether a central bank should lend to commercial banks which get into financial difficulties. Up to 5 marks for why it should: A central bank is a lender of last resort (1) one of its functions is to lend to commercial banks when they cannot borrow elsewhere (1) example of another function (1). If a central bank does not lend, the commercial banks may collapse (1) holders of bank accounts will lose money (1) they may get into difficulties (1) there may be a ‘run’ on other banks (1) with people withdrawing their money (1) putting other banks at risk (1). Fewer banks would reduce the funds for firms to borrow (1) investment would be reduced (1) economic growth would decline (1) makes it more difficult for commercial banks to carry out their function (1) example of another function (1). Up to 5 marks for why it should not: May encourage banks to take risks (1) lend to creditworthy customers (1) they may think they are too big to fail (1). It would involve an opportunity cost (1) could use funds to lend to new, expanding banks (1). 8

This question in 0455/23 Oct/Nov 2017

1 Crisis in the ice cream market Vanilla is used in the production of soft drinks, cakes and perfumes. Its main use, however, is in the production of ice cream. Fig. 1 shows the different costs of making ice cream for one firm. Fig. 1 The costs of producing ice cream for one firm raw materials including vanilla other wages insurance security lighting rent Madagascar is the world’s largest supplier of vanilla followed by Mexico and Tahiti. At the start of 2016, economists expected the price of ice cream to increase as the price of vanilla had risen by 130% in 2015. This was largely because of the poor harvests in Madagascar which reduced the output of vanilla in 2015. Ice cream is seen as a luxury product in most countries. It has a range of substitutes and this is one reason why producers do not always pass on higher costs to consumers. In 2015, there were a number of other changes in the production of ice cream including a rise in the productivity of the workers. As well as vanilla, Madagascar produces a number of other primary products including coffee and sugar. Nearly 80% of the country’s labour force is employed in the primary sector. The country has a relatively low Gross Domestic Product (GDP) per head and a relatively low Human Development Index (HDI) value as shown in Table 1. This limits the amount that people in Madagascar save. Table 1 GDP per head and HDI in selected countries in 2015 Country GDP per head (US$) HDI Argentina 22 400 0.836 Bangladesh 3 600 0.570 Cuba 10 200 0.769 Egypt 11 500 0.690 Ghana 4 300 0.579 Madagascar 1 500 0.510 Half of Madagascar’s population live in poverty. The government is trying to reduce poverty by introducing a programme of cash benefits. It is hoped that one effect of this will be to increase school enrolment and attendance of the children of poor families. To increase economic growth, the government has sold off a number of state-owned enterprises and is moving the economy towards a market system. (a) Identify two fixed costs of production in Fig. 1. [2] (b) Explain, using information from the extract, two reasons why a rise in the price of vanilla might not cause an increase in the price of ice cream. [4] (c) Analyse, using a demand and supply diagram, the effect of an increase in income on the market for ice cream. [5] (d) Analyse the extent to which the relationship shown in Table 1 between countries’ GDP per head and their HDI value is the expected one. [4] (e) Discuss whether or not a government should encourage people to save more. [5] (f) Explain, using information from the extract, how cash benefits given to the poor can reduce poverty. [4] (g) Discuss whether or not a market system benefits consumers. [6]

30 marks

Mark scheme: 1(a) Identify two fixed costs of production in Fig.1. One mark each for any 2 from: insurance, security, rent, lighting and wages. 2 are given, consider only the first three. 1(b) Explain, using information from the extract, two reasons why a rise in the price of vanilla might not cause an increase in the price of ice cream. Ice cream is a luxury product (1) likely to have elastic demand / producers will be concerned that a rise in price could cause a fall in revenue/profit/demand (1). Ice cream has substitutes (1) likely to have elastic demand / producers will be concerned that a rise in price could cause a fall in revenue / loss of customers / loss of demand (1). Rise in productivity of workers (1) fall in labour costs / lower costs may offset a rise in the price of vanilla (1). Fall in another cost identified in the pie chart (1) may offset a rise in the price of vanilla (1), 4 Question Answer Marks Guidance 1(c) Analyse, using a demand and supply diagram, the effect of an increase in income on the market for ice cream. Up to 4 marks for a diagram: • axes correctly labelled – price and quantity or P and Q (1) • demand and supply curves correctly labelled, S (1) • demand curve D1 shifted to the right D2 (1) • correct equilibriums identified either by lines drawn to both axes or equilibrium prices clearly identified e.g. E1 and E2 (1) 1 mark for written analysis: • an increase in income increases purchasing power (1) • people buy more ice cream when they have more money/income (1) • demand will increase as ice cream is a luxury good • price will rise 5 price of ice cream quantity of ice cream O P2 D1 D1 P1 Q1 Q2 D2 D2 S S Question Answer Marks Guidance 1(d) Analyse the extent to which the relationship shown in Table 1 between countries’ GDP per head and their HDI value is the expected one. Generally, in the same order / positively related / countries with highest GDP per head have the highest HDI (1) countries with high incomes generally spend more on education and healthcare (1) supporting evidence e.g. Argentina has highest GDP per head and highest HDI (1). Egypt higher in terms of GDP per head but lower in terms of HDI than Cuba (1). Cuba may have a high life expectancy (1) indicating good healthcare (1). Cuba may have a high number of mean and expected years of schooling (1) indicating a strong education system / more educated population (1). 4 Reward 1 mark for a supported conclusion that it is generally the expected relationship. Marks may be gained in relation to Cuba by mentioning Egypt may have less good healthcare and education. 1(e) Discuss whether or not a government should encourage people to save more. Up to 3 marks for why it should: More savings can fund investment / enable people to set up a business (1) higher investment can increase economic growth (1) higher economic growth can increase living standards (1). A government may make use of money in government-run saving schemes (1) e.g. to fund infrastructure projects (1). More savings can reduce consumer spending (1) which will lower total (aggregate) demand (1) which can reduce inflation (1). More savings can reduce demand for imports (1) improve the current account position (1). More savings can help people cope with emergencies / increase wealth / for future use (1) prepare for retirement (1) in case of unemployment (1) spend on education (1) reduce need for government expenditure e.g. pensions/education (1) enabling the government to spend on other named area (1). Up to 3 marks for why it should not: More saving may reduce output / cause recession (1) increase unemployment (1) cause deflation (1). More saving will increase deposits at banks (1) this may encourage them to lend to un- creditworthy customers (1) causing banks to collapse (1). 5 Accept response from the perspective of why it should not, by discussing why it would be better for the government to encourage spending, Reward change in consumer spending and total demand in either why it should, or why it should not, but not in both. Question Answer Marks Guidance 1(f) Explain, using information from the extract, how cash benefits given to the poor can reduce poverty. May enable them to send their children to school for longer (1) this may increase their children’s skills (1) qualifications (1) increase their job opportunities / start a business (1) increase their earning potential / living standards (1) enable them to purchase more goods and services (1) including basic necessities (1). 4 Maximum of 1 mark for a way cash benefits may reduce poverty, if not linked to education. Reward but do not expect reference to an implied multiplier effect resulting from the higher spending creating more jobs. 1(g) Discuss whether or not a market system benefits consumers. Up to 4 marks for why it might: In theory there will be consumer sovereignty (1) with firms being responsive to consumer demand (1). The price mechanism allocates resources automatically / profit motive provides an incentive to respond to consumer demand (1) avoiding delays in responding to changes in demand (1). There may be a high level of competition (1) keeping price low (1) increasing efficiency (1) keeping quality high (1) providing choice (1). Up to 4 marks for why it might not: Those with low incomes will lack purchasing power (1) the market will not produce what they want (1). Monopolies may develop (1) driving up price (1) reducing quality (1). Consumers may not always be fully informed (1) e.g. cigarettes (harmful / demerit goods) may be overconsumed (1) e.g. healthcare (beneficial / merit goods) under consumed (1) there may be external costs (1) market failure may occur (1). Some consumers may find too much choice confusing (1) advertising can distort consumer choice (1). 6 Reward but do not expect reference to public goods.

This question in 0455/22 May/June 2018

5 In October 2015, the Chinese government switched from its one child policy to a two child policy partly because of the challenges caused by an ageing population. The birth rate was falling anyway due to rising female participation in the labour force, improvements in education, later marriages and the rapidly rising price of housing. (a) Identify two causes of an ageing population. [2] (b) Explain why the price of housing may increase. [4] (c) Analyse why more women may enter the labour force. [6] (d) Discuss whether or not a rise in the birth rate will benefit an economy. [8]

20 marks

Mark scheme: 5(a) Identify two causes of an ageing population. One mark each for each of two from: A fall in the birth rate (1) a fall in the death rate / longer life expectancy (1) net emigration of young people / net immigration of old people (1). 2 result in a fall in the birth rate or fall in the death rate. These may be two causes of a fall in the birth rate or a fall in the death rate e.g. better healthcare and better nutrition. 5(b) Explain why the price of housing may increase. Increase in demand (1) due to e.g. increase in income / rise in population (1). Decrease in supply (1) due to e.g. rise in costs of production (1). 4 5(c) Analyse why more women may enter the labour force. May be a reduction in gender discrimination (1) a change in social attitudes (1) making it easier for women to get jobs (1) be promoted (1). There may be a rise in the pay available to women (1) increasing the opportunity cost of not being in the labour force (1). There may be a fall in the birth rate (1) making it easier for women to work (1). There may be improvements in the education of women (1) increasing their skills / raising their earning potential (1). There may be a rise in part-time and/or flexible employment (1) making it easier for women to combine working and caring for families (1). Increases in the cost of living (1) may create a need for higher family income / to support their family (1). Government measures to encourage the entry of women into the labour force (1) e.g. provision of free or subsidised childcare (1). 6 5(d) Discuss whether or not a rise in the birth rate will benefit an economy. Up to 5 marks for why it might: A higher birth rate will increase the labour force in the long run (1) increase the potential output (1) total (aggregate) demand may rise (1). It will lower the average age of the population, (1) younger workers may be occupationally mobile (1) geographically mobile (1) may be able to work with the latest technology (1). There may be rise in tax revenue (1). If the country is underpopulated (1) better use might be made of resources in the long run (1). Demand for products related to children will increase (1) benefiting e.g. toy industry (1). Up to 5 marks for why it might not: A higher birth rate will increase the number of dependents (1) resources that could have been used to e.g. increase the quality of healthcare will have to be devoted to providing more healthcare services to mothers and children (1) there will be an opportunity cost (1). It will reduce the size of the labour force in the short run (1) as mothers leave it to have children (1). If the country is overpopulated (1) resources may be depleted more quickly (1). 8 Reward but do not expect reference to the idea of an optimum population size.

This question in 0455/22 May/June 2018

5 The state of California has the most progressive tax system in the USA. The tax system helps reduce high poverty rates. Policy makers are considering reforming sales tax in the state to include services, while reducing the use of direct taxes. (a) Define progressive tax. [2] (b) Explain two reasons why a government may want to reduce poverty. [4] (c) Analyse, using a supply and demand diagram, the effect of increasing a sales tax. [6] (d) Discuss whether a government should increase indirect taxes and whether it should reduce direct taxes. [8]

20 marks

Mark scheme: 5(a) Define progressive tax. A tax that takes a higher percentage of income of the rich / lower percentage of income of the poor (2). Falls more heavily on the rich / imposes a higher burden on the rich (1). A tax which is used to reduce income inequality (1). 2 5(b) Explain two reasons why a government may want to reduce poverty. Reduce income inequality (1) raise living standards (1). To increase tax revenue (1) as average incomes / GDP will rise (1). To improve the country’s HDI / develop the country (1). Reduce healthcare expenditure (1) as the poor will be fitter (1). Increase labour productivity (1) leading to more output / lower unemployment (1). 4 Question Answer Mark Guidance 5(c) Analyse, using a supply and demand diagram, the effect of increasing a sales tax. Award up to 4 marks for a correct diagram: • Axes labels P and Q (1) • Supply and demand curves correctly labelled (1) • Supply curve shifting left (1) • Original and new equilibrium positions identified (1) Award up to 2 marks for associated explanation: Increasing tax raises a firm’s costs of production (1). A higher price (1) may be passed on to consumers (1). 6 price quantity O S2 S1 p2 p1 D1 q2 q1 Question Answer Mark Guidance 5(d) Discuss whether a government should increase indirect taxes and whether it should reduce direct taxes. Up to 5 marks for why the government should do this: Incentives to work may increase (1) if low income then the extra income from work (1) could reduce poverty (1) if high income then the individuals could work harder (1) generating economic growth (1). Raising indirect taxes on goods with external costs (demerit goods) e.g. cigarettes (1) can help to reduce market failure (1) e.g. health of the country improves (1). Up to 5 marks for why the government shouldn’t do this: Indirect taxes tend to be regressive (1) whilst direct taxes are progressive (1) so this will worsen inequality / poverty in a country (1). Both policies may lead to inflation (1) indirect tax increases push up prices of goods and services (1) direct tax cuts increase total (aggregate) demand (1). Individuals may save any cuts in direct tax (1) minimising the economic impact (1). It could cause individuals to spend more on imports (1) worsening the balance of payments (1). Tax take could fall (1) as indirect taxes can be avoided whereas direct taxes cannot (1). 8

This question in 0455/23 May/June 2018

1 Rubber production in Liberia Liberia is a west African country that has faced a number of serious problems in recent years. These have included a civil war and in 2014 the outbreak of the Ebola epidemic. There have also been improvements. The unemployment rate was 85% in 2004 but had fallen to 4% in 2016. This reduction has influenced both emigration and wages. Workers have received higher wages although some economists think that the higher wages have increased the country’s inflation rate which in 2016 was 8%. The country has a good supply of drinking water and a climate favourable to agriculture. More than 70% of the country’s labour force is currently employed in agriculture. The country’s main exports are rubber, iron ore, timber and gold. A US multinational company (MNC) runs the world’s largest single natural rubber farming operation in Liberia. The price of rubber fell by 75% between 2011 and 2016. The global supply of rubber had exceeded demand as a number of countries imposed import restrictions on rubber. In response to the lower price the US MNC cut its production, but still made a loss. The MNC does not want to go out of business and is trying to survive by cutting its costs. In the long run it hopes to maximise profits. When some of its 7000 workers retire, they will not be replaced. The MNC has introduced new production techniques and diversified into growing cocoa and coffee. The Liberian government is providing subsidies to local rubber farmers to help them buy new equipment and introduce new farming methods. Despite the challenging situation, a number of local Liberian rubber farmers are increasing the size of their operations by buying up more land. Some others are diversifying by using wood from the rubber trees to make furniture. While helping its rubber farmers, the Liberian government is also encouraging the expansion of the secondary and tertiary sectors. Between 2014 and 2016 it increased its expenditure on healthcare but this was at the expense of a number of public sector investment projects. Table 1 compares the infant mortality rate and healthcare expenditure per head in selected countries in 2015. Table 1 Infant mortality rate and healthcare expenditure per head in selected countries in 2015 Infant mortality rate Healthcare expenditure Country (deaths per 1000 per head live births) (US$) Cuba 4.5 459 Hungary 5.0 2 096 India 41.5 248 Liberia 67.5 90 Turkey 18.8 1 148 UK 4.4 3 749 (a) Identify, from the extract, two goals of business organisations. [2] (b) Explain, using information from the extract, two reasons why the price of rubber fell between 2011 and 2016. [4] (c) Analyse how an increase in wages could cause inflation. [5] (d) Analyse to what extent the information in Table 1 suggests that healthcare expenditure per head is an important influence on the infant mortality rate. [4] (e) Discuss whether or not having more of its workers employed in the tertiary sector would benefit the Liberian economy. [5] (f) Explain, using information from the extract, how the concept of opportunity cost affects all rubber farmers in Liberia. [4] (g) Discuss whether or not a high rate of unemployment would always cause emigration. [6]

30 marks

Mark scheme: 1(a) Identify, from the extract, two goals of business organisations. Survival / growth / profit maximisation / diversification 2 1(b) Explain, using information from the extract, two reasons why the price of rubber fell between 2011 and 2016. Supply exceeding demand / diagram showing excess supply (1) the existence of unsold rubber will encourage rubber producers to lower price (1). Improved production methods (1) lowering costs of production / increasing supply (1). The imposition of import restrictions / diagram showing the effect of import reductions (1) lowering demand for rubber / rubber producers may reduce prices to ensure their rubber is still competitive (1). Government subsidies (1) lowering costs of production / increasing supply / diagram showing supply increasing (1). 4 1(c) Analyse how an increase in wages could cause inflation. Higher wages may increase consumer expenditure (1) increasing total (aggregate) demand / diagram showing total (aggregate) demand increasing (1) causing demand-pull inflation (1) if demand rises by more than money supply / the economy is at, or near, full capacity (1). Higher wages may increase costs of production (1) decrease total (aggregate) supply / diagram showing total (aggregate) supply decreasing (1) causes cost- push inflation (1) if wages rise by more than productivity / may cause a wage- price spiral (1). 5 Question Answer Marks Guidance 1(d) Analyse to what extent the information in Table 1 suggests that healthcare expenditure per head is an important influence on the infant mortality rate. Generally, yes, it would be expected that countries spending a higher amount would have a lower infant mortality rate (1) because e.g. they would be able to afford more midwives/doctors (1). Examples of supporting evidence e.g. Liberia spends the least and has the highest (1) UK spends the most and has the lowest (1). There is an exception, Cuba (1) spends the 4th lowest and has the 2nd lowest infant mortality rate (1). 4 Question Answer Marks Guidance 1(e) Discuss whether or not having more of its workers employed in the tertiary sector would benefit the Liberian economy. Up to 3 marks for why it might: Jobs in the tertiary sector tend to be better paid (1) may raise living standards (1) working conditions tend to be better (1) e.g. less dangerous (1) demand for services tend to increase more than demand for primary products (1) imports of services may be reduced (1) exports of services may increase (1) current account position may be improved (1). Productivity/skills may be higher in the tertiary sector (1) which may cause economic growth (1) may make the country more developed (1). A larger healthcare sector could reduce the infant mortality rate / increase life expectancy (1). May attract MNCs/FDI (1) increasing employment (1). Up to 3 marks for why it might not: The country may be better at producing primary or manufactured products (1) the country has a climate suited to agriculture (1) which may reduce economic growth (1). There may be an opportunity cost in terms of less resources being available in the primary and secondary sectors (1). Some jobs in the tertiary sector are low-paid (1) example (1) because they require fewer skills (1). Many tertiary industries are based in cities (1) this may lead to problems of rural-urban migration / overcrowding (1). Liberia’s resources are more suited to producing rubber (1) which can be exported and bring in foreign exchange (1). Imports of manufactured/primary products may increase (1). 5 For all ‘Discuss’ questions Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is to be rewarded. Generic example Mark Economic growth will increase 1 because of reason« e.g. demand for services is increasing globally 1 Economic growth will decrease (reverse of 1st argument) 0 because of a different reason / not a reverse argument e.g. a country’s resources may be more suited to producing primary products. 1 Reward but do not expect reference to comparative advantage as equivalent to better at producing. Question Answer Marks Guidance 1(f) Explain, using information from the extract, how the concept of opportunity cost affects all rubber farmers in Liberia. Opportunity cost is the (next) best alternative foregone (1). The US MNC could use its resources to produce rubber (1) or cocoa/coffee (1). The local farmers could sell rubber (1) or rubber wood / make furniture (1). The farmers could use the money to buy more land (1) example, e.g. diversify into other areas / education for their children (1). Subsidies to farmers (1) could be used to help them in other ways e.g. education (1). 4 Question Answer Marks Guidance 1(g) Discuss whether or not a high rate of unemployment would always cause emigration. Up to 4 marks for why it might: People may go to other countries in search of jobs (1). A high rate of unemployment is likely to mean wages are low in the country / there is poverty in the country (1) people may emigrate in search of higher wages (1). A high rate of unemployment may mean poor healthcare / education / other services in the country (1) people and governments not having the income to spend much on these services (1) people may emigrate to get a higher standard of living (1). People may have skills more appropriate to jobs in other countries / in greater demand in other countries (1). Up to 4 marks for why it might not: Jobs may not be available abroad (1) unemployment may be higher in other countries (1) there may be restrictions on immigration (1). People may lack the skills to take up any available jobs in other countries (1). People may have family ties (1) restricting their mobility (1). People may not be aware of jobs in other countries / lack of information (1). There may be generous unemployment benefits in the country (1). The costs of living may be low in the country (1) which may discourage e.g. the retired from emigrating (1). People may be deterred by cost of emigration (1). People may be deterred by cultural differences in other countries (1). Unemployment may be short term / believed to be short term / the unemployed may be optimistic about future economic prospects in the country (1) if seasonal or frictional unemployment (1). 6 Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is expected.

This question in 0455/22 Oct/Nov 2018

7 Indian Railways is a state-owned enterprise, owned and operated by the Ministry of Railways. There is currently only one privately-owned railway line in India. The market for rail travel is influenced by changes in the markets for other forms of transport. For instance, changes in the supply of oil and petrol influence the market for car travel. (a) Define a market. [2] (b) Explain two reasons why the supply of a raw material such as oil may rise in the future. [4] (c) Analyse, using a demand and supply diagram, how the market for oil would be affected when the demand for oil increases by more than the supply of oil. [6] (d) Discuss whether or not car travel will increase in the future. [8]

20 marks

Mark scheme: 7(a) Define a market. 2 An arrangement that brings buyers and sellers into contact / products are bought and sold (2). Buyers (1) sellers (1). Example of the purchase and sale of products (1). 7(b) Explain two reasons why the supply of a raw material such as oil may 4 rise in the future. • New supplies may be discovered (1) after investment searching for them (1) • Price may rise (1) giving suppliers a profit incentive to supply more (1) • Advances in technology / cuts in wages (1) may reduce costs of obtaining the raw material (1) • Government subsidies (1) providing finance to search for oil / greater incentive to increase output (1) 7(c) Analyse, using a demand and supply diagram, how the market for oil 6 would be affected when the demand for oil increases by more than the supply of oil. Up to 4 marks for the diagram: Axes correctly labelled – price and quantity or P and Q (1). Demand and supply curves correctly labelled D1 and S1 (1). Demand and supply curves shifted to the right D2 and S2 (1). Equilibrium – shown by lines e.g. P2 Q2 or at point e.g. E2 (1). S1 price S2 of oil P2 E2 P1 D2 D1 O Q1 Q2 quantity of oil Up to 2 marks for written comments: More of the product will be traded / quantity will rise (1). Price will be higher (1). Note: Do not reward analysis marks for description of diagram e.g. price changes from P2 to P1 or quantity changes from Q1 to Q2. 7(d) Discuss whether or not car travel will increase in the future. 8 Up to 5 marks for why it might: Price of cars may fall (1) encouraging more people to buy cars (1). Price of petrol may fall (1) making it cheaper to run a car/petrol is a complement to cars (1). Population may increase (1) more potential drivers (1). More roads may be built (1) reduce time of car journeys (1). People may live further from work (1) requiring longer journeys (1). Driverless cars (1) may enable more people e.g. those with poor eyesight to use cars (1). Income may rise (1) enabling people to buy and use more cars (1). Up to 5 marks for why it might not: Price of substitute travel may fall (1) e.g. due to government subsidising rail travel (1). Taxes on car travel may rise (1) raising the cost of car travel (1). Parking charges may increase (1) parking is a complement to car travel (1). Congestion may rise (1) increasing travel time (1). Greater concern about the environment (1) may encourage some people to switch to more environmentally friendly forms of transport (1).

This question in 0455/22 Feb/March 2019

3 In February 2017, Europe experienced a shortage of fresh vegetables due to bad weather. For a period of time, the markets for a number of vegetables, including broccoli and lettuces, were not in equilibrium. The price of food tends to fluctuate more than the price of manufactured goods and services. These fluctuations influence the rate of inflation. (a) When is a market in equilibrium? [2] (b) Explain how a rise in the price of food would affect a country’s consumer prices index (CPI). [4] (c) Analyse, using a demand and supply diagram, how bad weather is likely to affect the market for broccoli. [6] (d) Discuss whether or not a higher inflation rate will benefit producers. [8]

20 marks

Mark scheme: 3(a) When is a market in equilibrium? When demand equals supply / when there is no pressure for price to change (2). When it is in balance (1). 2 drawn demand and supply diagram showing equilibrium. 3(b) Explain how a rise in the price of food would affect a country’s consumer prices index (CPI). CPI is a measure of inflation (1) Demand for food is inelastic / necessity (1). A rise in price of food would cause an increase in inflation / CPI (1). Food is an item in the CPI (1) it has a relatively high weighting (1) people spend a relatively high proportion on food (1) proportion declines as income rises (1). 4 3(c) Analyse, using a demand and supply diagram, how bad weather is likely to affect the market for broccoli. Up to 4 marks for the diagram: Axes correctly labelled – price and quantity or P and Q (1). Demand and supply curves correctly labelled (1). Supply curve shifted to the left (1). Equilibriums – shown by lines or e.g. E1 and E2 (1). Up to 2 marks for written comments: Bad weather will destroy crops / reduce supply of broccoli / quantity traded falls (1). Weather is an important influence on the supply of agricultural products / cost of producing broccoli will rise / price will rise (1). 6 S2 S1 Q2 Q1 P1 P2 D O quantity of broccoli price of broccoli Question Answer Marks Guidance 3(d) Discuss whether or not a higher inflation rate will benefit producers. Up to 5 marks for why it might: Producers may receive higher prices / revenue for their products (1) if costs rise by less (1) profits will rise (1) may encourage investment (1) expand the business (1). Producers may be able to borrow more cheaply (1) the burden of past debts will fall (1) if the rate of inflation is above the rate of interest (1). An inflation rate may rise from a low or negative rate (1) and this would provide a greater incentive for producers (1). Higher inflation rate in other countries (1) will make this country’s products more competitive (1). If demand is inelastic (1) a rise in price will increase revenue (1). Higher inflation will reduce the cost of borrowing (1). Up to 5 marks it might not: If cost of production rises (1) output may fall (1) firms’ profits may fall (1). Producers may have to spend time adjusting prices (1) menu costs (1). A lower and stable rate of inflation (1) may increase the confidence of producers (1). Producers may find it more difficult to export abroad / exports may fall (1) lower revenue (1). Producers may find it harder to assess relative prices (1) and so may make inefficient decisions (1). 8

This question in 0455/21 May/June 2019

3 There was a global surplus of steel in 2017. In mid-2017, the US government considered imposing tariffs on steel imports to protect its declining steel industry. Cheap imports from other countries were reducing employment in the US steel industry. The pattern of US employment was also being affected by improvements in education. (a) Identify two methods of trade protection other than tariffs. [2] (b) Explain how market forces will eliminate a surplus and a shortage. [4] (c) Analyse how improvements in education can affect the pattern of employment. [6] (d) Discuss whether or not the imposition of import tariffs by a country will reduce its unemployment. [8]

20 marks

Mark scheme: 3(a) Identify two methods of trade protection other than tariffs. • quotas • embargoes • voluntary export restraint • red tape / bureaucracy / artificially high standards • subsidies 2 3(b) Explain how market forces will eliminate a surplus and a shortage. A surplus will be eliminated by a fall in price (1) demand will rise / supply will fall (1). A shortage will be eliminated by a rise in price (1) demand will fall / supply will rise (1). 4 2 marks could be awarded for an accurately drawn demand and supply diagram showing changes in price. 3(c) Analyse how improvements in education can affect the pattern of employment. May be more skilled workers (1) increase qualifications (1) workers may seek better paid jobs (1) jobs with better working conditions (1). There is likely to be a reduction in primary sector employment (1) an increase in secondary / tertiary sector employment (1). May be an increase in women in employment (1) if girls benefit from improvements in education (1). May increase employment of teachers (1) if e.g. class sizes are reduced (1). May encourage an increase in migrant workers (1) attracted by better education for their children (1). 6 Question Answer Marks Guidance 3(d) Discuss whether or not the imposition of import tariffs by a country will reduce its unemployment. Up to 5 marks for why it might: Import tariffs may raise the price of imports (1) demand for imports may fall (1) consumers may switch to domestic products (1) firms may increase output (1) take on more workers (1). Tariffs can protect infant industries (1) allow them to grow (1) and employ more workers (1). Tariffs can protect declining industries (1) reduce structural unemployment (1). Tax revenue may increase (1) example of higher government spending that could reduce unemployment (1). Up to 5 marks for why it might not: Other countries may retaliate (1) imposing tariffs on this country’s exports (1) employment in the export industries may fall (1). Tariffs on imported raw materials (1) will increase costs of production (1) this may lead to higher prices of domestic products (1) causing a fall in demand (1). Imports may not have domestic substitutes (1) price of imports may still be lower (1) so consumers may continue to buy imports (1) demand for imports may be price inelastic (1). 8

This question in 0455/22 May/June 2019

7 The price elasticity of demand (PED) for sugar in most countries is less than 1. In 2017, the price of sugar fell. However, the price of specialised, higher quality sugar grown in countries such as Mauritius fell by less than the average global price. Efficient producers, such as some farmers in Brazil that have a low fixed cost of production, were also less affected by the fall in price. (a) State the formula used to calculate PED. [2] (b) Explain two reasons why the price of sugar may fall. [4] (c) Analyse the possible reasons why a producer’s fixed cost may increase. [6] (d) Discuss whether or not a country will benefit from specialising in an agricultural product such as sugar. [8]

20 marks

Mark scheme: 7(a) State the formula used to calculate PED. % change in quantity demanded divided by % change in price (2). Change in demand divided by change in price (1). 2 7(b) Explain two reasons why the price of sugar may fall. • demand may fall (1) • supply may increase (1) • a fall in income will lower demand (1) because of less purchasing power (1) • a fall in population will lower demand (1) as there will be fewer consumers (1) • a change in tastes will lower demand (1) as people may find sugar less appealing (1) • concern about health will lower demand (1) as consumers will switch to other foods (1) • a rise in the price of a complement (1) e.g. tea (1) • a fall in the price of a substitute (1) e.g. sweeteners (1) • reduction in costs of production will increase supply (1) as it is likely to lead to higher profits (1) • subsidies will increase supply (1) as they will give an incentive to firms to produce more (1) • a cut in indirect tax will increase supply (1) as it lowers costs (1) • good weather conditions will increase supply (1) as less of the crop will be lost (1) • more firms in the market (1) increasing competition in the market (1) 4 Question Answer Marks Guidance 7(c) Analyse the possible reasons why a producer’s fixed cost may increase. Fixed costs are costs that do not alter with output (1) in the short run (1). Rent may increase (1) landlords may decide to charge more for factories and offices (1). The amount charged for insurance may increase (1) insurance companies may be seeking higher profits / their costs may have risen (1). Interest paid on loans may increase (1) e.g. the central bank may have increased the rate of interest (1). A firm may have moved to a larger factory / changed its production process / using more capital goods (1) leading to higher fixed capital costs (1). Inflation may occur (1) increasing e.g. the cost of workers with long-term contracts (1). 6 Question Answer Marks Guidance 7(d) Discuss whether or not a country will benefit from specialising in an agricultural product such as sugar. Up to 5 marks for why it might: It may increase efficiency/productivity (1) workers may be well trained in sugar production (1) advantage may be taken of economies of scale (1) lower cost (1) lower price (1) exports may increase / imports may fall (1) improving the current account position (1). The country may have the right climate (1) to give a good crop of sugar beet/cane (1) economic growth may increase (1). Agriculture may be labour intensive (1) creating employment for high number of workers (1). The country may gain a reputation for high quality agricultural products (1) increasing demand (1). May benefit if demand for the product is high (1). Up to 5 marks for why it might not: Demand may fall (1) due to a change in tastes (1) rise in competitors (1). Supply may be reduced (1) by bad weather or a disease (1). Demand for manufactured good and for services tend to increase more as income rises (1) larger profits tend to be earned on these products (1). Diseconomies of scale may set in (1) Economies of scale tend to be more significant in manufacturing (1). Agricultural products tend to have more trade restrictions imposed on them (1) making it more difficult to export them (1). Market prices of agricultural products are more variable (1) farmers face uncertainty in predicting income (1). The country may become dependent on other countries for other products (1). 8 Reward but do not expect reference to absolute and comparative advantage.

This question in 0455/22 May/June 2019

1 Driverless cars and advances in technology It is predicted that driverless cars, powered by electricity, will be on the roads by 2030. Driverless cars have already been tried out on the roads in some cities, including Pittsburgh in the USA. It is thought that driverless cars will reduce accidents, will have lower repair costs and will create less pollution. At first, the supply of driverless cars may exceed the demand, but it is expected that they will soon grow in popularity. As more driverless cars come into use, the demand for bus travel and petrol stations may decline, and some taxi drivers may be made redundant. In contrast, the increased access to transport that driverless cars will give to people, including the elderly, is likely to increase demand for out of town restaurants and places of entertainment. It has been forecast that the technology being developed in connection with driverless cars will make the supply of them elastic. It is predicted that an 8% rise in the price of driverless cars would cause a 20% rise in the quantity supplied. Advances in technology and the replacement of workers by machines are forecast to destroy 80 million jobs in the USA. Job losses are also forecast in other countries and trade unions are likely to be less able to resist these due to a fall in membership and governments reducing the power of trade unions. Among the jobs thought to be at risk are accountants, train drivers and financial advisers. Demand for workers in other occupations, including doctors and dentists, may increase but there is a risk that unemployment may rise. The more educated workers are, the more easily they can move from one occupation to another. Table 1.1 shows education spending as a percentage (%) of GDP and the unemployment rate in selected countries. Table 1.1 Education spending and the unemployment rate in selected countries Education spending Unemployment rate Country as a % of GDP (%) Argentina 5.3 8.0 Brazil 5.8 13.5 Ghana 6.5 12.0 New Zealand 7.3 4.8 South Africa 6.0 26.0 USA 8.2 4.7 Jobs selling houses and flats may decline but it is expected that the demand for building workers may increase. Some people welcome house building in their area but others oppose it. (a) Identify, from the extract, two pairs of substitutes. [2] (b) Explain, using information from the extract, whether the market for driverless cars is expected to be in equilibrium in 2030. [2] (c) Calculate, using information from the extract, the price elasticity of supply (PES) of driverless cars. [2] (d) Explain, using information from the extract, two external costs that driverless cars could reduce. [4] (e) Analyse, using Table 1.1, the relationship between educational spending and the unemployment rate. [5] (f) Discuss whether or not an increase in house building will benefit the people who live in the area. [5] (g) Explain, using information from the extract, two reasons why the power of trade unions may decline in the future. [4] (h) Discuss whether or not a rise in unemployment is harmful. [6]

30 marks

Mark scheme: 1(a) Identify, from the extract, two pairs of substitutes. • Driverless cars and bus travel • Driverless cars and taxi travel • Bus travel and taxi travel • Machines / advanced technology and workers 2 1(b) Explain, using information form the extract, whether the market for driverless cars is expected to be in equilibrium in 2030. No (1) supply is expected to exceed demand (1). 2 1(c) Calculate, using information from the extract, the price elasticity of supply (PES) of driverless cars. 2.5 (2). Correct working: 20% / 8% OR 20 / 8 (1). 2 1(d) Explain, using information from the extract, two external costs that driverless cars could reduce. • accidents (1) people are injured and killed as a result of other people’s driving / accidents impose costs on hospitals and healthcare / less human error / driverless cars reduce the death rate / accidents can cause traffic congestion / fewer accidents may reduce cost of repairs (1) • pollution (1) cars emit carbon dioxide / pollution causes health problems / driverless cars are more environmentally friendly / use electricity which causes less pollution (1) • lower cost of insurance to (other) drivers (1) as a result of less accidents / lower cost of repairs (1) 4 Question Answer Marks Guidance 1(e) Analyse, using Table 1.1, the relationship between educational spending and the unemployment rate. Expected relationship – a country that spends more (a high proportion) of their GDP on education would have a low unemployment rate / a country with a higher unemployment rate is likely to spend less on education / it is an inverse relationship (1). Reasons for expected relationship – workers would be likely to be more skilled and productive / higher unemployment may result in less tax revenue to spend on education (1). Evidence in support of expected relationship – e.g. New Zealand or US (1) highest spenders and lowest unemployment rates (1). Evidence against expected relationship – e.g. Argentina or South Africa (1) Argentina spends a lower proportion than Ghana and Brazil but has a lower unemployment rate / South Africa spends more a higher proportion than Argentina and Brazil but has a higher unemployment rate (1). 5 A pattern of analysis is expected in response to this type of question. If there is no expected pattern of analysis, the following may be worthy of some reward, e.g.: • it is not a consistent relationship (1) • there are other influences on the unemployment rate (1) However, do not reward simple statements (repetition) of the figures given in the table. For example, USA spends 8.2% on education and has an unemployment rate of 4.7%, is not to be rewarded. Question Answer Marks Guidance 1(f) Discuss whether or not an increase in house building will benefit the people who live in the area. Up to 3 marks for why it might: House building may create jobs (1) lower unemployment (1) generate income / raise wages / raise living standards (1). House building will increase the supply of housing (1) the lower price of housing (1) makes houses more affordable (1) fewer homeless (1). May attract more firms to set up in the area (1) more services may be provided (1) due to more people living in the area / larger labour force (1). May save travel time for those working nearby (1) reduce pollution / congestion (1). Up to 3 marks for why it might not: House building may cause external costs (1) examples (2). More houses may reduce the value of people’s homes (1) reduce their wealth (1). There is an opportunity cost (1) the area used could have been used for e.g. school buildings (1). Demand for extra services may not be met (1). Jobs may only be temporary / seasonal unemployment (1). More housing may create overcrowding in the area. (1). 5 Apply this example to all questions with the command word DISCUSS (1(g), 1(h), 2(d), 3(d), 4(d) and 5(d)) Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Generic example Mark Tax revenue may decrease « 1 ... because of reason e.g. incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e. reverse of a previous argument. 0 Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education. 1 Question Answer Marks Guidance 1(g) Explain, using information from the extract, two reasons why the power of trade unions may decline in the future. Fall in membership (1) lower funds / less bargaining power (1). Rise in unemployment / workers being replaced by machines (1) trade unions may be reluctant to take industrial action for fear that members will be replaced by unemployed / non-member workers (1). Government may reduce the power of trade unions (1) making it harder for trade unions to protect workers’ rights (1). Movement from primary to tertiary sector (1) which may be less unionised / better working conditions (1). 4 Some points may be interchangeable e.g. rise in unemployment (1) resulting in fall in membership (1). Question Answer Marks Guidance 1(h) Discuss whether or not a rise in unemployment is harmful. Up to 4 marks for why it is: Output is likely to fall (1) incomes will decline / poverty increase (1) living standards will fall (1) lower total (aggregate) demand (1). Tax revenue will fall (1) government may have to cut spending on e.g. education and healthcare (1). Government may increase tax rates (1) which may create disincentive effect (1). The government will have to spend more on unemployment benefit (1) this will involve an opportunity cost (1) may result in a budget deficit (1). Unemployed workers may lose skills / become out of date (1) may need retraining (1). May increase emigration (1) lose skilled workers (1). May cause social problems e.g. crime / mental health problems (1). Up to 4 marks for why it is not: Inflation may fall (1) due to lower total (aggregate) demand (1). Firms may find it easier to recruit new workers (1) this will make it easier to expand (1) at lower wage costs (1). Productivity may be higher (1) more skilled workers kept (1). Unemployment may give the unemployed time to search for a better job (1) eventually raises their incomes (1). Rise may only be temporary (1). May reduce demand for imports (1) improve current account of the balance of payments (1). May be less pollution with lower output (1). 6 Reward but do not expect reference to a downward multiplier effect and/or not reaching productive capacity.

This question in 0455/22 Oct/Nov 2019

3 The population of Hungary is the most obese in Europe. Hungarians eat fewer vegetables than most Europeans and more food types that may be considered to be demerit goods. In 2017, the Hungarian government introduced a tax on unhealthy food, known as the chips tax. The tax has had some success in moving demand to healthier foods. Some economists suggest that governments should use price controls as well as taxes to influence the food market. (a) Define demerit good. [2] (b) Explain the difference between an extension in demand and an increase in demand. [4] (c) Analyse the effects on income distribution and tax revenue of an increase in indirect taxes. [6] (d) Discuss whether or not a government should impose a maximum price on food. [8]

20 marks

Mark scheme: 3(a) Define demerit good. A product which is more harmful to consumers than they realise / the government considers is more harmful (2). It is over-consumed / overproduced (1) it creates external costs (1). A product that is harmful (1). 3(b) Explain the difference between an extension in demand and an increase in demand. Logical explanation which might include: An extension in demand is caused by a change in the price of the product (1) rise in quantity demanded (1) it is shown by a movement along the demand curve (1). An increase in demand is caused by a change in an influence on demand other than a change in the price of the product / means more is demanded at each and every price (1) example of a cause of an increase in demand e.g. rise in incomes (1) it is shown by a shift in the demand curve (1). 4 Up to 2 marks for diagram(s) showing the difference. Maximum of 2 marks for extension in demand and a maximum of 2 marks for an increase in demand. Question Answer Marks Guidance 3(c) Analyse the effects on income distribution and tax revenue of an increase in indirect taxes. Coherent analysis which might include: Income is likely to become less evenly distributed (1) indirect taxes are usually regressive (1) taking a larger percentage of income of the poor (1). Tax revenue likely to rise (1) will rise more on goods with inelastic demand (1) e.g. food (1) may fall if demand falls significantly (1). If any extra tax revenue is spent on lower income groups (1) e.g. welfare benefits (1) the effect on income distribution is less certain / income may be more evenly distributed (1). Tax evasion and avoidance is less common in the case of indirect taxes (1) though there may be informal markets (1). 6 Question Answer Marks Guidance 3(d) Discuss whether or not a government should impose a maximum price on food. In assessing each answer, use the table opposite. Why it should: • may influence price and quantity purchased • if set below the equilibrium level, will reduce price • some people will be able to purchase food at a lower price • may reduce poverty – food is a basic necessity • may stop monopoly food producers setting high prices. Why it should not: • if set above the equilibrium, it will have no effect • it set below the equilibrium, will result in shortages • some additional measure will have to be introduced to ration out food • some foods may be harmful to health and their consumption should be discouraged • may result in firms making losses and so reducing quality of food or employment of workers • free market forces may result in a more efficient allocation of resources. 8 Level Descriptors Mark 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development or may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0 Question Answer Marks Guidance 3(d) Example of L2 answer: Government should impose a maximum price on foods. Price is likely to fall and this will aid those in poverty. They will be able to buy basic necessities easier and allow them to spend on other things. Governments should not impose a maximum price on food as it can cause businesses to make a loss and need government subsidisation. Principal Examiner comment: Reasonable on one side and limited on the other side. The effect on price, quantity demanded and quantity supplied may be shown on a diagram.

This question in 0455/22 Oct/Nov 2020

3 The island of Borneo is famous internationally for its rainforests which can bring many benefits, both private and external. However, the economy is heavily dependent on a finite resource, oil. The discovery of oil reserves in other parts of the world led to a significant fall in the world price of oil. This affected producers of oil in Borneo. (a) Define finite resource. [2] (b) Explain the difference between private and external benefits. [4] (c) Analyse, using a demand and supply diagram, the effects on the world price of oil of the discovery of new reserves of oil. [6] (d) Discuss whether or not the fall in the price of a product is a disadvantage to an economy. [8]

20 marks

Mark scheme: 3(a) Define finite resource. A resource is an aid to production (1) which is limited in supply (1) it cannot be replaced over time / fast enough / will run out (1) to keep pace with consumption (1). 2 No mark for an example 3(b) Explain the difference between private and external benefits. Logical explanation which might include: Private benefits are enjoyed by the producer (1) and consumer (1) first and second parties (1) of a product, example e.g. revenue for the producer / satisfaction for the consumer (1). External benefits are enjoyed by a third party (1) not directly involved in the production (1) or consumption process (1) example (1) 4 Maximum 3 marks for only explaining 1 type of benefit. 3(c) Analyse, using a demand and supply diagram, the effects on the world price of oil of the discovery of new reserves of oil. (6) Up to 4 marks for the diagram: Axes correctly labelled – price and quantity or P and Q (1). Original demand and supply curves correctly labelled (1). New supply curve shifted to the right (1). Equilibriums – shown by lines P1, P2 / Q1, Q2: or marking the equilibrium points E1 and E2 (1). Up to 2 marks for written comments: Discovery of new oil will enable an increase in supply (1) price will be lower (1). 6 Question Answer Marks Guidance 3(d) Discuss whether or not the fall in the price of a product is a disadvantage to an economy. In assessing each answer, use the table opposite. Why it might be a disadvantage: • It depends on size of fall in price and elasticity of demand for the product • It depends upon the importance of the product to the economy / how dependent on it • If demand is price inelastic, decrease in total revenue e.g. basic items / necessity, cannot cover the costs, firms may go out of business, less employment opportunities • Less profits, discourages investment, reduces economic growth • Less export revenue, may increase current account deficit • Fall in price may be due to cheaper imports, domestic firms lose out. • The product may be a demerit good which previously was overconsumed. • If the product is part of a deflationary situation, there could be recession / unemployment 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sided of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 Question Answer Marks Guidance 3(d) Why it might not be a disadvantage: • Depends on size of fall and whether it is short or long term • If demand is elastic, increase in total revenue e.g. luxury goods / many substitutes • Increase choices and affordability of product – better living standards • Fall in the price of a raw material may lower cost of production, reducing inflation and increasing economic growth • The product may be a merit good which previously was under- consumed • It may make a basic necessity more affordable – low income groups may be better off • It may be the result of an increase in productivity / a government subsidy • It may make the product more internationally competitive, improving the current account position. Level Description Marks 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at u sing economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

This question in 0455/21 Oct/Nov 2021

5 Some economists criticise high government spending and trade unions for creating market disequilibrium. However, trade unions may also play a key role in economic development. There are over 60 trade unions in Singapore, in both labour-intensive and capital-intensive industries. (a) Define market disequilibrium. [2] (b) Explain the difference between labour-intensive and capital-intensive industries. [4] (c) Analyse how trade unions could increase economic development. [6] (d) Discuss whether or not high government spending can help a government achieve its macroeconomic aims. [8]

20 marks

Mark scheme: 5(a) Define market disequilibrium. When quantity demanded does not equal quantity supplied (2). When there are shortages (1) or surpluses (1) of a product. 2 5(b) Explain the difference between labour-intensive and capital- intensive industries Logical explanation which might include: Labour-intensive industries rely more on human labour (1) i.e. workers (1) low-cost labour may be available (1) example of industry (1) Capital-intensive industries rely more on capital (1) i.e. machines (1) capital more efficient / cheaper than labour (1) example of industry 4 5(c) Analyse how trade unions could increase economic development. Coherent analysis which might include: Trade unions could help engage in collective bargaining on wages (1) higher wages (1) leads to higher purchasing power of workers (1). May increase motivation of workers (1) increase output (1). Better working hours (1) improved working conditions (1) protect workers’ rights (1) better health and safety (1) more job security (1) leads to higher standards of living (1) higher life expectancy (1). Increased productivity / efficiency of workers (1) decreases cost of production (1) decrease final price of goods and services produced in the country (1) increase competitiveness (1) higher output / economic growth (1). May help with training (1) raise quality of output (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not high government spending can help a government achieve its macroeconomic aims. In assessing each answer, use the table opposite. Why high government spending can help a government achieve its macroeconomic aims: • economic growth – increase total demand • full employment/low unemployment – increase demand for workers through more government infrastructure projects • government spending on education may raise workers’ skills and so lower unemployment • balance of payments stability – through subsidies for producers • redistribution of income – through spending on social welfare. Why high government spending cannot help a government achieve its macroeconomic aims: • increased total demand could lead to increase demand-pull inflation • too much government spending could lead to less private investments • overreliance of government subsidies could lead to complacency • high spending on social welfare could discourage the unemployed from trying to find jobs • may be accompanied by higher taxes which could be a disincentive to effort and enterprise • may increase budget deficit which could reduce confidence in the economy. 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sided of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 Question Answer Marks Guidance 5(d) Level Description Marks 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one- sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at u sing economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

This question in 0455/21 Oct/Nov 2021

1 (a) Calculate the number of births in Cyprus in 2019. [1] (b) Identify two indicators of living standards. [2] (c) State why the global market for grapes was in disequilibrium in 2019. [2] (d) Explain two reasons why more well-educated workers tend to work past retirement age than less-educated workers. [4] (e) Analyse how a rise in a country’s retirement age is likely to affect its government’s budget. [4] (f) Analyse the relationship between inflation rates and current account balances. [5] (g) Discuss whether or not, after 2019, Cyprus’s production possibility curve (PPC) is likely to shift to the right. [6] (h) Discuss whether or not adopting capital-intensive production will benefit consumers. [6]

30 marks

Mark scheme: 1(a) Calculate the number of births in Cyprus in 2019. 12 240 (1) 1 1(b) Identify two indicators of living standards. GDP per head / per capita (1). HDI (1). Life expectancy / healthy people (1). Proportion of people in primary sector (1). Level of education / qualifications (1). 2 Do not reward GDP 1(c) State why the global market for grapes was in disequilibrium in 2019. Bad weather / failure of the grape harvest (1) there was a shortage (1) which means demand exceeded supply (1). 2 1(d) Explain two reasons why more well-educated workers tend to work past retirement age than less-educated workers. Logical explanation which might include: Well-paid / good work benefits (1) which provides an incentive to work for longer / high job satisfaction / enter workforce late (1). Healthy (1) and so more able to work for longer / remain productive (1). Work in jobs which do not require physical strength / less tiring (1) older workers tend to be less strong / allows them to continue working as long as remain fit (1). 4 One mark for each of two reasons identified and one mark for each explanation. Question Answer Marks Guidance 1(e) Analyse how a rise in a country’s retirement age is likely to affect its government’s budget. Coherent analysis which might include: A rise in the retirement age / less people retired will reduce the cost of pensions (1) may reduce government spending / government may spend on alternatives e.g., infrastructure, education or health (1). More people in work will increase incomes / businesses expand production (1) raise direct tax revenue (1) spending will increase (1) raise indirect tax revenue (1). 4 Question Answer Marks Guidance 1(f) Analyse the relationship between inflation rates and current account balances. Coherent analysis which might include: Overview: Generally, an inverse relationship / the lower the inflation rate, the higher the current account surplus or the higher the inflation rate, the higher the current account deficit (1). Supporting evidencemax of 2 marks Mongolia has the highest inflation rate (1) and the largest current account deficit (1) Mongolia / Kenya / Nepal have the highest inflation rates (1) all have a current account deficit (1). Iceland / Slovenia have a low rate of inflation (1) but have a current balance of payments surplus (1) Exception: Cyprus lowest inflation rate (1) but a current account deficit / 3rd highest current account deficit (1). Comments: Most of the table shows the expected relationship. (1) Low inflation rates may make products more price competitive / high inflation rates may make prices less price competitive (1) 5 Do not accept current account balance is high or low. Answers need to refer to size of surplus or deficit. Simply using data without explanation is description rather than analysis. Question Answer Marks Guidance 1(g) Discuss whether or not, after 2019, Cyprus’s production possibility curve (PPC) is to shift to the right. Award up to 4 marks for logical reasons why it might, which may include: Quantity / quality of resources may have increased (1) retirement age may have increased (1) people living longer (1) so labour force is likely to have increased (1). Investment may have increased (1) due to low interest rates (1) more capital goods would increase productive capacity (1). Award up to 4 marks for logical reasons why it might not, which may include: Quantity and quality of resources may have decreased (1) land quality is decreasing (1) which will reduce the productivity of land (1). Entrepreneurs may emigrate (1) reducing the supply of enterprise / skilled workers (1). Birth rate is falling (1) size of workforce may fall in future (1) Covid19 may have reduced productivity (1). For recognising that any of these reasons could result in PPC shifting to the left / stay unchanged (1). 6 Apply this example to all questions with the command word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Each point may be credited only once, on either side of an argument, but separate development as to how/why the outcome may differ is rewarded. Generic example Marks Tax revenue may decrease 1 because of reason e.g., incomes may be lower. 1 Tax revenue may increase because incomes may be higher i.e., reverse of a previous argument. 0 Tax revenue may increase because of a different reason i.e., not the reverse of a previous argument e.g., government spending on subsidies may stimulate the economy more than spending on education. 1 Question Answer Marks Guidance 1(h) Discuss whether or not adopting capital-intensive production will benefit consumers. Award up to 4 marks for logical reasons why it might, which may include: It may reduce costs of production / more efficient / may result in economies of scale (1) lower costs may reduce prices (1). It may avoid disruption to supply (1) as no industrial action / strikes (1). It may be quicker / faster (1) to respond to changes in consumer demand (1) It may raise quality (1) as absence of human error (1). Award up to 4 marks for logical reasons why it might not, which may include: Products may be standardised / lack variety (1) individual wants may not be met (1). Capital equipment may break down / costly to maintain (1) causing delays in production (1). Initial high cost of capital equipment (1) may push up prices (1). 6

This question in 0455/21 May/June 2022

3 Leading jewellery firms in Qatar and Ukraine have asked their governments to remove trade protection between them to increase trade in jewellery. The jewellery firms of Qatar and Ukraine produce unique products which are improving in quality. They believe that increased trade between the two countries will enable them to exploit internal economies of scale in jewellery production. (a) Identify two internal economies of scale. [2] (b) Explain two methods of protection in international trade. [4] (c) Analyse, using a demand and supply diagram, the effects of higher quality products on the market for jewellery. [6] (d) Discuss whether or not protection in international trade benefits an economy. [8]

20 marks

Mark scheme: 3(a) Identify two internal economies of scale. Purchasing / buying (1) managerial (1) technical (1) financial (1) risk-bearing (1) labour (1) marketing (1) 3(b) Explain two methods of protection in international trade. Logical explanation which might include:  tariffs (1) are taxes on imports / which would increase the price of imports (1)  import quotas (1) are quantitative limitations on imports / reducing supply of imports (1)  subsidies (1) are grants given to domestic producers (1) to reduce price of domestic products and exports / enable them to compete with foreign goods (1)  embargoes / bans (1) are total restrictions on a product from a country / total restrictions on particular products / usually for political / social reason (1) 4 One mark for each of two methods identified and one mark for each explanation. Question Answer Marks Guidance 3(c) Analyse, using a demand and supply diagram, the effects of higher quality products, on the market for jewellery. Up to 4 marks for the diagram: Axes correctly labelled – price and quantity or p and q (1) Original demand and supply curves correctly labelled (1) Demand curve shifts to the right (1) Equilibriums – shown by lines; P1, Q1 and P2, Q2; or equilibrium points E1 and E2 (1). Up to 2 marks for written comments: Higher quality products will encourage more people to buy jewellery (1) price / quantity will be higher (1). 6 Question Answer Marks Guidance 3(d) Discuss, whether or not, protection in international trade benefits an economy. In assessing each answer, use the table opposite. Why it might be a benefit:  reduce imports – reduce current account deficit  helps infant industries grow – increase competitiveness in the future  helps maintain sunset industries – ensures employment  develop specialisation  help strategic industries – such as defence  restrict imports of demerit goods – such as alcohol Why it might not be a benefit:  increase in the price of goods and services – inflation - decreasing purchasing power of consumers  retaliation – difficult to export goods and services to other countries  increase in cost of production if firms require raw materials / semi- manufactured goods from other countries  complacency – low quality domestic goods and services  may cause unemployment e.g. in industries relying on imported products  if PED is less than one it may not be effective  may encourage smuggling 8 Level Description Marks 3 A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 Question Answer Marks Guidance 3(d) Level Description Marks 2 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 1 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 0 A mark of zero should be awarded for no creditable content. 0

This question in 0455/23 May/June 2022

4 Some firms have social welfare as their main objective. Globally, the number of this type of firm is increasing. Consumers are also starting to change their spending patterns by moving towards environmentally friendly products such as solar energy. Environmentally unfriendly firms are less able to make profits and some of these firms must merge to survive. (a) Identify two examples of social welfare objectives of firms. [2] (b) Explain two types of merger. [4] (c) Analyse, using a demand and supply diagram, the effects on the solar energy industry of the change in spending patterns towards environmentally friendly products. [6] (d) Discuss whether or not a merger can help a firm survive. [8]

20 marks

Mark scheme: 4(a) Identify two examples of social welfare objectives of firms. 2 Accept any reasonable example. Environmental protection (1) Provide jobs to disabled / ex-convicts / minorities (1) Promoting healthy lifestyle (1) Provide basic necessities to local communities (1) Good working conditions (1) 4(b) Explain two types of merger. 4 Accept forward and backward vertical integration for all 4 marks. Horizontal (1) is when two (or more) firms at the same stages of production in the same industry merge (1). Vertical (1) is when two (or more) firms at different stages of production in the same industry merge (1). Conglomerate (1) is when two (or more) firms in different industries merge (1). 4(c) Analyse, using a demand and supply diagram, the effects on the solar 6 energy industry of the change in spending patterns towards environmentally friendly products. Up to 4 marks for the diagram: Axes correctly labelled – price and quantity or p and q (1) Original demand and supply curves correctly labelled (1) Demand curve shifts to the right (1) Equilibriums shown by lines or e.g. E1 and E2 (1). Up to 2 marks for written comments: Changing spending patterns towards greener products will encourage more people to demand solar energy since it is more environmentally friendly and cleaner (1) decreased demand for polluting substitutes such as coal energy (1) price and quantity of solar energy will be higher (1). 4(d) Discuss whether or not a merger can help a firm survive. 8 Level Description Marks In assessing each answer, use the table opposite. 3 A reasoned 6–8 discussion which Why merger can help a firm survive: accurately examines • Merger may enable a firm to take greater advantage of economies of both sides of the scale economic argument, • Merger will enable struggling firm to get more capital injection to enable making use of more production / cover debts economic • Merger will enable transfer of technology from other firms which could information and lead to increase efficiency and productivity clear and logical • Merger will increase awareness of struggling firm and could increase analysis to evaluate demand. economic issues and situations. One Why merger cannot help a firm survive: side of the argument • Mergers could lead to diseconomies of scale which will increase the may have more average cost depth than the other, • Mergers that lacks synergy will make it more difficult for the firm to but overall both operate sides of the • Mergers may eliminate the brand name of the struggling company argument are altogether considered and • Merger will close parts of the firm. developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 4(d) Level Description Marks 2 A reasoned 3–5 discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple 1–2 attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero 0 should be awarded for no creditable content.

This question in 0455/21 Oct/Nov 2022

2 The economic problem results in choices and opportunity cost. People have to decide what job to do and where to live. In recent years Australia has recruited teachers from a number of countries including Canada, the UK and the US. Most of these teachers specialise in a single subject. (a) Define opportunity cost. [2] (b) Explain the economic problem and why it is always likely to exist. [4] (c) Analyse why the wages of all teachers may increase. [6] (d) Discuss whether or not a teacher would benefit from specialisation. [8]

20 marks

Mark scheme: 2(a) Define opportunity cost. 2 The (next) best alternative / choice (1) forgone / sacrificed (1). 2(b) Explain the economic problem and why it is always 4 likely to exist. Logical explanation which might include: The economic problem is finite / limited resources (1) and infinite / unlimited wants / wants exceed resources (1) scarcity (1). It is always likely to exist as wants grow faster than resources / wants are increasing (1) there will never be enough resources to produce all the products people would like to have (1). People are living longer / population is increasing (1) more resources are needed / some resources are being depleted (1). 2(c) Analyse why the wages of all teachers may increase. 6 Coherent analysis which might include: The wages of teachers may increase if demand for teachers rises (1) derived (1) this may be because there are more children to educate / rise in population size (1) smaller class sizes / children staying in education longer (1) teachers being more productive / skilful (1). A decrease in supply will increase wages (1) this may be due to a rise in qualifications needed (1) long period of training (1) rise in wages in other occupations / need to compete with other occupations (1) need to compete with wages paid to teachers in other countries / recruit from higher paying countries (1). Bargaining power of teachers may increase (1) more teachers may belong to trade unions (1) may be more prepared to take strike action (1) wages may be raised to keep up with inflation / maintain real wages (1). Government policy may favour teachers (1) e.g. there may be an increase in school leaving age / increase provision of education (1). Increase in minimum wage (1). 2(d) Discuss whether or not a teacher would benefit from 8 Level Description Marks specialisation. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making use of Why it might: economic information and clear and • may be trained more quickly logical analysis to evaluate economic • become more skilled / productive issues and situations. One side of the argument may have more depth than • may be in higher demand the other, but overall both sided of the • may be better paid argument are considered and • may increase chance of promotion developed. There is thoughtful evaluation of economic concepts, Why it might not: terminology, information and/or data • subject may become less popular appropriate to the question. The • may become bored teaching the same subject discussion may also point out the • if lose job, may find it difficult to get another job possible uncertainties of alternative • may spend a long time developing the specialisation decisions and outcomes. • may not get the opportunity to move into another 2 A reasoned discussion which makes 3–5 subject. use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content.

This question in 0455/22 Oct/Nov 2022

2 Washington State is the state which grows the most apples in the US. In 2019, apple production increased in Washington State but the market was in disequilibrium. Apple farming is a labour- intensive industry because apples are picked by hand. The market for apples in the US is competitive. (a) Define market disequilibrium. [2] (b) Explain opportunity cost and how it can influence a farmer’s decision to grow apples. [4] (c) Analyse how labour-intensive production can benefit an economy. [6] (d) Discuss whether or not consumers benefit from a competitive market. [8]

20 marks

Mark scheme: 2(a) Define market disequilibrium. 2 A market where demand and supply are not equal / balanced / matched (2). A market where there is a surplus / excess supply (1) or a shortage / excess demand (1). 2(b) Explain opportunity cost and how it can influence a 4 farmer’s decision to grow apples. Logical explanation which might include: Opportunity cost is the (next) best alternative / choice / option (1) sacrificed / forgone / given up (1). A farmer could grow another crop (1) size of opportunity cost / choice made is influenced by revenue / cost / profit / resources available / weather (1). 2(c) Analyse how labour-intensive production can benefit an 6 This is a static analysis so do not reward answers that write economy. about higher government revenue and expenditure and rise in total demand and economic growth. Coherent analysis which might include: Labour-intensive production uses a high proportion of labour (1) it may increase employment (1) lower unemployment (1) raise incomes (1) raise standard of living / reduce poverty (1). The country may have a large supply of labour (1) the labour force may be relatively unskilled (1) which is cheap to employ / cheaper than using capital (1) saving money for firms (1) more flexible than capital in adjusting supply (1) less pollution / more environmentally friendly (1). Labour-intensive production may provide individually made products / handcrafted / higher quality (1) raise skills level of workforce (1) may be in high demand internationally (1) increase exports / reduce deficit on current account balance (1). 2(d) Discuss whether or not consumers benefit from a 8 Level Description Marks competitive market. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making use of Why they might: economic information and clear and • give consumers some power logical analysis to evaluate economic • may lower prices issues and situations. One side of the argument may have more depth than • may raise quality the other, but overall both sided of the • increase choice argument are considered and • goods and service may be readily available. developed. There is thoughtful evaluation of economic concepts, Why they might not: terminology, information and/or data • firms may be too small to take advantage of economies appropriate to the question. The of scale discussion may also point out the • firms may not have much profit to invest in research possible uncertainties of alternative and development decisions and outcomes. • there may be wasteful duplication • there may be wasteful expenditure on advertising 2 A reasoned discussion which makes 3–5 • there may a reduction in quality because of cost-cutting use of economic information and clear • there may be too much choice, taking time to make analysis to evaluate economic issues and situations. The answer may lack decisions some depth and development may be • consumers may benefit more from monopoly where one-sided. There is relevant use of economies of scale result in lower prices than in a economic concepts, terminology, competitive market information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content. 2(d) This is a discussion of a market not of an economic system so public goods and merit goods are not relevant.

This question in 0455/23 Oct/Nov 2022

3 In 2019, India became the world’s largest producer of sugar. Sugar cane is grown in the country by a large number of mainly low‑income farmers. They sell sugar cane to mills which process the sugar cane into sugar. Processing the sugar cane is more capital‑intensive than growing it. The Indian government sets a minimum price for sugar cane and subsidises the export of sugar. (a) Define a minimum price. [2] (b) Explain two advantages of capital‑intensive production. [4] (c) Analyse why low‑income farmers are likely to have low living standards. [6] (d) Discuss whether or not a government subsidy on the export of sugar will help it achieve its macroeconomic aims. [8]

20 marks

Mark scheme: 3(a) Define a minimum price. 2 A price set by e.g. government (1) above the equilibrium price (1). A price floor (1) to encourage higher supply (1) will result in a surplus (1). 3(b) Explain two advantages of capital-intensive 4 One mark each for each of two advantages identified and one production. mark each for each of two explanations. Logical explanation which might include: If more than two advantages are given, consider the first three. Lower costs of production (1) can produce on a large scale / may result in lower prices / higher profits (1). Raise productivity / efficiency (1) higher output / can Accepting lower costs of production as overall lower costs. produce faster (1). Nothing for lower labour costs. Quality may increase / consistency of quality may be greater (1) may increase demand (1). Absence of human error (1) less wastage (1). Capital goods can work long hours (1) need few breaks / no need for holidays (1). Capital goods will not take industrial action (1) will not disrupt production (1). Can eliminate boring / repetitive / physically demanding tasks (1) increase workers’ job satisfaction (1). 3(c) Analyse why low-income farmers are likely to have 6 low living standards. Coherent analysis which might include: May be unable to afford basic necessities / may spend a high proportion of income on basic necessities / low purchasing power / low ability to consume goods and services (1). Unable to save much (1) banks reluctant to lend to them (1) examples of items they may need to borrow to buy which could improve their quality of life (1). Unable to afford good quality housing (1) which can result in poor health / overcrowding (1). Unable to afford good health care (1) good nutrition / food (1) more likely to become ill (1) lower life expectancy (1). Unable to afford good education (1) reduce range of interests (1). Unable to buy good capital equipment for farms (1) making work hard (1). May have to reinvest into their farms giving them less to spend (1). May experience poor working conditions / physically demanding work (1) long hours (1) reducing health (1) Live in rural areas (1) which may lack infrastructure (1). 3(d) Discuss whether or not a government subsidy on 8 Level Description Marks the export of sugar will help it achieve its macroeconomic aims. 3 A reasoned discussion which accurately 6–8 examines both sides of the economic In assessing each answer, use the table opposite. argument, making use of economic information and clear and logical analysis Why it might: to evaluate economic issues and • lower price of exports and increase their supply situations. One side of the argument may • increase export revenue and improve the current have more depth than the other, but account balance overall, both sides of the argument are • higher output of sugar can contribute to economic considered and developed. There is growth thoughtful evaluation of economic • more people may be employed in growing sugar concepts, terminology, information and / and processing sugar cane or data appropriate to the question. The discussion may also point out the Why it might not: possible uncertainties of alternative • other countries’ sugar may still be cheaper decisions and outcomes. • may make farmers and mill owners lazy 2 A reasoned discussion which makes use 3–5 • sugar sellers may not lower their prices of economic information and clear • demand for sugar may be price-inelastic analysis to evaluate economic issues • introduction of capital equipment may lower and situations. The answer may lack employment some depth and development may be • other countries may retaliate against the subsidy one-sided. There is relevant use of and so current account position may not be economic concepts, terminology, improved information and data appropriate to the • higher exports may increase total demand question. resulting in inflation • opportunity cost – e.g. spending on education 1 There is a simple attempt at using 1–2 which may be more effective. economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.

This question in 0455/22 Feb/March 2023

1 (a) Calculate the total number of people in Cambridge aged 18–29 in 2019. [1] (b) Identify two types of industries in Cambridge that operate in the tertiary sector. [2] (c) Identify two benefits of having highly knowledge‑intensive exports. [2] (d) Explain how having a more educated labour force can reduce poverty. [4] (e) Draw a demand and supply diagram to show the effects of increased global income on the market for education in Cambridge. [4] (f) Analyse the relationship between the percentage of population aged 25–64 with a university degree and GDP per head. [5] (g) Discuss whether or not free trade is beneficial for a city such as Cambridge. [6] (h) Discuss whether or not firms in Cambridge will continue to grow. [6]

30 marks

Mark scheme: Question Answer Marks Guidance 1(a) Calculate the total number of people in Cambridge aged 18– 1 29 in 2019. 37 440 (1) 1(b) Identify two types of industries in Cambridge that operate in 2 If more than two types are given, consider the first three. the tertiary sector. Education (1). Healthcare (1). Research and development (1). 1(c) Identify two benefits of having highly knowledge-intensive 2 If more than two benefits are given, consider the first exports. three. Exports highly priced (1). Accept high value for highly priced. Price inelastic in demand (1). Increased demand for exports (due to increased global incomes) (1). 1(d) Explain how having a more educated labour force can 4 reduce poverty. Logical explanation which might include: a more educated labour force will be more skilled / more productive (1) enabling them to earn higher wages (1) able to afford basic necessities (1). a more educated labour force may have more job opportunities / less unemployment (1) wages may be higher than unemployment benefits (1). a more educated labour force has access to more information on health (1) increasing the ability to work (1) have access to better healthcare (1). 1(e) Draw a demand and supply diagram to show the effects of 4 increased global income on the market for education in Cambridge. D&S diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). New curve shifted to the right (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). 1(f) Analyse the relationship between the percentage of 5 Responses do not have to be in the format suggested population with a university degree and GDP per head. but they should address the expected / normal relationship, offer supporting evidence of that, highlight Coherent analysis which might include: any exceptions to that, and analyse the overall data. Expected relationship: Positive / direct relationship (1) the higher percentage of population with a university degree, the higher the GDP per head (1). Analysis of expected relationship: as percentage of population with a university degree increases, the more skills / qualification they will have (1) therefore, they have higher productivity and can earn more (1). Supporting evidence: e.g. Indonesia lowest percentage of population with a university degree, lowest GDP per head ; Canada, Switzerland and UK have the highest three in each category; Colombia has the second lowest percentage of population with a university degree and the second lowest GDP per head (2). Exception: Switzerland (1) has lower percentage of population with a university degree than Canada or the UK, but higher GDP per head (1). Analysis of the exception: Other influences, e.g. quality of secondary education, proportion of the population employed in banking (1). 1(g) Discuss whether or not free trade is beneficial for a city 6 Apply this example to all questions with the such as Cambridge. command word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Award up to 4 marks for logical reasons why it might, which may include: Each point may be credited only once, on either side of an argument, but separate development as to how / why • easier to export (1) increased export revenues (1) increased the outcome may differ is rewarded. revenue / profits for producers (1) higher growth in the city (1). Generic example mark • easier to import / more imports (1) cheaper imports of goods and materials / lower costs for firms (1) lower prices (of Tax revenue may decrease… 1 exports) (1). • more jobs created (1) reducing the level of unemployment ...because of reason e.g. incomes may be 1 (1). lower. • increase size of the market (1) economies of scale (1) e.g. purchasing / technical / marketing / managerial / financial Tax revenue may increase because 0 (1). incomes may be higher i.e. reverse of a • increased choice for consumers (1) from increased imports previous argument. (1) higher quality goods / variety of goods (1). • more competition (1) or more transfer of ideas and Tax revenue may increase because of a 1 knowledge (1) leads to more innovation (1) lower prices (1) different reason i.e. not the reverse of a • encourage entrepreneurship / investment (1) profit incentive previous argument e.g. government (1) spending on subsidies may stimulate the economy more than spending on education. 1(g) Award up to 4 marks for logical reasons why it might not, which may include: • overdependence on foreign markets (1) economic shocks in other countries can negatively affect revenues of firms (1) reduce economic growth and development in the city (1). • free trade could reduce competitiveness of firms (1) other economies might have relatively lower costs (1) cheap imports / more imports (1) stop development of infant industries (1) may lead to job losses in the city (1). • free trade only affects certain producers / firms / workers (1) leads to increased inequality / uneven distribution of income (1). • free trade leads to more environmental degradation (1) due to more production / more need for cross-border transport (1) creating external costs / negative externalities (1). • may increase consumption of demerit goods (1) reduce health (1). • free trade could lead to the creation of global monopolies (1). reducing the ability of smaller domestic firms to compete (1). 1(h) Discuss whether or not firms in Cambridge will continue to 6 grow. Award up to 4 marks for logical reasons why it might, which may include: • ease of access to a large amount of highly-skilled and educated workers, from all over the world (1) easy to find workers (1) to produce goods and services (1) or lower cost of labour (1) • skilled workers are more productive (1) more innovation / new ideas / high quality products (1) • young workers (1) may be up-to-date with modern technology (1) • good infrastructure (1) such as access to ultra-fast broadband (1) productivity is higher (1) faster production / less delays (1) • good transport links to other cities and international airports (1) easy to export / high demand for their exports (1) easy to reach customers (1) faster deliveries (1) increased demand for goods and services (1). Award up to 4 marks for logical reasons why it might not, which may include: • high land and office costs (1) high cost of production (1) higher capital start-up costs (1) lower profits (1) • high house prices (1) poor air quality (1) may discourage workers from locating in Cambridge (1) difficult for firms to find workers (1) • small population (1) small market (1) limited demand (1) limited scope for revenue / profits for Cambridge firms (1) • overdependence on one sector (e.g. education) (1) limits potential growth from other sectors (1) • skilled workers are available in other cities (1).

This question in 0455/21 Oct/Nov 2023

2 A third of the world’s ski resorts are located in the Alps. Prices for holidays in the Alps are relatively higher than in other regions. The recent pandemic, however, reduced the revenues of many large and small firms in the tourism industry in the winter season of 2020/2021. Many blamed strict government regulations for this. However, government intervention also helped many firms to survive. (a) State how average revenue is calculated. [2] (b) Explain two advantages of a large firm. [4] (c) Analyse the possible causes of higher prices of a product such as ski holidays in the Alps. [6] (d) Discuss whether or not government intervention is beneficial for firms. [8]

20 marks

Mark scheme: 2(a) State how average revenue is calculated. 2 Accept quantity without ‘sold’ as the divisor. Average revenue = total revenue (1) / quantity sold (1) 2(b) Explain two advantages of a large firm. 4 One mark each for each of two advantages identified and one mark each for each of two explanations. Logical explanation which might include: Accept explanation of two different economies of scale. economies of scale (1) (average) cost lower than smaller firms Credit another example of economies of scale e.g. (1) financial economies. finance / capital available (1) ease of getting loans from banks (1) technological development (1) high productivity (1) large customer base (1) high revenue / profits (1) may be well-known (1) increase brand loyalty (1). 2(c) Analyse the possible causes of higher prices of a product 6 Accept any relevant example of a fall in the price of a such as ski holidays in the Alps. complement e.g. ski equipment, as a reason for higher demand. Coherent analysis which might include: • higher demand / higher popularity (1) from e.g. advertisements / reputation (1) rise in quality (1) rise in price of a substitute / another type of holiday (1) • more inelastic demand (1) quantity demanded less responsive to changes in price (1) e.g, due to higher brand loyalty (1) • higher income of target market (1) luxury good (1) • lower supply (1) e.g. due to better quality (1) • more inelastic supply (1) quantity supplied less responsive to changes in price (1) more regulations (1) • higher cost of production (1) higher labour costs (1) higher minimum wage (1) higher living costs of workers in ski industry (1) • investment in improving facilities e.g. ski lifts (1) may raise costs in the short run (1). 2(d) Discuss whether or not government intervention is 8 Level Description Marks beneficial for firms. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making use of Why it might: economic information and clear and logical analysis to evaluate economic • government could provide subsidies to reduce firms' costs / issues and situations. One side of the help boost output / help during natural disasters / help firms argument may have more depth than survive the other, but overall both sides of the • government could reduce taxes to reduce cost of production argument are considered and • minimum prices could increase revenues of firms developed. There is thoughtful • government spending on education could increase skills of evaluation of economic concepts, workers terminology, information and / or data • government spending on benefits could increase demand appropriate to the question. The for products discussion may also point out the • regulations controlling monopolies could promote possible uncertainties of alternative competition. decisions and outcomes. Why it might not: 2 A reasoned discussion which makes 3–5 use of economic information and clear • government regulations could increase cost of production analysis to evaluate economic issues • minimum wage could add to firms' costs, reducing profits and situations. The answer may lack • indirect taxes or direct taxes could reduce firms’ profits some depth and development may be • maximum prices could reduce firms’ revenues one-sided. There is relevant use of • trade restrictions could limit competition. economic concepts, terminology, information and data appropriate to the question. 2(d) Level Description Marks 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content.

This question in 0455/21 Oct/Nov 2023

5 In 2020, Singapore experienced a decrease in both its population size and its labour force. 2020 was a year of great change in a number of Singaporean markets. Some moved from disequilibrium to equilibrium. Despite all these changes, Singapore managed to increase its exports of goods and services. (a) Identify two benefits of a decrease in a country’s population size. [2] (b) Explain how a market moves from disequilibrium to equilibrium. [4] (c) Analyse, using a production possibility curve (PPC) diagram, the effect of a decrease in the size of a country’s labour force on its economy. [6] (d) Discuss whether or not an increase in exports will benefit an economy. [8]

20 marks

Mark scheme: 5(a) Identify two benefits of a decrease in a country’s 2 population size. Two from: • may be fewer dependents • less pressure on resources • less food needed • move population towards the optimum level / reduce overpopulation • reduce overcrowding / more land space • reduce pollution / less negative externalities • lower imports • lower government expenditure (on healthcare/education) • less unemployment / less unemployment benefit • may increase GDP per head. 5(b) Explain how a market moves from disequilibrium to 4 One mark for reference to a change in price. equilibrium. Maximum of 2 marks for diagrams which show initial Logical explanation which might include: disequilibrium and change in price which restores If demand is greater than supply / there is a shortage / equilibrium. excess demand (1) price will rise (1). If supply is greater than demand / there is a surplus / excess supply (1) price will fall (1). Demand will again equal supply / demand would not initially have been equal to supply (1). 5(c) Analyse, using a production possibility curve (PPC) 6 diagram, the effect of a decrease in the size of a country’s labour force on its economy. Up to 4 marks for the diagram: Axes correctly labelled with different outputs (1). Initial curve drawn as a curve/line sloping downward to the axes (1). New curve drawn as a curve/line sloping downward to the axes (1). Shift to the left indicated by arrow or letters (1). Up to 2 marks for coherent analysis which might include: A decrease in the size of the labour force reduces resources / factors of production available (1) this lowers productive capacity / the maximum output that can be produced (1). Note to gain the marks for the curves, these must be drawn to the axes. 5(d) Discuss whether or not an increase in exports will 8 Level Description Marks benefit an economy. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic argument, making use of economic Why it might: information and clear and logical analysis • may increase export revenue, improve the current to evaluate economic issues and account balance situations. One side of the argument may • may increase total demand have more depth than the other, but • may increase investment overall, both sided of the argument are • may increase output / economic growth considered and developed. There is • may reduce unemployment thoughtful evaluation of economic • may increase incomes. concepts, terminology, information and/or data appropriate to the question. The Why it might not: discussion may also point out the • may cause demand-pull inflation possible uncertainties of alternative • opportunity cost of selling more products on the home decisions and outcomes. market 2 A reasoned discussion which makes use 3–5 • may lead to shortages on the home market of economic information and clear • may deplete resources analysis to evaluate economic issues • may push up the exchange rate, reversing the increase and situations. The answer may lack in exports in the long run some depth and development may be • may make the economy more subject to external one-sided. There is relevant use of shocks. economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no 0 creditable content.

This question in 0455/22 Oct/Nov 2023

1 (a) Calculate Montenegro’s budget deficit as a percentage of its GDP. [1] (b) Identify two examples of capital goods in Montenegro. [2] (c) Explain one way price elasticity of demand may influence firms’ decision making. [2] (d) Explain two ways the pattern of employment has changed in Montenegro in recent years. [4] (e) Draw a demand and supply diagram to show the effect of a minimum price set above the equilibrium price on the market for oranges. [4] (f) Analyse the relationship between countries’ trade in goods and services balances and their current account balances. [5] (g) Discuss whether or not privatisation is likely to have benefited consumers in Montenegro. [6] (h) Discuss whether or not deflation would benefit the Montenegro economy. [6]

30 marks

Mark scheme: Question Answer Marks Guidance 1(a) Calculate Montenegro’s budget deficit as a percentage 1 Calculation is -$0.6 bn divided by $4.8 bn of its GDP. Allow 12.5 12.5%. 1(b) Identify two examples of capital goods in Montenegro. 2 These are the only two capital goods mentioned in the text but accept answers such as telecommunications equipment Computers (1) office buildings (1). and aluminium production factories 1(c) Explain one way price elasticity of demand may 2 One mark for the way identified and one mark for an influence firms’ decision making. explanation. If demand is price elastic / high (1) firms will know that if they Note: source material only mentions demand for holidays as raise price, revenue will fall / if they lower price, revenue will being price-elastic. rise (1). No mark for identifying price-inelastic but do allow second mark that price inelastic demand means if they raise price revenue will rise / if they lower price, revenue will fall. Do not reward impact on demand or on profits 1(d) Explain two ways the pattern of employment has 4 One mark each for each of two reasons identified and one changed in Montenegro in recent years. mark each for each of two explanations. Logical explanation which might include: Note: question requires a reason for the change in pattern Higher proportion of workers employed in the tourism of employment industry / tertiary sector (1) growth in tourism / lower proportion employed in primary and secondary sectors (1). More workers employed in the private sector / commercial banks / telecommunications / aluminium products (1) due to privatisation / less employed in state sector (1). 1(e) Draw a demand and supply diagram to show the effect 4 of a minimum price set above the equilibrium price on the market for oranges. Coherent analysis: Demand and supply diagram: Axes correctly labelled – price and quantity or p and q (1). Original demand and supply curves correctly labelled (1). Minimum Price / Price floor line set above the equilibrium and correctly labelled – accept Pmin or Pm or MP but not P2. Supply shown as greater than demand e.g. labelling of Qd<Qs (1). Note: No mark for showing minimum price if also shows a shift in supply or demand curve as it is no longer above market equilibrium. Ignore all written comments. 1(f) Analyse the relationship between countries’ trade in 5 Allow income for primary income and current transfers for goods and services balance and their current account secondary income. balances. Responses do not have to be in the format suggested but There are two approaches to answering this question: they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, Approach A: Coherent analysis which might include: and analyse the overall data. Expected relationship: MAX 2 marks. Do not accept relationship is directly proportional. Positive / direct relationship (1). Countries which have a deficit on the trade in goods and services balance might be expected to have a deficit on the current account balance (1). Countries which have a surplus on the trade in goods and services balance might be expected to have a surplus on the current account balance (1). Supporting evidence: MAX 2 Marks Three countries / Bosnia & Herzegovina / Kosovo / Montenegro all have a deficit on the trade in goods and service balance also had a deficit on the current account balance (1) two countries / Bulgaria / Slovenia had a surplus on the trade in goods and service balance but also had a surplus on the current account balance (1). Exception: Max 2 marks Croatia (1) had a deficit on trade in goods and services balance but a surplus on the current account balance (1). Approach B: Expected Relationship: Max 2 marks. 1(f) There is no expected relationship as the current account balance contains other items which can either be positive or negative (1) and are not dependent on the trade in goods and services (1). Supporting evidence: Max 2 marks There are 5 countries where the current account balance is higher than the trade in goods and services balance (1) example (1). Exception: Max 2 marks Slovenia (1) where current account balance is worse that trade in goods and services balance / trade in goods and services is $4.6bn but current account balance is only $3.0bn (1). Analysis for both approaches: Max 3 marks Trade in goods and services is the largest component of the current account (1) current account also includes primary income and secondary income (1) Bosnia & Herzegovina, Bulgaria, Croatia, Kosovo and Montenegro must have had a surplus on the primary and secondary income (1) Slovenia must have had a deficit on the primary and secondary income (1). 1(g) Discuss whether or not privatisation is likely to have 6 Apply this example to all questions with the command word benefited consumers in Montenegro. DISCUSS (1g, 1h, 2d, 3d, 4d and 5d) Award up to 4 marks for logical reasons why it might, Each point may be credited only once, on either side of an which may include: argument, but separate development as to how/why the outcome may differ is rewarded. • Firms are profit driven (1) may have increased investment / research & development (1) raising quality Generic Example Marks of goods and services (1) lowered cost of production (1) • more firms entering the market (1) increased Tax revenue may decrease… 1 competition (1) may reduce prices (1) may give more choice to consumers (1) ...because of reason e.g. incomes 1 • firms may respond more quickly (1) to changes in may be lower. consumer demand (1). Tax revenue may increase 0 Award up to 4 marks for logical reasons why it might because incomes may be higher not, which may include: i.e. reverse of a previous argument. • state-owned firms may have been subsidised (1) investment may be now lower (1) Tax revenue may increase 1 • privatised firms may be profit maximisers (1) may because of a different reason i.e. become monopolies (1) and may restrict supply (1) to not the reverse of a previous push up prices (1) lowered quality of goods produced argument e.g. government (1) creates inequality as not all consumers can afford to spending on subsidies may buy (1) stimulate the economy more than • privatised firms may be smaller (1) and so not able to spending on education. take advantage of economies of scale (1) • privatised firms do not take account of external costs (1) Note: The question is about the impact on consumers. Do e.g. pollution (1). not reward answers that relate to the economy or the government. Award one mark for an accurate explanation of what is meant by privatisation. 1(h) Discuss whether or not deflation would benefit the 6 Reward but do not expect explanation of benign and malign Montenegro economy. deflation. Award up to 4 marks for logical reasons why it might, Allow reference to demand-side deflation but not demand- which may include: pull deflation or cost-push deflation as they are not acceptable terms. • could make products more internationally competitive (1) leading to greater exports (1) reducing imports (1) improving the current account balance / reducing a deficit on the current account (1) • if caused by advances in technology / supply side measures e.g. higher labour productivity (1) could increase output (1) and employment (1) and lead to economic growth / higher standard of living (1). Award up to 4 marks for logical reasons why it might not, which may include: • current inflation rate is only 0.4% (1) • greater uncertainty (1) could discourage consumer spending / investment by firms (1) as households and firms could expect prices to fall further (1) • if caused by a fall in total demand (1) could reduce output (1) and causing recession (1) firms make losses / go out of business (1) could cause more unemployment (1) and unemployment is already high at 18% (1) • could increase a budget deficit (1) due to lower tax revenue from lower sales taxes / income taxes (1) increase in unemployment benefits (1). Award one mark for an accurate explanation of what is meant by deflation e.g. a fall in the price level is sufficient here.

This question in 0455/23 Oct/Nov 2023

2 Unemployment in the United Kingdom (UK) fell in December 2021 to 4.1%. Market forces would usually mean that wages would increase due to this lower unemployment. However, workers’ living standards did not increase. New international trade deals were not made fast enough to offset the decreasing trade between the UK and the European Union. (a) Identify two ways of measuring unemployment. [2] (b) Explain two factors that could influence living standards, apart from unemployment rates. [4] (c) Analyse how market forces can increase wages. [6] (d) Discuss whether or not free trade between countries increases economic growth. [8]

20 marks

Mark scheme: 2(a) Identify two ways of measuring unemployment. 2 claimant count (1) (labour force) survey (1) 2(b) Explain two factors that could influence living standards 4 One mark for each factor identified and one mark for each apart from unemployment rates. explanation. Logical explanation which might include: Accept arguments which describe reasons for either • income / wage levels (1) higher wages allow people to low / high living standards. afford more goods and services (1) • education (1) high education levels lead greater skills Accept answers that give HDI (1) with reference to either and to better paid jobs / lead to high human GDP per head, education or health. development index (1) • health standards / healthcare (1) high health standards lead to better enjoyment of life / less illness / better well- being (1) • cost of living / inflation rate (1) affecting purchasing power (1) • working hours (1) lower working hours gives more leisure time (1) • hygiene / sanitation (1) good water quality prevents diseases (1) • environmental standards (1) e.g. pollution reduces quality of life (1) • availability of public / merit goods (1) e.g. street lights / parks (1) • crime rates (1) low crime rates improve safety / quality of life (1) 2(c) Analyse how market forces can increase wages. 6 Reward, but do not expect, answers that analyse this question using elasticity of demand and supply. Coherent analysis which might include: • an increase in demand (1) for labour (1) may increase wages if the demand for a product increases (1) i.e. derived demand (1), there will be an increase in demand for workers producing that product (1) for example, if price of substitutes such as robots increases, there will be an increase in the demand for human labour (1) • a decrease in supply (1) of labour (1) may increase wages if it is caused by a decrease in the labour force (1) or a decrease in number of people qualified / having skills in that occupation (1). 2(d) Discuss whether or not free trade will increase 8 Level Description Marks economic growth. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making Why it might: use of economic information and • may enable countries to specialise on what they are clear and logical analysis to best at producing evaluate economic issues and • higher competition may increase productivity and lower situations. One side of the costs of production, increasing demand for their argument may have more depth products than the other, but overall both • may enable firms to buy raw materials and capital sides of the argument are goods at a lower price considered and developed. There • may give firms access to larger markets, enabling them is thoughtful evaluation of to expand output. economic concepts, terminology, information and / or data Why it might not: appropriate to the question. The • may prevent infant industry from growing discussion may also point out the • may speed up the closure of declining industries possible uncertainties of • may replace domestic output with imports alternative decisions and • may reduce tax revenue outcomes. • firms may gain monopoly power and may restrict output • firms may engage in unfair competition e.g. dumping. 2(d) 2 A reasoned discussion which 3–5 makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded 0 for no creditable content.

This question in 0455/21 Oct/Nov 2024

2 In the first half of 2022, Guyana’s GDP grew by 36.4%. Most of this growth was due to higher output in the primary sector. The government used some of the tax revenue generated from this growth to fund long‑run development projects such as infrastructure and education. However, in the short run, there was a rise in house prices. (a) Identify two examples of primary sector industries. [2] (b) Explain two causes of rising GDP. [4] (c) Analyse why house prices may increase. [6] (d) Discuss whether or not increased government spending on education will lead to economic development. [8]

20 marks

Mark scheme: 2(a) Identify two examples of primary sector industries. 2 If more than two primary industries are given, consider the first three. Two from: Accept two specific examples, e.g. growing wheat, catching • farming / agriculture tuna, but not from the same industry. • mining • fishing • forestry 2(b) Explain two causes of rising GDP. 4 One mark each for two causes identified and one each for two explanations. Logical explanation which might include: Only reward increase in total demand once. • increased consumption (1) decrease in taxes (1) such as income tax / corporation tax (1) increased disposable income /profits (1) • increase in investment (1) leading to increase in total demand (1) • increase in government spending (1) e.g. spending on infrastructure (1) increasing total (aggregate) demand in the economy (1) • improvements in technology (1) increase in productivity (1) • increase in the quantity (1) and quality of factors of production (1) e.g. increase in size of labour force (1) improved labour skills (1) increase in productive capacity of the economy (1) • decrease in interest rates (1) cost of borrowing falls (1) borrowing increases (1) • decreases in exchange rate (1) price of exports falls / price of imports rises (1) increase exports / decrease imports / increase net exports (1). 2(c) Analyse why house prices may increase. 6 MAXIMUM 4 MARKS for identification of reasons without analysis in terms of demand and / or supply. Coherent analysis which might include the following. Increase in demand (1) due to lower interest rates (1) increasing borrowing for house purchases (1) higher population (1) higher incomes (1) increasing ability to purchase houses (1) higher confidence (1) increasing willingness to buy houses (1). Decrease in supply (1) reduction in subsidies on new house building (1) increased taxation on housing (1) government building fewer houses (1) stricter planning regulation (1) land is used for other things e.g. infrastructure (1). Increasing cost of production of new houses (1) cost of labour (1) cost of raw materials (1) cost of land (1) increased costs passed on to buyers of houses as higher prices (1). Less government intervention (1) removal of price controls (1). 2(d) Discuss whether or not increased government spending 8 Level Description Marks on education will lead to economic development. 3 A reasoned discussion which 6–8 In assessing each answer, use the table opposite. accurately examines both sides of the economic argument, making use Why it might: of economic information and clear and logical analysis to evaluate • increase skills / qualifications / knowledge economic issues and situations. One • increase job opportunities side of the argument may have more • encourage more investments depth than the other, but overall, • increase productive capacity both sides of the argument are • reduce consumption of demerit goods considered and developed. There is • improved health / life expectancy thoughtful evaluation of economic • higher HDI concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 2 A reasoned discussion which makes 3–5 use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 2(d) Why it might not: Level Description Marks • takes a long time to have an impact on the economy 1 There is a simple attempt at using 1–2 • financial cost of government spending e.g. taxation / economic definitions and borrowing terminology. Some reference may be • opportunity cost e.g. health spending made to economic theory, with occasional understanding. • reduced benefit to the economy if there is emigration of skilled workers / net migration is negative 0 A mark of zero should be awarded 0 • government might spend the money inefficiently for no creditable content. • education programmes may be ineffective.

This question in 0455/21 Oct/Nov 2025

2 Some markets in Belgium are in equilibrium. The country produces a wide range of goods and services with different degrees of price elasticity of demand. The Belgian Government wants the economy to move to a production possibility point beyond its current production possibility curve (PPC). Belgium’s scientific industry is one industry which is doing well. Workers in this industry are highly specialised. (a) Define market equilibrium. [2] (b) Explain two ways an economy could reach a point outside its current PPC. [4] (c) Analyse how price elasticity of demand can influence a firm’s pricing decisions. [6] (d) Discuss whether or not firms benefit from their workers undertaking training. [8]

20 marks

Mark scheme: 2(a) Define market equilibrium. 2 Demand equalling supply (2). No shortage (1) no surplus (1). Balance of demand and supply (2). 2(b) Explain two ways an economy could reach a point 4 One mark each for two ways identified and one mark each outside its current PPC. for two explanations. Logical explanation which might include the following. If more than two reasons are given, consider the first three. • Increase investment (1) devoting more resources to capital goods (1). • Encourage immigration (1) increase size of the labour force (1). • Land reclamation (1) creating more land on which to e.g. grow crops (1). • Increase in education and training (1) raise quality / efficiency / productivity of labour (1). • Increase spending on research and development / new technology (1) increase quality / efficiency / productivity of capital (1). • Discovery of sources of resources (1) example/enables extra output to be produced (1). 2(c) Analyse how price elasticity of demand can influence a 6 Reward, but do not expect: firm’s pricing decisions. Facilitate price discrimination (1) charging higher prices in Coherent analysis which might include the following. markets with inelastic demand (1) valid example, e.g. higher rail fares at peak times (1). Price elasticity of demand is a measure of the responsiveness of demand to a change in price (1). If demand is elastic, a rise in price will cause a greater percentage change in demand (1) may indicate the firm’s product has close substitutes / is not a necessity / takes a significant proportion of consumers’ incomes (1) may encourage firms to lower price (1) raise revenue (1). If demand is inelastic, a rise in price will cause a smaller percentage change in demand (1) may indicate the firm’s product has few substitutes / is a necessity / takes a small proportion of consumers’ incomes (1) may encourage firms to raise prices (1) revenue would increase (1). 2(d) Discuss whether or not firms benefit from their workers 8 Level Description Marks undertaking training. 3 A reasoned discussion which accurately 6–8 In assessing each answer, use the table opposite. examines both sides of the economic argument, making use of economic Why they might: information and clear and logical • may increase productivity analysis to evaluate economic issues • may enable workers to work with more advanced and situations. One side of the technology argument may have more depth than • may lower costs of production the other, but overall, both sides of the • may be able to fill promoted posts argument are considered and • reduce waste developed. There is thoughtful • raise quality of output evaluation of economic concepts, • training may be provided by the government at no direct terminology, information and/or data cost for firms. appropriate to the question. The • increase workers motivation, reducing labour turnover discussion may also point out the • increase flexibility to cover absences. possible uncertainties of alternative decisions and outcomes. Why they might not: • if the firms provide the training, increase costs / 2 A reasoned discussion which makes 3–5 use of economic information and clear opportunity cost • output may fall while workers are being trained analysis to evaluate economic issues and situations. The answer may lack • training may not be successful some depth and development may be • trained workers may demand higher wages one-sided. There is relevant use of • trained workers may leave to work for other firms – economic concepts, terminology, other firms will gain the benefits of the training. information and data appropriate to the question. 2(d) Level Description Marks 1 There is a simple attempt at using 1–2 economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for 0 no creditable content.

This question in 0455/22 Oct/Nov 2025