Market structure — Paper 2 — IGCSE Economics 0455 topical questions

Question 1

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, bu…

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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.

Question 2

Indonesia’s output is influenced by its factors of production. A production possibility curve diagram can be used to show this relationship…

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2(a) Identify the two human factors of production. • Labour (1) entrepreneur/enterprise (1). 2 2(b) Explain two economic concepts shown by a production possibility curve diagram. 1 mark each for each of two concepts identified: • opportunity cost • scarcity/economic problem/unlimited wants and limited resources • choice • efficiency/full employment • specialisation • economic growth/the difference between actual and potential economic growth 1 mark each for each of two explanations given: • The curve shows that if more of one type of product is produced, less of another product can be made • The curve shows that there is a limit to the amount that can be produced with existing resources/maximum output of two products • The curve shows that more than one production point cannot be selected • Any point on the curve is efficient/any point inside the curve is inefficient • The curve shows the maximum amount of a product that can be produced if all resources are devoted to one good • Economic growth is shown by a shift to the right of the curve/actual growth is shown by a movement towards the curve and potential growth by a shift to the right 4 Maximum of 2 marks for a list- like approach. Only reward the use of a diagram if the concepts are clearly shown and linked to an explanation. Accept limited resources as an alternative to scarcity. Question Answer Marks Guidance 2(c) Analyse why demand for a product may become more elastic over time. • More substitutes may be available for the product (1) due to more firms/more competition/more innovation/improved versions (1) which means people are more willing to switch to and from the product (1) • The product may be seen to be more of a luxury (1) and less of a necessity (1) • Demand becomes more price sensitive the higher the price (1) as the product becomes less affordable (1) • The product may become less habit forming (1) addictive products have price inelastic demand (1) • It may become easier to postpone purchasing the product (1) so a rise in price may result in more consumers delaying its purchase (1) • The product may take up a higher proportion of income (1) change in price would become more significant (1) • Demand will become more price sensitive as the price of complements rises (1) as the two products combined become less affordable (1) 6 Maximum of 3 marks for a static approach e.g. demand is elastic when there are substitutes. Question Answer Marks Guidance 2(d) Discuss whether small firms can compete successfully against large firms. Up to 5 marks for why they might: • May provide a personal service (1) operate in a niche market (1) may be more in touch with consumers (1) may be more adaptable/flexible in response to changes in consumer demand (1) • May be subsidised by the government (1) which would reduce costs of production (1) allowing small firms to charge lower prices (1) • May be operating in an industry where economies of scale are not significant (1) or there are diseconomies of scale (1) raising average cost (1) example (max 2) • May be able to take advantage of external economies of scale (1) reducing average cost (1) example (max 2) Up to 5 marks for why they might not: • Large firms may benefit from economies of scale (1) enjoy lower average costs (1) example (max 2) • Large firms may take over small firms (1) may drive small firms out of business by charging lower prices (1) • Large firms may have more market power (1) use barriers to entry (1) drive firms out of the industry by e.g. using predatory pricing (1) • Large firms may be better known (1) have brand loyalty (1) • Large firms may have more finance (1) which may enable them to purchase more efficient capital/machinery/technology (1) spend more on advertising (1) 8 A response may develop a mixture of relevant points to achieve up to 5 marks on either side. Do not credit references to just ‘costs’ in relation to EoS/DoS. 1 mark may be awarded for small firms and large firms are able to charge lower prices, if explained separately. Maximum of 2 marks on each side of the discussion for a list- like approach.

Question 3

2015 saw more than US$4000 billion-worth of mergers worldwide, many in the USA and the UK. Some mergers occur between firms in different co…

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4(a) Define ‘conglomerate integration’ A merger (1) between firms producing different products (1). 2 4(b) Explain why firms in a perfectly competitive market are price-takers. • No one firm can change market price/one firm’s output is insufficient to influence price (1) price takers have to accept the market price (1) • If one firm raises its price it will lose all of its customers (1) as demand for its products will be perfectly elastic (1) all the products of the firms in the industry are homogeneous/perfect substitutes for each other (1) price will not be lowered (1) as the firms will be able to sell any quantity they want at the market price (1) • Perfect information (1) so no consumer will be willing to pay one firm’s higher price (1) 4 4(c) Analyse the causes of an increase in a country’s exchange rate. • Change in market conditions for a floating exchange rate (1) • Increase in demand for the currency (1) cheaper exports/higher quality exports (1) may lead to greater demand for exports (1) higher interest rates may increase demand for financial investment (1) there may be speculation that the currency may rise further (1) • Decrease in supply of the currency (1) more expensive imports/poorer quality imports/trade barriers (1) may lead to lower demand for imports (1) lower interest rates may cause inward financial investment (hot money) to fall (1) • Government decision to raise the value of the currency (1) for a fixed exchange rate (1) 6 Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 4(d) Discuss whether a large firm will always have lower average costs of production than a small one. Up to 5 marks for why they might: • May be able to take advantage of economies of scale (1) purchasing/buying economies – receiving discounts from buying in bulk (1) • technical – using large scale capital equipment (1) • managerial – employing specialists (1) • selling – e.g. lower transport costs (1) • financial – borrowing at lower interest rates (1) • research and development – running a department to develop new products (1) • Large firms spread fixed costs over high output, reducing AFC (1) • Large firms may have access to cheap labour abroad (1) Up to 5 marks for why they might not: • May experience diseconomies of scale (1) raising average cost (1) • problems managing the firms (1) poor communication (1) • poor industrial relations (1) • involve an opportunity cost (1) • may have to switch resources from producing consumer goods (1) • lower living standards in the short run (1) • Large firms are less likely to receive government support (1) in the form of a subsidy (1) • Large firms may pay higher rates of tax (1) adding to average costs (1) corporation tax is progressive (1) 8 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. Accept advantages of small firms over large firms, e.g. government support.

Question 4

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 b…

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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).

Question 5

Qatar is a growing economy and has benefited from the expansion of the insurance industry. This industry is currently dominated by one firm…

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3(a) Define ‘perfect competition’. 2 Very high level of competition (1) firms are price takers (1) many buyers and sellers (1) free entry and exit (1) homogeneous / same product (1) perfect information (1) 3(b) Explain two influences on the size of firms. 4 1 mark each for each of two influences identified: • size of market • availability of finance/capital • type of business organisation • influence of government policies • age of firms • skills of entrepreneurs • goals of entrepreneurs. 1 mark each for each of two explanations given: • the higher the demand for the product/greater the value of sales, the larger the firm is likely to be • firms that can borrow, sell shares or have high profits are able to expand • a MNC will be larger than e.g. a sole trader • a government may run large state-owned enterprises/operate restrictions on mergers • older firms tend to be larger than younger firms • firms run by skilful entrepreneurs are likely to be larger than those run by less skilful entrepreneurs • entrepreneurs may want the firm to remain small to keep control / may want it to be large to e.g. gain economies of scale. 3(c) Analyse the causes of an increase in labour productivity. 6 Improved education/training (1) workers will be skilled/specialised (1) capable of producing a higher output per hour (1). Advances in technology (1) better quality of capital goods (1) with more and better capital goods workers can produce more (1). Better working conditions (1) contented workers may be more productive (1). Better health (1) healthier workers can produce more (1) Higher wages (1) may motivate workers more (1). Fall in employment (1) the less productive workers tend to lose their jobs first (1) the more productive workers will remain (1). 3(d) Discuss whether a country which engages in free trade is likely to 8 have a higher economic growth rate than one which uses trade protection. Up to 5 marks for why it might: It may enable countries to concentrate on what they are best at (1) making best use of their resources/specialisation (1). Greater exports bring in foreign revenue (1) contributing to economic growth (1). Unrestricted competition may improve efficiency of firms (1) increase sales (1) increase output (1). Firms will have more sources of raw materials (1) may lower production costs (1) lower prices (1) increase international competitiveness (1) make firms more price competitive (1). Capital equipment / new technology can be imported (1) gaining new ideas (1) improving production (1). Firms may be able to grow (1) take advantage of economies of scale (1) lower average costs (1). May attract MNCs (1) that contribute to economic growth (1). Note: reward but do not expect reference to comparative or absolute advantage. Up to 5 marks for why it might not: May make it difficult for infant industries to grow (1) unable to compete (1) because too small to take advantage of economies of scale (1). May result in declining industries going out of business (1) no longer contributing to output/GDP (1). Foreign firms may dump products in the country (1) selling at less than cost price (1) may drive domestic firms out of business (1).

Question 6

In Saudi Arabia, output of cement has risen as a result of an increase in demand from the construction industry for building houses, school…

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2(a) Define ‘demand’. The willingness/desire/want (1) and ability to buy a product (1) in a given period (1). 2 2(b) Explain two reasons why a country might want to restrict exports. 1 mark each for each of two reasons identified: • keep prices low on home market • prevent stocks running out • maintain monopoly of raw materials • reduce balance of payments surplus / reduce demand-pull inflation • raise price of exports. 1 mark each for each of two explanations given: • reducing exports may increase supply on the home market • a government may want to conserve e.g. oil for future generations to enjoy • reducing exports of raw materials that are found mainly in the country may mean that other countries/firms will not be able to produce the product • may increase export revenue if demand is inelastic. 4 2(c) Analyse how information on price elasticity of demand for its product can influence a firm’s pricing decisions. If a firm knows that demand for its products is price-elastic (1) it will know a fall in price will cause a rise in revenue (and vice versa) / percentage price change causes a bigger percentage change in demand (1). It will also know that its products probably have close substitutes (1). If it knows demand for its products is price-inelastic (1) it will know a rise in price will cause a rise in total revenue / percentage change in price is greater than percentage change in demand (1). It will also know its products probably do not have close substitutes (1). If it knows that demand for its products have unit price elasticity of demand (1) it will know that its revenue will not change if it changes price (1). It is difficult to calculate PED (1) firms may use other factors to determine price (1). 6 Question Answer Marks Guidance 2(d) Discuss whether a merger of two firms in the same industry will be likely to reduce the price of the product. Up to 5 marks for why it might: A horizontal merger may allow the firm to enjoy economies of scale (1) example/s (2) lower average costs (1) enabling the firm to lower prices and maintain/increase profit / pass on savings (1). A horizontal merger may allow a firm to rationalise (1) to cut out duplication (1). Up to 5 marks for why it might not: A merger may result in a firm experiencing diseconomies of scale (1) example/s (2) higher average costs (1). A merger may increase market share / power / firm becomes a price maker (1) reducing competition (1) making demand price-inelastic (1) prices may rise rather than fall (1). 8

Question 7

Banking and unemployment in Morocco Morocco’s banking industry has been described as one of the best in Africa. It has some of Africa’s lar…

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1(a) Identify, using information from the extract, TWO functions of a commercial bank. Providing savings accounts (1) lending (1) setting interest rates on loans (1). 2 just look at the first three. 1(b) Explain, using information from the extract, TWO reasons why the banking market in Morocco is NOT an example of perfect competition. Three banks control more than two-thirds of the market (1) implies high % of market/dominance/not large number of small firms/ price maker (1). The banks use brand names (1) there is no advertising/no brand loyalty in perfect competition (1). Set own interest rates (1) in perfect competition, firms are price takers/prices determined by the market (1). Provide different services (1) the product is homogeneous in perfect competition (1). 4 1(c) Analyse why a commercial bank may prefer to sell its services in foreign countries rather than its home country. It may make more profit (1) demand for banking services may be higher (1) demand may be falling in home country but rising abroad (1) due to e.g. higher incomes/larger population (1) less competition (1). Costs of production may be lower abroad/efficiency higher (1) due to e.g. lower rents/lower wages (1). There may be a greater availability of skilled labour abroad (1) due to better education (1). Foreign governments may provide subsidies (1) have lower rates of tax (1). Unfavourable domestic policies (1) e.g. restrictions on the money supply (1) limits the bank’s ability to make profits domestically (1). Selling services abroad may help to reduce risks (1). 5 1(d)(i) Analyse whether the information in Fig.1 supports the view that: (i) countries with high population growth rates have a high unemployment rate Generally no (1) supporting evidence e.g. countries with the highest population growth rate, Uganda and Benin, had the lowest unemployment rates (1). 2 Accept any relevant country evidence. Question Answer Marks Guidance 1(d)(ii) Analyse whether the information in Fig.1 supports the view that: (ii) the youth unemployment rate is usually twice that of the overall unemployment rate. Generally yes (1) Supporting example (1) Egypt is the exception (youth unemployment rate almost four times as high) (1). Morocco is exactly twice (1) no other country is exactly twice (1). 2 1(e) Discuss whether or not older workers are always paid more than younger workers. Up to 3 marks for why older workers may be paid more: Older workers may have been with a firm for a long time (1) may have gained promotion (1) developed skills (1) gained experience (1) may have undertaken training (1) may be in managerial jobs (1) may be more productive (1). Up to 3 marks for why older workers may not be paid more: May be less productive (1) less fit for physical work (1) may be out of date with new technology (1) lack new ideas (1) may have had less education in the past (1). May be less occupationally mobile (1) less willing/able switch jobs (1). May be less geographically mobile (1) less willing/able to move in search of higher paid employment (1). 5 Accept skills or efficiency on either side. One mark if given on both sides. More marks can only be awarded if a reason for better skills is given. 1(f) Explain, using information from the extract, ONE reason why a relatively poor country may have a low unemployment rate. A large proportion of its population is employed in agriculture (1) in subsistence farming (will employ family members) (1) labour-intensive (1) would employ a high proportion of labour (1) relative to capital (1) Lack finance to invest in new (labour-saving) technology (1). No specific skills required for (subsistence) agriculture / low entry requirements for unskilled (1). 4 Question Answer Marks Guidance 1(g) Discuss whether or not commercial banks in Morocco would benefit from further mergers. Up to 4 marks for why they might: The merger would give the banks / firms more market power (1) a relatively quick way to grow (1) may be able to raise price (1) without losing too many customers (1). It could be a horizontal merger (1) which may enable greater advantage to be taken of economies of scale (1) example (1) lower (average) costs (1) lower prices / increased demand (1) higher profit (1). Up to 4 marks for why it might not: The reduction in competition may make the banks / firms complacent (1) may not try to keep costs down (1). The firms may experience diseconomies of scale (1) example (1) higher (average) costs (1) higher prices / reduced demand (1) lower profit (1). Costs of integrating firms such as redundancies/loss of morale (1). Large firms may lose customers due to lack of personal touch (1). 6 Accept profits and/or costs on either side. One mark if given on both sides. More marks can only be awarded if a reason for change in profits is given.

Question 8

Swaziland is a small African country where six in ten people live in poverty and most firms are small and use little capital equipment. In …

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2(a) What may be the opportunity cost of building an airport? Opportunity cost is the (next) best alternative foregone (1). Relevant example e.g. building a hospital (1). 2 2(b) Explain two reasons why a government would want to turn its country from a developing into a developed country. Developed countries tend to have higher GDP/output/economic growth (1) reduces poverty (1) Developed countries tend to have higher living standards (1) due to earning higher incomes / higher GDP per head (1) Developed countries may have better education (1) e.g. resulting in more skilled workers (1) so improving productivity (1). Developed countries tend to have better healthcare (1) resulting in longer life expectancy / lower death rate (1). Developed countries tend to have more economic power (1) stronger in international negotiations (1). Developed countries tend to have a higher proportion of workers employed in the tertiary sector (1) which may mean better working conditions (1). Tax revenue may be higher (1) enabling more government expenditure (1). 4 Accept response from the perspective of the disadvantages of developing countries. Accept any reason that is linked to improved macroeconomic performance or improved living standards. 2(c) Analyse the external costs that can be caused by the building and expansion of an airport. External costs are harmful effects on third parties / social costs minus private costs (1). Building and operating an airport will cause noise pollution (1) air pollution (1) which will be experienced by those living near the airport (1) reducing their health (1). Traffic congestion may be caused (1) delaying people’s journeys (1). The prices of houses close to the airport may fall (1) reducing local residents’ wealth (1) local residents may be displaced (1). Train companies may lose revenue (1) as people switch from train travel to air travel (1). Environmental damage / global warming (1) e.g. loss of wildlife habitats (1). 6 Accept pollution on its own as one example. Also allow visual pollution, but maximum of 2 marks for types of pollution. Question Answer Marks Guidance 2(d) Discuss whether people would prefer to buy a product from a small firm or a large firm. Up to 5 marks for why they might prefer to buy from a small firm: May be flexible (1) quick to respond to changes in consumer demand (1) as do not have to consult others (1). May provide a personal service (1) can get to consumers and their requirements (1) adapt to particular requirements (1). May be specialised (1) produce high quality products (1). Small firms may receive government subsidies (1) enabling them to keep price low / quality high (1). Unlikely to experience diseconomies of scale (1) example (1). Up to 5 marks for why they might prefer to buy from a large firm: Lower prices (1) due to lower costs (1) because of economies of scale (1) example (1). Better known brands (1) due to advertising (1). Wider variety (1) better quality (1) better after sales (1) due to more funds to invest (1). 8 Accept response from either perspective. Accept better quality for either side, but only one mark if given on both sides. More marks can only be awarded if it is established why there may be better quality.

Question 9

In the UK, bus journeys outside London have fallen by nearly 40% since 1980. This fall in demand has been largely due to a rise in bus fare…

Accepted Answer

4(a) Define a substitute and give an example. A rival product / a product that can be used instead of another (1) e.g. bus travel and car travel / oranges and apples (1). 2 4(b) Explain two advantages a firm may gain from being a monopoly. May be able to charge high prices / price maker (1) due to lack of competition (1) enabling it to earn a high profit (1). May produce at lower costs (1) due to economies of scale / charge lower prices (1). May produce high quality products (1) as high profits enable it to invest and innovate (1). May be able to compete with foreign firms (1) gain a wider market / export more (1). May have stronger bargaining power with suppliers (1) keeping costs low (1). 4 4(c) Analyse how price elasticity of demand for a product influences the revenue a firm receives. Formula or definition of PED (1). If demand is elastic, a rise in price will cause a fall in revenue (1) because the quantity demanded will fall by more than the rise in price (1) in percentage terms (1) example of type of product with elastic demand e.g. a luxury (1). If demand is inelastic, a rise in price will cause a rise in revenue (1) because the quantity demanded will fall by less than the rise in price (1) in percentage terms (1) example of a product with inelastic demand e.g. one without a substitute (1). If demand is perfectly inelastic, a rise in price will cause an equally proportionate rise in revenue (1) because the quantity demanded will not change (1). If demand is perfectly elastic, a rise in price will cause revenue to fall to zero (1) because people will stop buying the product (1). If demand is unitary, a rise in price will leave total revenue unchanged (1) as the proportionate change in quantity demanded and price will be the same (1). 6 Accept as reasons why demand may be price- elastic, availability of substitutes and why demand may be price- inelastic, lack of substitutes. Question Answer Marks Guidance 4(d) Discuss whether or not a government should subsidise bus transport. Up to 5 marks for why it should: A subsidy will lower costs, (1) it may encourage a rise in bus travel (1) reducing bus fares (1). It may reduce poverty / redistribute income (1) the poor tend to use buses more than the rich (1) better quality travel (1). Bus travel creates fewer external costs than car travel (1) reduce pollution (1) reduce traffic congestion (1) increase employment / reduce unemployment (1) increase labour mobility (1). Up to 5 marks for why it should not: It will involve an opportunity cost (1) the government might instead spend more on e.g. education / raise taxes (1). Bus companies may not pass on the subsidy to passengers (1) subsidies may make bus companies complacent (1) not try to keep their costs low (1) may not improve quality (1). Rail transport may be more efficient (1) may provide more social benefits (1) generate lower social costs (1). 8 Reward but do not expect reference to bus transport being a merit good.

Question 10

The production process in the oil industry is capital-intensive. The pollution it generates means it is one cause of environmental market f…

Accepted Answer

6(a) Identify two features of a capital-intensive production process. Process which relies heavily on capital goods e.g. machines (1) does not use much labour (1) relies less on other factors of production e.g. land (1). 2 6(b) Explain how market failure might occur in the oil industry. Market failure is when there is an inefficient allocation of resources (1). There is over-consumption / over-production of oil (1) because the external costs (1) are ignored by the market mechanism (1), such as pollution / global warming / harm to the environment (1). There are cases of monopoly power (1) restricting output (1) pushing up price (1). 4 Question Answer Mark Guidance 6(c) Analyse, using a production possibility curve (PPC) diagram, the effect of reallocating resources from kerosene to LPG. Award up to 4 marks for a correct diagram: • Axes labels LPG and kerosene (1) • Curve / downward sloping line drawn to axes (1) • Two production points illustrating increased production of LPG (1) • New production point indicated (1) Award up to 2 marks for associated explanation: Reallocating resources will involve a movement along the PPC (1) this will involve an opportunity cost (1). 6 Accept points on the curve with arrow from A to B. kerosene LPG K1 L1 L2 K2 A B Question Answer Mark Guidance 6(d) Discuss whether or not removing a firm’s monopoly power will benefit consumers. Up to 5 marks for why it might: More choice for consumers (1) improved competition (1) will causes prices to fall (1) which will increase consumers’ real disposable income (1). The monopoly may be experiencing diseconomies of scale (1) with high (average) costs of production (1) Quality is likely to improve (1) as firms will innovate in order to win customers (1). Competition will force firms to be more efficient in order to survive (1). They will look to reduce costs in order to remain competitive (1) and will invest in research and development to maintain market share (1). Up to 5 marks for why it might not: A monopoly firm can take advantage of economies of scale (1) reducing (average) costs of production (1) example (1) the removal of monopoly power may increase prices for consumers, reducing their welfare (1) Consumers may rely upon the reputation of a monopoly (1) for quality / customer service (1) too much choice can lead to confusion / inconvenience for consumers (1). The firm may be state owned (1) may take into account the full social costs and benefits (1) may have charged low prices (1) to make products affordable (1). 8

Question 11

Productivity has fallen recently in Finland particularly in the public sector. The country has a relatively high number of small firms. In …

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5(a) What is the difference between the private sector and the public sector? The private sector is the part of the economy where market forces / price mechanism / producers and consumers’ decisions allocate resources (1) firms are owned by private individuals (1). The public sector is the part of the economy where the government makes the decisions / government controlled / government-owned firms (1). 2 5(b) Explain two reasons why productivity may fall. Productivity may fall as the result of a decline in the quantity or quality of education/training (1) workers will be less skilled (1). A decline in investment (1) workers will work with less equipment (1). A decline in wage rates (1) will reduce workers’ motivation (1). Worse working conditions (1) reduce job satisfaction (1). A rise in working hours (1) making workers more tired (1). Work may become more repetitive / less interesting (1) which may result in workers becoming bored (1). Change in average age of workers (1) e.g. older workers may be less up to date with new technology / younger workers may have received less training / be less experienced (1). Higher tax rates in a country (1) may reduce workers’ motivation (1). Poorer healthcare in a country (1) reducing workers’ physical strength / mental alertness (1). 4 5(c) Analyse how an increase in the price elasticity of demand and the price elasticity of supply of its products could benefit a firm. A more elastic demand would mean that the firm could reduce price (1) to raise revenue (1) as demand would rise by more than the fall in price (1) if revenue rises by more than costs, profit will increase (1). A more elastic supply will mean that the firm can adjust more quickly the amount it sells when price changes (1) the firm will be able to take greater advantage of an increase in demand / rise in price (1) the firm will be able to take more of its products off the market should price fall (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not small firms are likely to survive in the long run. Up to 5 marks for why they might: Small firms may provide a personal service (1) may have greater contact with their customers (1) more responsive to changes in consumer demand (1). May be more flexible (1) fewer people to consult (1). May be producing products in low demand (1) not facing competition from large firms (1). May be a local monopoly / in a good location (1) may not face competition in the area (1). May cooperate with other small firms (1) enable advantage to be taken of e.g. buying in bulk (1). May supply specialised products / in a niche market (1) including to large firms (1). May receive government subsidies (1) lowering their costs of production (1). Up to 5 marks for why they might not: May be driven out of business (1) by larger firms with lower costs of production (1) better known (1) larger firms can take advantage of economies of scale (1).examples of economies of scale (Up to 2). Large firms may take over / merge with smaller firms (1) to gain market power (1) take advantage of economies of scale (1). Government subsidies may only be short term (1). Some small firms may cease to exist when their owners retire/die (1) e.g. sole traders (1). Less capital available / difficulties in raising capital (1) make it difficult to purchase new / high quality equipment (1) make it difficult to invest in R&D (1). 8 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.

Question 12

The price of gold rose in 2016. This encouraged owners of gold mines to employ more resources to increase the supply of gold. The level of …

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7(a) Identify two factors of production involved in mining gold. Any 2 from: Labour/miner (1) land / gold ore (1) capital/equipment (1) enterprise/owner (1) 2 7(b) Explain two reasons why a government may impose a tariff on imported gold. To discourage the purchase of the foreign gold / reduce the demand for imported gold (1) to improve the current account position on the balance of payments (1). To raise revenue (1) to fund government expenditure (1). If gold is an infant industry (1) enable domestic industries to grow (1) increase output / become more competitive / efficient / natural resources discovered (1) Protect domestic gold industry (1) protect jobs / keep unemployment low (1) encourage expansion of domestic firms (1). Retaliation (1) in response to trade restrictions on gold imposed by other countries (1). 4 Reward but do not expect an argument based on the dumping of gold. 7(c) Analyse how perfect competition differs from a monopoly. In perfect competition there are many sellers (1) in monopoly there is only one (1). In perfect competition there are no barriers to entry and exit / free entry and exit (1) in monopoly there are barriers (1). Firms in perfect competition are price takers (1) a monopoly is a price maker (1). In perfect competition there is perfect knowledge (1) that other firms may not be aware of e.g. the profit being earned by a monopoly (1). In perfect competition there is a low degree of market concentration (1) in monopoly it is 100% (1). In perfect competition there are perfect substitutes / homogenous products / identical products (1) in monopoly there are no substitutes / a unique product (1). 6 Reward but do not expect that perfectly competitive firms can only earn normal profit in the long run, whereas a monopoly can earn supernormal/abnormal profit. Question Answer Marks Guidance 7(d) Discuss whether or not an economy should mine and sell all of its gold now. Up to 5 marks for why it should: Will create employment (1) raise output / higher economic growth (1) increase incomes (1) increase living standards (1). It can be exported (1) demand may be high now (1) improve trade in goods (1) improve the current account position (1). More tax revenue can be earned (1) enable the government to spend more on e.g. education/healthcare (1). Up to 5 marks for why it should not: It will stop future generations (1) being able to benefit from its sale / reduce economic growth (1) as resources will be depleted (1) as a result of higher demand (1) e.g. due to higher income (1). The price of gold may rise in the future (1) now may not be the best time to sell it (1). The exchange rate may currently be low (1) which may reduce the revenue that the country can gain from exporting the gold (1). Advances in technology (1) may lower costs of extraction in the future (1). Gold mining may cause external costs (1) example e.g. pollution (1). In the long run, gold may have to be imported (1) increasing the current account position (1). It may lead to overspecialisation (1) potential for structural unemployment (1). 8 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.

Question 13

The mobile (cell) phone industry is growing in Asia with more workers being employed. In March 2017, there was a merger between two mobile …

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5(a) Identify two fixed costs. 2 • rent • interest on past loans • insurance • salaries 5(b) Explain two ways monopoly differs from perfect competition. 4 • one supplier in monopoly (1) many suppliers in perfect competition (1) • a monopoly has 100% share of the market (1) one perfectly competitive firm will have a small share of the market (1) • barriers to entry and exit in monopoly (1) free entry and exit in perfect competition (1) • a monopoly is a price maker (1) while a perfectly competitive firm is a price taker (1) • a monopolist may advertise (1) no advertising in perfect competition (1) • there may be brand loyalty in monopoly (1) but no attachment between buyers and sellers in perfect competition (1) • there are no substitutes in a monopoly (1) there are perfect substitutes in perfect competition (1). 5(c) Analyse what determines a firm’s demand for labour. 6 Demand for the product (1) demand for labour is a derived demand (1) the higher the demand for the product, the more workers employed (1). Productivity / high skills / qualifications (1) a rise in productivity will increase the return from employing labour / the higher skills the higher the demand (1). Wage rate (1) a fall in the wage rate would be likely to increase the demand for labour (1). The price (1) and productivity (1) of substitutes to labour (1) and complements to labour (1). Production method (1) demand will be higher if production is labour- intensive (1). 5(d) Discuss whether or not a merger will increase profits. 8 Up to 5 marks for why it might: A merger will reduce competition (1) the merged firm will have increased market share (1) this may make demand for its products more inelastic (1) may be able to raise price (1). The new combined firm may be able to take greater advantage of economies of scale (1) so lower average cost (1) examples (2). The new firm may be able to rationalise (1) cut out duplication (1) lower average cost (1). There may be more ideas / sharing of ideas (1) increasing innovation / raising quality (1). A vertical merger will provide greater control over the quality of raw materials / outlets (1). Up to 5 marks for why it might not: The reduction in competition may reduce competitive pressure on the new firm to keep costs low (1) and quality high (1) so demand may fall (1). It may be difficult for the two former firms to adopt common methods of production (1) there may be duplication of equipment and staff (1). The merged firm may experience diseconomies of scale (1) higher average cost (1) examples (2).

Question 14

Universal basic income (UBI) UBI is a scheme where a government provides everyone with a payment, regardless of their circumstances. Such a…

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1(a) Identify, using information from the extract, two reasons why a person may have a low income. • old • sick • unemployed • being on state benefits • being in need of, but not receiving state benefits in their country 2 Difference between fourth and fifth bullet point is where a country is not able to fund state benefits, so people remain on low income. 1(b) Explain, using information from the extract, whether Russia has a progressive, proportional or regressive income tax system. Proportional (1) AND the same rate / people with different incomes paying the same % / all paying 13% (1). 2 1(c) Calculate, using Table 1, what percentage of annual average income in Costa Rica, a person would have if he receives UBI of $337.5 a month. 25% (2). Correct working: $337.5 × 12 / $16 200 (1). 2 1(d) Analyse, using Table 1, the relationship between annual GDP per head and life expectancy. Generally, the higher the annual GDP per head, the longer the life expectancy (1) e.g. rich people are likely to have better nutrition / healthcare (1). The two countries, Monaco and Finland, with the highest annual GDP per head have the longest life expectancy (1). The country with the lowest annual GDP per head, Mali, has the lowest life expectancy (1). Russia or Costa Rica is an exception (1) e.g. Costa Rica has a lower annual GDP per head but a higher life expectancy than Russia (1). 5 Countries must be named. Question Answer Marks Guidance 1(e) Explain an example of opportunity cost in the extract. • Opportunity cost is the best alternative (1) foregone (1) plus • The opportunity cost of UBI (1) is the existing system of state benefits (1) or • The opportunity cost of spending on unemployment benefits (1) is spending on education / healthcare (1) 4 1(f) Discuss whether or not a monopoly will charge high prices. Up to 3 marks for why it might: A monopoly is a single seller (1) has high market power (1) is a price maker (1) demand for its product may be inelastic (1) due to lack of substitutes (1) can raise revenue by raising price (1) may be seeking to maximise profit (1). A monopoly may be inefficient (1) due to lack of competition (1) resulting in higher costs and prices (1). Up to 3 marks for why it might not: A monopoly may have low average cost of production (1) due to economies of scale (1) example (1). A monopoly may not be a profit maximiser (1) example of another objective (1). A monopoly may have a product with elastic demand (1) e.g. may be producing a luxury (1). A monopoly may be concerned that charging high prices will encourage new firms to enter the market (1) reducing its market power (1). A monopoly may fear government intervention (1) and keep prices low (1). A monopoly may be government controlled (1) and charge low prices (1). 5 Reward but do not expect reference to price discrimination resulting in low prices for some consumers. Question Answer Marks Guidance 1(g) Explain, using information from the extract, two reasons why someone from India with the same income as someone from Finland may enjoy a higher living standard. Lower prices in India (1) an Indian household may have greater purchasing power / be able to buy more goods and services (1) Colder weather in Finland (1) which is likely to increase people’s willingness to spend / greater need to spend to keep warm (1) Lower tax rates in India (1) greater purchasing power / higher disposable incomes (1) 4 Opposite arguments are also correct e.g. higher tax rates in Finland, etc. Question Answer Marks Guidance 1(h) Discuss whether or not a government paying higher state benefits to the unemployed will reduce unemployment. Up to 4 marks for why it might: The unemployed will have a higher income (1) they may spend more (1) total (aggregate) demand may increase (1) firms may expand (1) take on more workers (1). Enables the unemployed to spend on education and training (1) and improve their chances of getting a job (1). Up to 4 marks for why it might not: Unemployment benefit may become higher than the wages the low paid may receive (1) this may encourage some people to stop working (1) increase voluntary unemployment (1). Higher state benefits may be financed by increased taxation (1) total (aggregate) demand may not rise (1). Government spending money on education and training (1) may have greater impact on reducing unemployment (1). 6 Apply this example to all questions with the command word DISCUSS (1(f), 1(h), 2(d), 3(d), 4(d), 5(d), 6(d) and 7(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 to be rewarded. Generic Example Marks Tax revenue may decrease« (one mark) 1 ...because of reason e.g. incomes may be lower (one mark) 1 Tax revenue may increase because incomes may be higher i.e. reverse of 1st argument (no marks) 0 «because of a different reason that is not the reverse of a previous argument e.g. government spending on subsidies may stimulate the economy more than spending on education 1

Question 15

In 2017, two firms in the chemical industry in China merged. This created the world’s largest chemical group with approximately US$100 bill…

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2(a) Define industry. Firms (1) that produce the same product (1) example (1) 2 2(b) Explain two types of integration (merger). • horizontal integration (1) firms from same industry and same level of production integrate (1) • vertical integration (1) firms from same industry but different levels of production integrate (1) • conglomerate integration (1) firms from different industries integrate (1) 4 Allow full marks if forward and backward vertical integration is explained accurately. 2(c) Analyse the advantages that an MNC has over a firm which only produces domestically. Set up in economies where labour costs are less (1) and raw material costs are cheaper (1) which can give them cost advantage in the international markets (1). Greater market (1) easier access to foreign markets (1) greater profits (1) fewer trade barriers (1) production set up in countries which have lots of favourable trade agreements (1) bigger output (1) economies of scale (1). Reduction in risk (1) diversified markets (1). Locate operations near the potential market (1) which results in lower transportation cost (1). Wider access to more skilled workers (1) more productive (1). 6 Question Answer Marks Guidance 2(d) Discuss whether or not an economy benefits from firms which are monopolies. Up to 5 marks for how it might: Monopolies can gain more profits (1) they will be able to reinvest more (1) more choices from the company (1) total demand increases (1) economic growth (1) expand production (1) employ more workers (1) unemployment decreases (1) more R&D (1) more innovation (1) higher quality (1) more productivity (1) more exports (1) improved current account position (1). Up to 5 marks for how it might not: Lack of competition (1) complacency (1) less productivity (1) less innovation (1) price is higher (1) inflation (1) exploitation of consumers (1) less choice (1) lower quality (1). 8

Question 16

More agricultural markets come close to perfect competition than markets for manufactured goods and for services. The goals of business org…

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7(a) Identify two characteristics of perfect competition. • many buyers • many sellers • no barriers to entry (and exit) • (firms are) price takers • Identical / homogeneous product • no attachment between buyers and sellers • perfect knowledge 2 7(b) Explain two goals a business organisation may have. Profit maximisation (1) making as much profit as possible / increasing the gap between revenue and cost / rewarding entrepreneurs (1). Growth / expansion (1) increasing the size of the firm by e.g. merging / seeking to gain market power (1) to take advantage of economies of scale (1). Survival (1) during difficult times such as recession / when a firm is first established the aim may just be to stay in the market (1). Profit satisficing (1) achieving enough profit to keep shareholders’ happy while following other objectives (1). Social welfare (1) business organisations operating in the public sector may e.g. be concerned about the environment / charging a low price to help the poor (1). 4 Question Answer Marks Guidance 7(c) Analyse the main reasons for the differences in the size of firms. Type of business organisation (1) state-owned enterprises and multinational companies operate on a larger scale than sole traders (1). Size of market (1) the market for some products is large / expanding (1) example (1) while others are declining (1) example (1). Some firms have more access to finance (1) public limited companies can sell shares (1) sole traders cannot (1). Some firms grow through merging (1) type of merger e.g. horizontal merger (1). Motives of owners (1) e.g. some prefer the firm to remain small so that they can retain control / ownership (1). Some firms may be subsidised (1) which may encourage them to produce a higher output (1). Some firms may be more profitable (1) can reinvest profits / internal growth (1). Length of time in the market (1) longer there, more time to grow (1). Some firms may be able to take advantage of economies of scale (1) example of an economy (1). Some firms may experience diseconomies of scale (1) example (1). Type of product / capital v. labour-intensive (1) e.g. aircraft have to be produced on a large scale (1). 6 Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 7(d) Discuss whether or not the use of supply-side policy measures by a government will reduce firms’ average costs of production. Up to 5 marks for why they might: Education and training (1) should increase labour productivity (1) this could reduce labour costs (1). A cut in income tax (1) may reduce upward pressure on wages (1). A cut in indirect taxes (1). Privatisation (1) may make firms more efficient (1) especially if there is competition in the market (1). Deregulation (1) may reduce the cost of complying with rules and regulations (1). Subsidies (1) may enable firms to buy more efficient machinery (1) train workers (1) may be able to take advantage of economies of scale (1). Remove tariffs (1) enable firms to get raw materials at lower prices (1). Spending on infrastructure (1) reducing transport costs (1). Up to 5 marks for why they might not: Education and training may not be in the areas in demand (1) may not increase workers’ skills (1) some workers who are educated / trained may emigrate (1). Wages of workers may rise by more than productivity (1) increasing labour costs (1). Privatised firms may become private sector monopolies (1) this will reduce pressure on them to keep costs down (1). Subsidies may be given to reduce unemployment / maintain employment (1) additional workers may be less productive (1) may experience diseconomies (1). There may be corruption (1). 8 Maximum of 5 marks if only one policy measure discussed.

Question 17

In 2017, the Brazilian paper industry was booming. Its total revenue increased and it employed both more, and better quality, factors of pr…

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3(a) Define total revenue. The total income / money received (1) from a firm’s sales (1). OR Price (1) multiplied by quantity sold (1). 3(b) Explain two differences between capital and labour. Logical explanation which might include: Capital is a human-made resource / factor of production / machines (1) labour is a human resource / factor of production / workers / type of worker (1) Capital is increased by investment (1) labour is increased by e.g. rises in population (1) The quality of capital is improved by advances in technology (1) the quality of labour is improved by e.g. better education (1) Capital is paid interest (1) labour is paid wages (1). Capital can be a fixed cost (1) whereas labour can be a variable cost (1). Capital can be a one-off investment (1) wages are paid regularly (1). Labour tends to be mobile (1) capital tends to be immobile (1). Capital can work for 24 hours (1) workers have breaks / work for less than 24 hours (1). 4 One mark for each of two differences identified and one mark for each explanation. Question Answer Marks Guidance 3(c) Analyse the possible effects on consumers of a merger between two paper-producing firms. Coherent analysis which might include: This would be a horizontal merger (1) it may enable the merged firm to take greater advantage of economies of scale (1) so lower average costs of production (1) which may lower prices (1) enabling consumers to buy more / save more (1). The merger may increase profits (1) allowing the merged firm to spend more on e.g. R&D (1) gain new ideas (1) increase investment (1) consumers may gain from a rise in the quality of the product (1) new products may be produced(1). The merger may reduce competition / result in a monopoly (1) which may increase prices (1). If the merged firm is a monopoly it may restrict supply / result in outlets being shut down (1) making it more difficult for consumers to obtain the product (1) may reduce choice (1) may result in diseconomies of scale (1). A reduction in competitive pressure (1) may reduce the quality of the product (1). 6 Question Answer Marks Guidance 3(d) Discuss whether or not demand for coffee is likely to rise in the future. In assessing each answer, use the table opposite. Why it might: • incomes may rise increasing people’s ability to buy coffee • price may fall (due to e.g. subsidies) increasing people’s willingness and ability to buy coffee • the quality of coffee may rise • population may increase. Why it might not: • price of substitutes, such as tea / coffee produced by other countries, may fall so people may switch away from drinking coffee • there may be a health report suggesting that drinking coffee is harmful to health • the price of complements, such as milk, may rise • taxes / tariffs may be imposed on coffee • Less may be spent on marketing. Example of a Level 2 answer: Coffee is an inelastic good which means the demand for it remains the same irrespective of the price. The demand for coffee increases with time as the population grows, so demand may be a constant growth. However, demand may not rise in the future as there are alternatives to coffee. Education on the harmful effects of coffee has increased leading to less consumption of coffee, reducing the demand for it. 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) Principal Examiner comment: The answer is two-sided but lacks depth. It starts with a confused statement on the meaning of a product having price-inelastic demand. It then correctly identifies an influence on demand for coffee (population) and shows understanding of how an increase in population will affect demand for coffee. On side two, the influence of alternatives (substitutes) is accurate and there is a clear link between education and reduced demand for coffee. More discussion on, for example, changes in relative price or quality of substitutes would have been appropriate. 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

Question 18

(a) Calculate Vietnam’s GDP per head in 2017. [1] (b) Identify two rewards to factors of production. [2] (c) Explain what happened to Vietn…

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Question Answer Marks 1(a) Calculate Vietnam’s GDP per head in 2017. 1 $6900 (1). 1(b) Identify two rewards to factors of production. 2 Wages (1) profits (1). 1(c) Explain what happened to Vietnam’s foreign exchange rate between 2 2010 and 2017. Logical explanation which might include: It fell/depreciated (1) more dong had to be given to buy one dollar (1). 1(d) Explain two benefits an economy may gain from having a young 4 labour force. Logical explanation which might include: May be more flexible (1) switch from doing different tasks (1). May be more mobile (1) able to switch from one job to another or from one place to another place (1). May be more up to date with advances in technology (1) more productive/able to use advanced technology (1). 1(e) Analyse why Vietnam’s budget deficit may decline in the future. 4 Coherent analysis which might include: High economic growth will raise incomes/wages rising (1) higher profits (1) more revenue from direct taxes (1) higher incomes is likely to result in more spending (1) more revenue from indirect taxes (1). Tax rates may be increased (1) reducing the gap between tax revenue and government spending (1). Deregulation / privatisation may increase profits (1) resulting in higher revenue from direct taxes /corporation tax (1). 1(f) Analyse the relationship between government spending on education 5 and the percentage of the labour force employed in the tertiary sector. Coherent analysis which might include: Generally the countries with the highest % spending on education have the highest percentage employed in the tertiary sector and vice versa (1) up to two examples e.g. Norway has the highest % spending and the highest % employed in the tertiary sector, Bangladesh has the lowest % spending and the lowest % employed in the tertiary sector (2) the main exception is Vietnam – second highest % spending but lowest % employed in the tertiary sector (1) there may be a time lag in this case (1). It is the expected relationship as some tertiary jobs require high skills (1) countries that can afford to devote a high percentage of resources to education may have achieved a relatively high level of development (1) a higher percent spent will create jobs in education (1). 1(g) Discuss whether or not an increase in competition is likely to benefit 6 Vietnamese consumers. 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 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. 0 reverse of a previous argument. Tax revenue may increase because of a different reason i.e. not the reverse of a previous argument e.g. government spending on 1 subsidies may stimulate the economy more than spending on education. Award up to 4 marks for logical reasons why it might, which may include: • prices may be reduced to attract more consumers (1) making them more affordable to consumers (1) • choice will be increased in terms of sellers (1) and possibly in terms of a greater range of products (1) • quality may rise (1) with pressure being put on producers to produce good products to attract consumers (1) • producers may respond more fully to changes in consumer demand (1) Award up to 4 marks for logical reasons why it might not, which may include: • firms may be smaller (1), less able to take advantage of economies of scale (1), so prices may be higher (1) • firms may have less profit (1) and so spend less improving the quality of the product (1) • some firms may be MNCs (1), less concerned about causing external costs (1) 1(h) Discuss whether or not the increase in borrowing is likely to have 6 caused inflation in Vietnam in 2017. Award up to 4 marks for logical reasons why it might, which may include: • higher consumer demand (1) and investment (1) will increase total (aggregate) demand (1) • higher total demand may cause demand-pull inflation/cause producers to raise prices (1) • government spending may rise, further adding to total (aggregate) demand (1) • the economy has very low unemployment/full employment (1) making it difficult for supply to respond to higher demand (1) • tax rates may rise (1) which may increase costs of production (1) causing cost-push inflation (1) Award up to 4 marks for logical reasons why it might not, which may include: • higher investment may reduce costs of production (1) lowering cost- push inflation (1) • higher consumer spending may enable firms to grow (1) and take greater advantage of economies of scale (1) • increased education (1) may raise labour productivity (1), reduce costs of production (1) and lower cost-push inflation (1) • privatised firms may be more efficient (1) • more competition may reduce price rises (1)

Question 19

Mali is a low income and low productivity country in Africa. Its government is using fiscal policy to reduce poverty. The country’s main in…

Accepted Answer

5(a) State two key questions about how resources are allocated. 2 One mark each for two from: What to produce, how to produce it, for whom / who gets what is produced. 5(b) Explain two fiscal policy measures that can be used to reduce poverty. 4 Logical explanation which might include: Rise in government spending on education (1) make it easier for people to gain jobs / better paid jobs (1). Rise in government spending on healthcare (1) providing a basic necessity / increase productivity of workers (1). Subsidise / free provision of food (1) providing a basic necessity / reduce absolute poverty (1). Subsidise / free provision of housing (1) helping those unable to afford housing (1). Increase in state benefits (1) e.g. paying more in unemployment benefit will raise the income of some of the poor (1). Use of progressive taxes / reduction of regressive taxes (1) reduce relative poverty (1). 5(c) Analyse why a country may have low productivity. 6 Coherent analysis which might include: Education may be low (1) and training may be low (1) workers may lack skills (1). Wages may be low (1) working conditions may be poor (1) reducing the motivation of workers (1). There may a lack of investment (1) workers working with out of date/low quality capital goods (1). Healthcare may be low (1) causing workers to be tired (1). 5(d) Discuss whether or not mergers benefit an economy. 8 In assessing each answer, use the table below. Level Description Marks 3 A reasoned discussion which accurately examines both 6–8 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. 2 A reasoned discussion which makes use of economic 3–5 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 economic definitions 1–2 and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be awarded for no creditable 0 content. Why they might: • may enable the new firm to take greater advantage of economies of scale, lower average cost and lower prices, resulting in lower inflation • may enable the new firm to earn higher profits and spend more on research and development and investment. This could raise the quality of products and increase economic growth • may enable the new firm to compete more effectively internationally which could improve the current account position • a vertical merger can increase the efficiency of production by co- ordinating the production stages. This could increase productive potential. Why they might not: • the new firm may experience diseconomies of scale, higher average cost and higher prices. This may increase the inflation rate • a horizontal merger will reduce competition which can increase prices, reduce choice, lower efficiency and reduce quality. This may reduce international price competitiveness which may harm the country’s current account position. It could also lower the country’s economic growth rate • the new firm may rationalise and this may result in unemployment.

Question 20

(a) Calculate Turkey’s total output. [1] (b) Identify two factors that affect borrowing in an economy. [2] (c) Explain the relationship bet…

Accepted Answer

1(a) Calculate Turkey’s total output. $320 billion 1 1(b) Identify two factors that affect borrowing in an economy. • interest rates • confidence levels • wages / incomes 2 1(c) Explain the relationship between the growth of Istanbul’s service sector and its growth in total output. Logical explanation which might include: Higher growth in service sector leads to higher total economic growth (1). This is expected as countries become more developed, the share of services increases (1) and the share of primary sector decreases (1). For example, in 2011, the service industry grew most rapidly at 28.16% and the total economic growth was 21.9% (1). However, although growth of service sector was lowest in 2010 at 11.9%, total growth was 14.38% (1), higher than in 2014 where growth of service sector was higher (1). 3 1(d) Explain two reasons for Istanbul’s increased population. Logical explanation which might include: People moving from rural areas to the city centre (1) e.g. for higher wages / more employment opportunities / better housing / low cost of living / good transport links (1). Improved healthcare (1) longer life expectancy / lower infant mortality / higher quality of life (1). 4 One mark for each of two reasons identified and one mark for each of two explanations. Question Answer Marks Guidance 1(e) Analyse how good transport links have contributed to Istanbul’s economic growth. Coherent analysis which might include: Good roads could lead to reduction in commute time (1) good roads / air transport leads to faster transport of goods and services (1). Workers can move easily / higher labour mobility (1) reduce unemployment (1). More competition in the labour market (1) more competition in the product market (1) could lead to fall in cost of production (1) increase in productivity (1). Easy to conduct business internationally due to good air transport links (1) access to huge international market (1) e.g. 1.5 billion people within a flight time of 4 hours (1) may have attracted MNCs (1). Contributed to the growth of the transport industry (1) allowing transport firms to take greater advantage of economies of scale (1). 4 1(f) Draw a demand and supply diagram to show the effects on flights to Turkey of greater worries about safety for tourists. 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 left (1) Equilibriums – shown by lines P1 and Q1 and P2 and Q2, or by labelling equilibrium points as E1 and E2 (1). 4 O Question Answer Marks Guidance 1(g) Discuss whether or not Istanbul benefits from investment by MNCs. Up to 4 marks for why it may be beneficial: Increased investment leads to increased total demand (1) leads to economic growth (1). Increase demand for workers in Istanbul (1) decreasing unemployment rates (1) increasing incomes (1) and increasing standards of living (1). Bring new / better technology (1) increase productive capacity / productivity (1) Increase variety of products on sale (1) produce new products (1) Increase tax revenue (1) allowing local government to spend more on e.g. roads (1). Up to 4 marks for why it may not be beneficial: Replace domestically owned firms in Istanbul / decrease demand for domestic firms (1) MNCs may be more efficient than domestic firms (1) leading to failure of domestic firms / decrease demand for domestic firms (1) monopoly of MNCs (1). Profits leave the country (1) not reinvested domestically (1). MNCs may exploit workers (1) such as low wages (1) poor working conditions (1). MNCs may exploit environment (1) e.g. pollution (1). 6 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(h) Discuss whether or not competition is beneficial for airlines. Up to 4 marks why it is beneficial: Competition will lead to airline being forced to be more efficient (1) productivity increase (1) use latest technology (1) reduce wasteful spending (1) quality increases (1) cost of production goes down (1) prices become more affordable (1) increase in quantity demanded (1) total revenue and profit increases (1). Up to 4 marks why it is not beneficial: Too much competition means less market share for each airline (1) less quantity demanded (1) airlines may have to advertise more (1) increase cost of production (1) total revenue and profit decreases (1) airlines who can’t compete may go bankrupt / leave the market (1). Too much competition may result in the airline being small (1) cannot take advantage of economies of scale (1). An airline may not benefit from becoming more competitive (1) because of brand loyalty (1) lower demand for air travel (1). 6

Question 21

Russia’s birth rate fell by 11% in 2017 to its lowest level for a decade. Over the next 30 years, Russia’s population is forecast to fall f…

Accepted Answer

3(a) Define privatisation. The sale of state-owned assets / state-owned enterprises / nationalised industries (1) to the private sector / individuals (1). 2 Allow denationalisation (2) only private firms (1). 3(b) Explain two causes of a fall in the birth rate. Logical explanation which might include: Rise in the cost of having children (1) e.g. children staying in education for longer (1). Rise in the education of women (1) may be more likely to enter employment/delay having children (1). Rise in government provision of state pensions (1) less need for couples to have children to support them in old age (1). Rise in access to contraceptives (1) making family planning more effective (1). Improvement in healthcare (1) reducing infant mortality (1). Increase in state provision of welfare payments (1) reducing the need to have children support parents in old age (1). Reduction in infant mortality (1) people having fewer children in the expectation more will survive (1). Ageing population (1) fewer people of child-bearing age (1). Education (1) e.g. higher cost of having children (1) women may get married later (1). More women working (1) may delay childbirth (1). Government policy (1) e.g. placing a limit on number of children (1). 4 One mark for each of two causes identified and one mark for each of two explanations. No mark for simply linking fall in birth rate with low income. Question Answer Marks Guidance 3(c) Analyse, using a production possibility curve (PPC) diagram, the effects of a decrease in the quantity of capital goods in an economy. Up to 4 marks for the diagram: Axes correctly labelled (1). Initial curve drawn as a curve or downward sloping line to the axes (1). New curve drawn as a curve or downward sloping line to the axes (1). Shift to the left / pivot indicated by arrow or lettering (1). Up to 2 marks for coherent analysis which might include: Capital goods are a resource / investment used to produce other goods (1). Fewer capital goods / factors of production reduce potential output / productive capacity (1). 6 Accept a PPC diagram that shows fewer capital goods and the same quantity of consumer goods. Accept Good A / Good B labelling on axis. Note: movement along the existing PPC is incorrect. So potentially only 2 marks for correctly labelled axes and correct curve. A B capital goods O B A consumer goods Question Answer Marks Guidance 3(d) Discuss whether or not a government should allow monopolies. In assessing each answer, use the table opposite. Why it should: • monopolies may be able to take advantage of economies of scale • may be able to experience lower average costs and charge lower prices • may earn high profits and so be able to spend on investment and research and development • may be able to produce high quality products • may be internationally competitive • maybe nationalised monopolies with welfare objectives Why it should not: • maybe market failure/abuse market power • may charge high prices • may restrict output • may become complacent • may not improve quality Example of Level 3 answer: Yes, the government should allow monopolies. It will prevent duplication of goods due to unique products with no close substitutes produced. This can reduce the wastage of resources. Monopolies can also benefit from economies of scale as they produce in large quantities so they can benefit from cost saving by negotiating favourable prices as a result of bulk buying. This can translate into lower prices for consumers, increasing their ability to consume more goods and services, boosting economic growth and their standard of living. 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) Since it is possible for monopolies to earn supernormal profits, they are more able to spend more on research and development of their products, improving quality for consumers. No, they should not allow monopolies. Due to them being a single seller, this allows them to exploit consumers by charging higher prices as there is imperfect information and they are the only firm in the market, consumers have no choice but to buy the unreasonably priced products which means consumers spend too much in the long run and may even cause inflation to rise too. Monopolies may also increase income inequality as the producer gains at the expense of their consumers, especially those on lower incomes, causing poverty for those on low incomes especially if these products are essential goods and services such as food and utilities. Principal Examiner comment: This is a well thought out response with strong arguments on both sides and several aspects analysed.

Question 22

Sweden has a mixed economic system. In 2018, it was operating at a point inside its production possibility curve (PPC). In 2018, the countr…

Accepted Answer

5(a) Define a mixed economic system. One with a public / government sector (1) and a private sector / use of market forces (1) One which makes use of the price mechanism (1) and government directives (1). 2 5(b) Explain the difference between a point inside a PPC and a point outside a PPC Logical explanation which might include: A point inside indicates unemployed resources (1) inefficient use of resources / wasted resources (1) output is below potential output (1) an attainable point (1). A point outside is unattainable (1) not enough resources / beyond productive potential / only achievable with more resources / only achievable with better quality resources / not achievable with current resources / will be possible with future economic growth (1). 4 Maximum of 2 marks for point inside and a maximum of 2 marks for point outside. Question Answer Marks Guidance 5(c) Analyse why an actor may decide to become a teacher. Coherent analysis which might include: Wage rate may be higher (1) enable more goods and services to be purchased (1) higher living standards (1) demand for teachers may increase (1). Greater job security (1) actors often experience frictional/casual unemployment (1). More sociable/convenient working hours (1) may fit in more with having children (1) teachers may also enjoy longer holidays (1). Working conditions may be better (1) may be a safer environment (1) may have better pensions (1). May find they are better qualified / suited to be a teacher (1) more likely to be successful in the career (1). May gain more job satisfaction (1) enjoy helping children learn (1). 6 Maximum of 3 marks for a list-like approach. Question Answer Marks Guidance 5(d) Discuss whether all monopolies have low costs of production. In assessing each answer, use the table opposite. Why some have: • may earn high profits and so may have incentive to reinvest • may be small e.g. a local monopoly / low total costs • may be large and so may experience economies of scale • state-owned monopolies may be subsidised Why some do not: • lack of competition may reduce pressure to keep costs low • may be small so do not benefit from economies of scale • may be large so experience diseconomies of scale / high average costs • may be producing in a country with a high inflation rate Example of an L3 answer Monopolies are firms that dominate the market for a particular product. They supply 100% of the market and usually there are no substitutes to the product it supplies. There is no competition for a monopoly. A monopoly may not have a low cost of production as it may allocate resources inefficiently. Monopolies do have any competition as they may simply produce low quality products and earn large profits without working hard to lower costs of production. 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 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 Question Answer Marks Guidance 5(d) A monopoly will usually require a large scale of production to operate and may soon grow too large and face diseconomies of scale. It may have supply constraints pushing up the cost of production. It may be subject to labour diseconomies as the workers feel alienated in such a large enterprise leading to extra cost of labour disputes. All this could promote increased costs of production. Furthermore, governments may implement regulations that the monopoly must rigidly follow increasing the cost of production at each step. However, monopolies may be able to maintain a low cost of production as it grows. It can benefit from economies of scale. The advertising cost will be spread over a large base, lowering costs. Banks will provide loans easily due to available collateral and suppliers will also reduce costs as they can deliver bulk orders lowering their transport costs. These internal economies of scale help monopolies keep low costs of production. Monopolies may invent new production methods, technologies and invest in R & D to keep their costs low to compete with international firms. They may also try to be efficient if there are high fines or high taxes in the economy. Example of L2 answer Monopolies might have low cost of production since the benefit from greater economies of scale such as purchasing economies which means buying in bulk and receiving discounts from the supplier. Another economies of scale could be technical economies which is investing with more capital goods, increasing the productive capacity and reducing average cost. Level Description Marks 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 5(d) Although having higher economies of scale, there may be diseconomies of scale like managerial diseconomies, which means firms having problems in management of the company, which means firms having problems in management of the company, this will reduce productivity and hence increasing cost of production. Another diseconomy could be communication problems which might occur between the entrepreneur, the workers and the managers. Example of an L1 answer Monopolies are single firms where they don’t have any other competitors. They might lose money often because it is very tough job to run a monopoly company. They could have low cost of production because if they produce more the price might be the same but if the consumers doesn’t want the products would go to waste.

Question 23

Cyclical unemployment is below the national average in some big cities in Canada such as Toronto, Vancouver, and Montreal. This could be a …

Accepted Answer

3(a) Define structural unemployment. Workers without jobs (1) Unemployment due to a change in the structure of the economy / change in demand and supply conditions / decline of some industries (2) lack of the appropriate skills (1) lack of labour mobility (1). 3(b) Explain two causes of low productivity. Logical explanation which might include: Poor education and training (1) leading to lack of skills / qualifications (1). Poor technology (1) slower or less output per capital / labour input (1). Poor management (1) waste of resources (1). Lack of investment (1) capital older/slower/out-of-date (1). Emigration of skilled workers (1) output of unskilled workers who are left is lower (1). Poor working conditions (1) making it difficult for workers to do their jobs efficiently (1). Low pay (1) which may demotivate workers (1). Long working hours (1) making workers tired (1). 4 One mark for each cause identified and one mark for each explanation. Lack of specialisation is too vague. Question Answer Mark Guidance 3(c) Analyse how higher government spending and tax cuts can lead to a fall in cyclical unemployment. Coherent analysis which might include: Higher spending on e.g. unemployment benefits / education / infrastructure / healthcare (1) could lead to higher demand for goods and services (1) increased demand for goods and services leads to higher revenues/profits for firms (1) increased investments (1) increasing output (1) increased demand for workers to produce the output (1). Tax cuts such as income tax cuts (1) increased disposable income (1) increase consumer expenditure (1) increased demand for goods and services (1) higher revenues/profits for firms (1) increased investments (1) increasing output (1). Tax cuts such as corporation tax cuts (1) increased after tax profits (1) increased investments (1) increasing output (1). Tax cuts such as indirect tax cuts (1) decrease cost of production (1) increased supply / output (1). 6 Maximum of 4 marks for only higher spending OR tax cuts Question Answer Mark Guidance 3(d) Discuss whether or not competition between firms in the same industry is always a disadvantage to workers. In assessing each answer, use the table opposite. Why it might be a disadvantage • more competition between firms means firms try to be more efficient, which could lead to lower job opportunities / greater instability of employment • there may be greater use of short-term employment contracts • more competition between firms could push down the wages of the workers. • more competition between firms could lead to workers being exploited e.g. overtime work, worse working conditions. Why it might be an advantage • more competition between firms would lead to firms training workers to be more productive • increased productivity leads to higher wages • increased productivity could lead to more investments – leading to more demand for workers • more competition between firms could lead to lower prices, which benefits workers who are also consumers • lower prices could lead to more demand, which increases the demand for workers as well • greater efficiency could result in higher revenue some of which may be spent improving working conditions • more competition between firms could lead to them raising wages and / or improving working conditions to attract the best workers • more competition between firms gives more opportunities for workers to switch jobs. 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 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 Question Answer Mark Guidance 3(d) Level Description Marks 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 24

Norway has engaged in free trade to a greater extent in recent years. The country operates a floating foreign exchange rate. There has been…

Accepted Answer

4(a) Identify two benefits of free trade. Two from: • higher output/growth • higher income/living standards • more employment/more jobs • more choice/access to other markets • lower price • greater ability to take advantage of economies of scale/greater efficiency/specialisation • drives competition • better quality goods • stronger global co-operation 2 Question Answer Marks Guidance 4(b) Explain two differences between a floating foreign exchange rate and a fixed foreign exchange rate. Logical explanation which might include: A floating exchange rate is determined by market forces (1) a fixed exchange rate is set by the government/central bank (1). A floating exchange rate can change on a day-to-day basis (1) whereas a fixed exchange does not often change in value (1). A rise in the value of floating exchange rate is an appreciation / a fall in the value of a floating exchange rate is a depreciation (1) a rise in the value of a fixed exchange rate is a revaluation/a fall in value of a fixed exchange rate is a devaluation (1). A floating exchange rate does not require a central bank to buy and sell the currency (1) a fixed exchange rate needs reserves of foreign currency to maintain it (1). 4 One mark each for each of two differences identified and one mark each for each of two explanations. Question Answer Marks Guidance 4(c) Analyse how a change in the pattern of employment in a country may change its average wage. Coherent analysis which might include: A higher proportion of skilled workers (1) due to better education/training (1) will raise the average wage/skilled workers tend to be highly paid (1). An increase in proportion of workers in the tertiary sector/smaller proportion of workers in the primary sector (1) example of industry/as economy develops there tends to be more workers in the tertiary sector/fewer in the primary sector (1) will tend to increase the average wage (1). A greater proportion of women workers (1) change in social attitudes/anti-discrimination legislation (1) may increase the average wage (1). A higher proportion of workers in the public sector (1) may be better training / may be more fringe benefits/may be more job security (1) may increase/reduce the average wage (1). A larger proportion of workers in the formal economy (1) more likely to be represented by a trade union/will have legal rights (1) may increase the average wage. Age (1) older workers may be more experienced/in promoted posts (1) may be better paid (1). 6 Allow up to 3 marks for why wages may change due to changes in demand and supply with reference to a particular industry. Note: answers must address a change in pattern of employment Question Answer Marks Guidance 4(d) Discuss whether or not a government should stop firms merging. In assessing each answer, use the table opposite. Why it should: • will have greater market share • may abuse greater market power • may become complacent • consumers may experience higher prices and lower quality • may engage in rationalisation • may increase unemployment • may experience diseconomies of scale Why it should not: • may innovate more • may provide consumers with lower prices and higher quality • may be more international competitive • may improve current account position • may increase economic growth • may experience economies of scale 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 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 Question Answer Marks Guidance 4(d) Level Description Marks 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

Question 25

Industries and markets are changing in Vietnam. There is greater use of division of labour in a range of industries. Many markets are becom…

Accepted Answer

5(a) Define division of labour. Workers specialising (1) in particular tasks / repeating the same task (1). Breaking down production into different / separate tasks (1) using different workers for the different tasks (1). 5(b) Explain two reasons why a loss-making firm may continue to produce. Logical explanation which might include: May not expect the loss to last (1) may think demand will rise/costs will fall in the future (1). May be subsidised by the government (1) to e.g. promote social welfare/encourage consumption of merit goods/increase exports/respond to dumping by other countries (1). May lower prices to drive out competitors/increase market share (1) raising price when successful (1). May accept losses in short-term (1) in order to expand in long-term (1) May have high retained profits (1) to allow for downturns in demand/cover the losses (1). May be a new firm (1) in the process of growth/trying to survive (1). A firm’s main objective may not be profit maximisation (1) e.g. growing market share/charity/provides public goods (1). 4 One mark each for each of two reasons identified and one mark each for each of two explanations. Reward but do not expect reference to predatory pricing. Question Answer Marks Guidance 5(c) Analyse the advantages that consumers may gain from a competitive market. Coherent analysis which might include: Wide choice of producers (1) producing a similar product (1). Efficiency (1) better quality (1) greater choice of products (1) firms may innovate (1) as firms try to gain a larger share of the market (1). Lower price (1) as firms try to beat competition (1) increasing consumers’ purchasing power/standard of living (1). Raise consumer sovereignty (1) firms may respond quickly to changes in consumer demand (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not an increase in a country’s manufacturing output will increase its economic development. In assessing each answer, use the table opposite. Why it might: • increase products available for households • increase capital goods enabling greater capacity • may raise incomes/profits • create employment • may promote growth of the other two sectors – greater demand for raw materials and greater demand for services e.g. insurance • may mean firms are getting larger – economies of scale, reduced average costs, increased exports • likely to have a higher value added than primary sector • greater stability in income than primary sector Why it might not: • may create pollution/reduce open spaces • jobs may have poor working conditions • employment may not rise if capital-intensive methods are used • opportunity cost/less resources used in primary and/or tertiary sectors • wages may be lower than tertiary sector • may reduce natural resources available for future • goods produced may be of poor quality/inefficiently produced/uncompetitive 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 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 Question Answer Marks Guidance 5(d) Level Description Marks 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 26

The economic problem means that countries have to decide what to produce. Ghana uses much of its agricultural land to grow cocoa. Cocoa is …

Accepted Answer

5(a) Define the economic problem. Finite/limited resources (1) unlimited/infinite wants (1). Wants exceeding resources (2). Scarcity (1). 2 5(b) Explain whether land is mobile. Logical explanation which might include: Most land is geographically immobile (1) fixed in one place / cannot move from one place to another place (1). Some forms of land e.g. wildlife can be moved from one place to another (1). Land is occupationally mobile (1) capable of changing its use / e.g. land can be used for farming or housing (1). 4 Question Answer Marks Guidance 5(c) Analyse the causes of a shift to the right in the supply curve of chocolate. Coherent analysis which might include: A shift to the right of the supply curve means that more will be supplied at each and every price / supply has increased due to a non-price factor/influence (1). Lower costs of production (1) due to any cause (other than tax or subsidy) e.g. lower wages / higher productivity / lower transport costs (1). Subsidy (1) providing an additional income / effectively lowering costs / providing a financial incentive (1). Advances in technology (1) increasing output per unit of resource / increase efficiency / raise productivity of capital (1) Good harvest of cocoa / raw material (1) perhaps due to improvement in weather conditions / improvements in fertilisers (1) reducing price of raw material (1) increasing supply of raw material (1). Lower tax on chocolate / lower indirect tax / lower corporate tax (1) making it more profitable to produce (1). Fall in price/rise in cost of production/ fall in profitability of another product produced by chocolate firms (1) encouraging the switch of some resources to chocolate production (1). 6 Note: no marks for a diagram. Question Answer Marks Guidance 5(d) Discuss whether or not consumers would benefit from a firm becoming a monopoly. In assessing each answer, use the table opposite. Why they might: • a monopoly may have lower average costs of production due to economies of scale • lower costs of production may result in lower prices • a monopoly may have larger profits which can be spent on R&D • higher R&D can improve the quality of the product • may be a state-owned monopoly which seeks to increase social welfare. Why they might not: • monopoly may use market power to increase price • lack of competition may reduce pressure to improve quality • consumers will have less choice • there may be a lack of availability if the monopoly restricts supply to drive up price • a monopoly may have higher average costs due to diseconomies of scale. 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 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 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 27

(a) Calculate how many dollars 6400 Nigerian naira would have bought in 2019. [1] (b) Identify two ways a bank could increase demand for it…

Accepted Answer

Question Answer Marks Guidance 1(a) Calculate how many dollars 6400 Nigerian naira would 1 have bought in 2019. 16 (1). 1(b) Identify two ways a bank could increase demand for its 2 services. Open more branches (1) carry out an advertising campaign (1) improve online / mobile banking (1). 1(c) State why a merger between two commercial banks is a 2 horizontal merger. Same stage of production / both in the tertiary (service) sector / same sector (1) same industry / same product / same service (1) can increase market share (1). 1(d) Explain two reasons why a large US commercial bank 4 One mark for each of two reasons identified and one mark may charge a high price for its services. for each explanation. Logical explanation which might include: High spending on opening new branches / advertising campaigns / developing online banking (1) need to get back costs / make a profit / may experience diseconomies of scale (1). May offer high quality services (1) have high demand / customers willing to pay a high price (1). High degree of monopoly / market power / control 32% of market (1) customers may have brand loyalty / reluctant to switch banks / lack of substitutes / inelastic demand / can charge high prices to earn high profits/raise total revenue / be a price maker (1). High incomes in the US (1) many customers have the ability to pay a high price (1). Employ skilled / well educated workers (1) so may pay high wages / may have high costs of production (1). 1(e) Analyse how an increase in unemployment may affect 4 the Nigerian government’s budget. Coherent analysis which might include: Likely to increase a deficit / reduce a surplus / may result in a budget deficit (1). Tax revenue likely to fall / budget likely to fall (1) due to lower incomes (1) less income tax revenue (1) lower profits (1) less corporation tax revenue (1) lower spending (1) less indirect tax revenue (1) government may cut taxes to reduce unemployment (1). Government spending likely to rise (1) more spending on e.g. benefits / subsidies to the poor / law and order/ healthcare (1) may be more spending on measures to reduce unemployment / expansionary fiscal policy (1) may spend less on other areas e.g. education (1). 1(f) Analyse the relationship between countries’ average 5 No marks for just stating what the figures are e.g. Germany years of schooling and birth rates. has 15 years of schooling and a birth rate of approximately 8. US has 14 years of schooling and a birth rate of Coherent analysis which might include: approximately 12. Argentina has 11 years of schooling and Overview a birth rate of approximately 16 etc. Generally, an inverse relationship / the more years of schooling, the lower the birth rate / the fewer years of schooling, the higher the birth rate (1). Supporting evidence Up to 2 marks maximum for two pieces of relevant supporting evidence e.g.: • Germany has the highest years of schooling and lowest birth rate (1) • Chad has lowest years of schooling and highest birth rate (1) • US has more years of schooling than Argentina and so a lower birth rate (1) • the three countries with three highest years of schooling have the three lowest birth rates (1). Exception Nigeria / Eritrea (1) Nigeria has more years of schooling than Eritrea but a higher birth rate (1). Comments More years of schooling is likely to cause people to form partnerships / have children later / focus on careers / increase awareness of contraception/family planning / increase health / reduce size of families (1) increase cost of raising children / having more children may reduce the ability of families to keep their children in education for many years / exception may be result of other influences e.g. differences in fertility rates / differences in social attitudes (1). 1(g) Discuss whether or not a subsidy, given to farmers by 6 Apply this example to all questions with the command the Nigerian government, would reduce the deficit on word DISCUSS the current account of its balance of payments. (1g, 1h, 2d, 3d, 4d and 5d) Award up to 4 marks for logical reasons why it might, which Each point may be credited only once, on either side of an may include: argument, but separate development as to how/why the It should raise supply / increase output (1) equivalent to outcome may differ is rewarded. lower cost (1) lower price (1) increasing international competitiveness (1). Generic example mark There may be more funds available to invest (1) raise quality (1) increase exports / reduce imports (1). Tax revenue may decrease… 1 Award up to 4 marks for logical reasons why it might not, ...because of reason e.g. incomes may be 1 which may include: lower. It may increase inefficiency (1) as firms rely on the subsidy (1) may not pass on the benefit of the subsidy to consumers Tax revenue may increase because incomes 0 (1). may be higher i.e. reverse of a previous Nigeria may have a high inflation rate (1) which may offset argument. the cost advantage of the subsidy (1). There may an increase in incomes at home (1) which may Tax revenue may increase because of a 1 increase imports / divert exports to the home market (1). different reason i.e. not the reverse of a There may be a recession abroad / decrease in incomes of previous argument e.g. government spending trading partners (1) which reduces exports (1). on subsidies may stimulate the economy more Lower export prices will not raise export revenue if demand than spending on education. is inelastic (1). The exchange rate may rise (1) increasing export prices / lowering import prices (1). Farmers may import e.g. more machinery (1). There may be adverse weather conditions / disease (1) which reduces quality / quality may remain poor (1). There may be import restrictions / increase in import restrictions imposed by other countries (1). 1(h) Discuss whether or not the US government should 6 A minimum price diagram without explanation can get a impose a minimum price on chocolate. maximum of 2 marks. These marks may be the equivalent of a combination of two of higher price, demand extending, Award up to 4 marks for logical reasons why it should, supply extending or a surplus being created. which may include: It will raise price (1) reduce demand / demand contracts / quantity demand falls / consumption falls. (1) reduce obesity (1). Social cost of eating chocolate may exceed social benefit (1) due to external costs (1) example e.g. cost on health service / may reduce need for government spending on healthcare (1) overconsumption of chocolate (1) move market closer to where social benefit equals social cost (1) increase welfare (1). May raise health of the population / eating chocolate may be unhealthy (1) raise labour productivity (1). There may be information failure (1) some chocolate is a demerit good (1). Award up to 4 marks for logical reasons why it should not, which may include: Poor may not be able to afford chocolate (1) regressive measure (1). Not everyone overweight / some may consume chocolate in quantities that are not harmful (1) may cause demand to switch to other high sugar products / discriminate against other high sugar products (1). It will encourage supply to extend (1) a surplus may develop (1). There may be an illegal market in chocolate (1). There may be a cost to the government (1) it may have to pay to monitor that the price is being charged (1) lower tax revenue from chocolate (1) may be an increase in unemployment (1). 1(h) Demand may be inelastic (1) resulting in a relatively small fall in demand / chocolate may be addictive (1). It depends on how high the minimum price is (1) may have no effect if set below the market equilibrium (1).

Question 28

Washington State is the state which grows the most apples in the US. In 2019, apple production increased in Washington State but the market…

Accepted Answer

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.

Question 29

Vietnam has a high number of female entrepreneurs. Some of their firms have grown and now compete with foreign multinational companies (MNC…

Accepted Answer

2(a) Identify two reasons why people become 2 If more than two reasons given, consider the first three. entrepreneurs. To make money / earn a profit (1) to be independent / not having to be told what to do (1) to follow an interest / be innovative / to run / own business (1) willingness to take risks (1) possess good leadership skills (1) easier to set up a firm / lower barriers to entry (1) for self-esteem / status / become well-known (1) flexible working hours (1) unable to find a job (1). 2(b) Explain two benefits an MNC can bring its host 4 One mark each for each of two benefits identified and one mark country. each for each of two explanations. Logical explanation which might include: If more than two benefits given, consider the first three. Increase employment (1) raise living standards / increase income / higher wages / reduce poverty (1). Increase skills (1) provide training to workers (1). Increase exports / reduce imports (1) improve the current account of the balance of payments (1). Increase GDP / output (1) raise economic growth (1). Increase competition (1) raise efficiency / reduce prices (1). Bring in new technology (1) raise quality / raise productive capacity / productivity / reduce costs of production (1). Increase the range of goods and services available in the country (1) raise living standards (1). Increase tax revenue (1) enable the government to spend more (1). Increase infrastructure (1) an MNC may build e.g. roads / reduce e.g. transport costs (1). 2(c) Analyse how a government could encourage the 6 Note: reference to measures to reduce consumption of demerit consumption of merit goods. goods can only be rewarded if clearly linked to switching to alternative merit goods. Coherent analysis which might include: Provide a subsidy (1) reduce any indirect tax (1) lower price (1) make the goods more affordable (1) raise quality (1). Provide information about the benefits of consuming the goods (1) e.g. health campaigns / advertisements (1) overcome information failure (1). Use regulation (1) make consumption compulsory / impose fines for non-consumption (1) e.g. school attendance (1). Provide services such as education / healthcare (1) free to consumers (1). Set maximum price (1) to make the goods more affordable (1) but may create a shortage (1). Measures to reduce demerit goods clearly linked to idea of encouraging substitution of merit goods (1) relevant example (1). 2(d) Discuss whether or not private sector firms are 8 Level Description Marks likely to charge lower prices than public sector firms. 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 they might: to evaluate economic issues and • competition may encourage private sector firms to situations. One side of the argument may charge low prices have more depth than the other, but • private sector firms may seek to reduce waste overall, both sides of the argument are and costs to avoid going out of business considered and developed. There is • private sector firms may have more funds to thoughtful evaluation of economic invest concepts, terminology, information and / • higher investment may reduce costs of production or data appropriate to the question. The • may be an MNC with significant economies of discussion may also point out the scale possible uncertainties of alternative decisions and outcomes. Why they might not: 2 A reasoned discussion which makes use 3–5 • profit motive may encourage private sector firms of economic information and clear to charge high prices analysis to evaluate economic issues • private sector firms may be monopolies and situations. The answer may lack • public sector firms may be subsidised some depth and development may be • public sector firms may charge low prices to make one-sided. There is relevant use of the products affordable economic concepts, terminology, • public sector firms may produce on a large scale 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.

Question 30

In Greece, rich households spend more than the average household. The amount of spending in an economy influences whether its production po…

Accepted Answer

5(a) Identify two reasons why rich households spend more than the average household. Two from:  higher incomes  find it easier to borrow  more confidence  more savings / more wealth  high cost of luxury goods and services  maintaining / showing status  rich households may choose to have large families 2 If more than two reasons are given, consider the first three. 5(b) Explain the significance of a production point inside a PPC and a production point on its PPC. Logical explanation which might include: A point inside a PPC means output is lower than potentially achievable (1) there are unemployed resources / there is inefficient use of resources (1). A point on a PPC means output is at its maximum (1) all resources are employed / full employment / there is efficient use of resources (1). A production point shows a combination of goods produced (1) example e.g. X capital goods and Y consumer goods (1). 4 One mark each for each of two significances identified and one mark each for each of two explanations. Question Answer Marks Guidance 5(c) Analyse why someone who has been unemployed for more than a year may not get another job. Coherent analysis which might include: May lose skills (1) qualifications may become out of date (1) may experience ill-health (1) lack of recent job experience (1) high cost of retraining (1) may become less attractive to employers (1). Skills may be outdated (1) industry in decline (1) will need retraining (1). Economy could be in recession (1) with high number of people unemployed and few vacancies (1). May lose confidence / become discouraged / depressed (1) put less effort into finding another job (1). Unemployed workers may be occupationally immobile (1) geographically immobile (1). Unemployment/welfare benefits may be high (1) may be above low wages / maybe sufficient to live on (1). May face discrimination (1) on grounds of e.g. age (1). May retire (1) and leave the labour force (1). 6 Question Answer Marks Guidance 5(d) Discuss whether or not a government should encourage firms to merge. In assessing each answer, use the table opposite. Why it should:  may result in economies of scale  lower average costs of production  lower prices for consumers  raise quality of products  increase international competitiveness and improve current account  improved performance may increase profits and corporation tax Why it should not:  may result in diseconomies of scale  may increase monopoly power / reduce competition  raise prices  may reduce innovation  rationalisation may result in some workers losing their jobs  should be left to market forces to decide. 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 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

Question 31

In 2020, the largest Thai commercial bank merged with a smaller commercial Thai bank. It was expected that the merger would affect the pric…

Accepted Answer

2(a) Identify two influences, other than price, on a customer’s choice of bank. Two from:  services provided  amount willing to lend  size of bank  online facilities  location  interest paid or charged  where family banks  advertising  green investments  community involvement  reputation  confidence in the bank / reliability / safety  relationship with staff  whether foreign currency can be exchanged 2 If more than two influences given, consider the first three. Not accepting brand loyalty. Accept whether the bank offers Islamic banking. Also accept interest on its own. 2(b) Explain two reasons why a merger may result in higher prices for consumers. Logical explanation which might include: More market power / less competition / monopoly power / may become a monopoly (1) can raise price as consumers will not be able to switch to other firms / demand may become more inelastic / can control price / become a price maker (1). May experience diseconomies of scale / example of a diseconomy of scale that may be experienced (1) raise prices due to higher (average) costs (1). Carrying out the merger may be expensive (1) price raised to cover the cost of e.g. retraining staff / making some staff redundant (1). 4 One mark each for each of two reasons identified and one mark each for each of two explanations. If more than two reasons given, consider the first three. Can accept higher cost if linked to diseconomies of scale or carrying out the merger. Not accepting the idea of higher costs because the firm will be larger (idea of higher total costs). Question Answer Marks Guidance 2(c) Analyse how an increase in bank lending can benefit an economy. Coherent analysis which might include: It could increase consumer expenditure (1) increase total demand (1) raise employment /reduce unemployment (1) reduce deflation (1). It could increase investment / increase spending on capital goods (1) benefit from advances in technology / innovation / better quality capital goods (1) increase productivity (1) raise the quality of products (1) lower price (1) increase exports (1) lower imports (1) improve the current account balance (1) cause economic growth / increase GDP / increase output / encourage firms to expand / new firms to set up (1). May enable the people to improve skills / to set up small business / buy basic necessities / reduce poverty (1). Lend to firms in financial difficulties (1) stop them going out of business (1). 6 Question Answer Marks Guidance 2(d) Discuss whether or not a market economy allocates resources in the best possible way. In assessing each answer, use the table opposite. Why it might:  price moves to reflect changes in demand and supply  resources move from products falling in demand towards those rising in demand  profit incentive for firms to produce what consumers demand / consumer sovereignty  competition results in efficiency which drives down costs and prices  changes in wages move labour to those jobs most in demand Why it might not:  merit goods are under-consumed so not enough resources are devoted to their production  demerit goods are overconsumed so too many resources are devoted to their production  no resources are devoted to public goods as there is no incentive to produce them  there may be factor immobility  monopolies may restrict output  external costs and benefits will not be taken into account when deciding on the allocation of resources. 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 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

Question 32

The number of Chinese restaurants in the UK fell by approximately 7% in 2020 compared to the year before. Reasons for this include falling …

Accepted Answer

3(a) Identify two challenges facing small firms. Two from: Raising finance (1) May not be able to employ specialist staff (1) Less well known (1) Managing cash flow (1) Survival / may have high level of competition (1) Not able to take advantage of economies of scale / high average cost (1) Accept any reasonable challenges facing small firms. Question Answer Mark Guidance 3(b) Explain two possible opportunity costs for firms if they invest in the latest technology. Logical explanation which might include: They may not be able to pay as much in wages (1) forgoing having extra workers to help in their business / more skilled workers (1) They may not be able to get good quality raw materials (1) sacrificing the quality of their product (1) They may not be able to operate in a good location (1) more difficult for customers to reach the firm (1) They may not be able to buy land (1) for expansion (1) They may not be able to spend on advertising / marketing / spending on the brand (1) forgoing the opportunity to increase demand (1) Retained profits (1) could have been distributed to the owners (1) 4 One mark each for each of two opportunity costs identified and one mark each for each of two explanations. If more than two opportunity costs given, consider the first three. Question Answer Mark Guidance 3(c) Analyse two causes of a fall in demand for a product such as Chinese food. Coherent analysis which might include: Decrease in price of substitutes / better quality substitutes (1) increasing demand for substitutes (1) such as Indian food or other kinds of food (1) there may be an increase in the advertising of substitutes / better known rivals may enter the market (1). Increase in the price of complements (1) e.g. delivery charges (1) Decrease in income (1) decreasing demand for Chinese food as people eat out less (1) as eating out is seen as luxury goods (1). Change in tastes / trends moving away from Chinese food (1) increasing demand for other types of food (1) Decrease in quality of Chinese food (1) lack of investments (1) may be a health report about the advantages of eating another type of food (1). Lack of advertising (1) due to little investments in marketing (1) less popular / less awareness of product (1). 6 If more than two causes given, consider the first three. Question Answer Mark Guidance 3(d) Discuss whether or not competition is harmful to a firm. In assessing each answer, use the table opposite. Why it might be:  reduction in market share  less revenues / less profits  less growth  less reinvested profits – less innovation  may need to lower prices / spend more in order to compete  may be difficult to enter or stay in an industry if there are large firms with low average costs Why it might not be:  less complacency  more innovation  increase quality of goods and services produced  domestic competition leads to international competitiveness 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 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

Question 33

In 2020, some firms in Suriname, a South American country, stopped production. This was because the firms could not cover their variable co…

Accepted Answer

3(a) Define, with an example, a fixed cost. 2 Not sufficient to state a cost that does not change. A cost that does not change with output / a cost that has to Accepting electricity / electricity bills and wages. be paid even when output is zero (1) e.g. rent (1). 3(b) Explain two types of unemployment. 4 Allow explanation of two types of frictional unemployment i.e. search, casual or seasonal and two types of structural Logical explanation which might include: unemployment i.e. regional and technological. Also allow • frictional unemployment (1) workers in between jobs voluntary and involuntary. (1) • structural unemployment (1) changes in demand and One mark each for each of two types identified and one supply conditions / skills not matching vacancies / mark each for each of two explanations. lack of labour mobility (1) • cyclical / demand-deficient unemployment (1) lack of total demand / occurs during a recession (1) 3(c) Analyse how supply-side policy measures could reduce 6 Reward the same point e.g. ‘raise productivity’ only once. unemployment. Coherent analysis which might include: Accept lower interest rate if linked to encouraging investment. Education (1) can increase qualifications / literacy rate (1) training (1) can increase skills / productivity / quality of labour (1) raise mobility / increase job opportunities (1) reduce structural unemployment (1). Lower income tax (1) reduce unemployment benefit (1) increases the incentive for the unemployed to find work quickly (1) reduce frictional unemployment (1). Lower corporation tax / tax incentives (1) encourage firms to invest / expand output (1). Privatisation (1) deregulation (1) can increase efficiency (1) reduce firms’ costs (1) enabling firms to afford more workers (1). Reform of trade unions / labour market reforms (1) Deregulation / removing labour regulations (1) making it easier to hire and fire workers (1). Government spending on infrastructure (1) can reduce firms’ costs of production / reduce transport costs (1) encouraging firms to expand (1) increase labour mobility (1). Minimum wage legislation (1) reducing may encourage employer to employ more workers / increasing may encourage the unemployed to search more actively for work (1). Subsidies (1) encouraging firms to expand / prevent firms going out of business (1). Better/more healthcare (1) can increase productivity / reduce working time lost (1). 3(d) Discuss whether or not having fewer firms in a market 8 will benefit consumers. Level Description Marks In assessing each answer, use the table opposite. 3 A reasoned discussion which 6–8 accurately examines both sides of Why it might: the economic argument, making • firms may be larger, may be able to benefit from use of economic information and economies of scale clear and logical analysis to • economies of scale may include e.g. financial, evaluate economic issues and managerial, technical situations. One side of the • lower costs may result in lower prices argument may have more depth • firms may have more market power - firms may make than the other, but overall, both more profit and may reinvest which can improve quality sides of the argument are • firms may have moved to another market in response to considered and developed. There changes in consumer demand is thoughtful evaluation of • firms that were creating pollution and other external economic concepts, terminology, costs may close down information and/or data appropriate • may reduce the time consumers spend shopping to the question. The discussion around may also point out the possible uncertainties of alternative decisions and outcomes. Why it might not: • firms may experience diseconomies of scale 2 A reasoned discussion which 3–5 • diseconomies of scale may include e.g. communication makes use of economic information problems, control problems and poor industrial relations and clear analysis to evaluate • less choice economic issues and situations. • lack of competition / move towards monopoly resulting The answer may lack some depth and development may be one- in lower quality and higher prices sided. There is relevant use of • lower availability. economic concepts, terminology, information and data appropriate to the question. 3(d) 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.

Question 34

(a) Calculate the price elasticity of demand for coffee. [1] (b) Identify two rewards to factors of production in Nicaragua. [2] (c) Explai…

Accepted Answer

1(a) Calculate the price elasticity of demand for coffee. () 0.3 (1) 1(b) Identify two rewards to factors of production in Nicaragua. Wages (1) profits (1) 2 Only accept these answers if within the first three listed. 1(c) Explain one way in which unemployment is measured. Claimant count (1) based on workers claiming unemployment benefits (1). OR Labour force survey (1) asking people if they are out of work and looking for employment (1). 2 One mark for a way identified and one mark for an explanation. 1(d) Explain two functions of money in Nicaragua. Medium of exchange (1) used to buy and sell products / used to trade (1). Store of value (1) used to save / keeps its value over a period of time (1). 4 One mark each for each of two functions identified and one mark for each of two explanations. Only accept these answers if within the first three listed. Question Answer Mark Guidance 1(e) Analyse the relationship between the percentage of the labour force employed in agriculture and GDP per head. Coherent analysis which might include: Relationship: Inverse or negative relationship / move in opposite directions (1). Countries with a high percentage of their labour force employed in agriculture tend to have a low GDP per head (1). Supporting evidence: The four countries with the lowest % of the labour force employed in agriculture had the highest GDP per head (1) Specific reference to one or more countries e.g. Bahamas had the lowest % employed in agriculture and the highest GDP per head (1). Use of GDP per head data to show comparison between country with high employment in agriculture and one with low percentage employment in agriculture (1). Analysis of expected relationship: Wages may be low in agriculture (1) wages / value added tends to be higher in the secondary and / or tertiary sector (1). Exception: Nicaragua / Dominica (1) Nicaragua has the second highest % of labour force employed in agriculture but the lowest GDP per head / Dominica had the highest % of labour force employed in agriculture but the second to lowest GDP (1). Analysis of exception: Explanation of another influence on GDP per head (1). 4 Responses do not have to be in the format suggested but they should address the expected/normal relationship, offer supporting evidence of that, highlight any exceptions to that, and analyse the overall data. Note the four are: Bahamas Barbados Costa Rica Saint Lucia Question Answer Mark Guidance 1(f) Analyse, using a demand and supply diagram, how a drought could affect the market for coffee. Coherent analysis which might include: D&S 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 left (1). Equilibriums – shown by lines P1 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). Written analysis: A drought will lead to a shortage / will increase costs of production (1). OR The lower supply will push up price / reduce quantity (traded) (1). 5 Question Answer Mark Guidance 1(g) Discuss whether or not small firms benefit Nicaraguan consumers. Award up to 4 marks for logical reasons why they might, which may include:  know customers’ requirements (1) provide a personal service / see them often (1) may be flexible (1)  may be many small firms / competitive markets (1) prices may be low (1) quality may be high (1) may offer wider choice collectively than a few large firms (1)  may provide products for which there is only a low demand (1) niche market (1)  makes goods more accessible in rural areas (1). Award up to 4 marks for logical reasons why it might not, which may include:  may not be able to take advantage of economies of scale (1) examples (1) higher average cost of production (1) higher price (1)  small firms may have lower profits (1) may limit investment / funds available (1) fail to raise quality (1)  may limit choice (1) individual small firms may have a limited range of products (1) cannot provide all that consumers may want (1). 6 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 Only reward reference to quality or prices once. Question Answer Mark Guidance 1(h) Discuss whether or not Nicaragua should devote more of its resources to coffee production. Award up to 4 marks for logical reasons why it should, which may include:  global demand for coffee is increasing (1) demand for coffee is price inelastic (1) revenue / profits may increase (1) more tax revenue for government (1)  firms grow in size (1) greater specialisation / economies of scale may reduce average costs (1) raise quality (1) increase profits (1) more competitive (1)  exports may increase (1) improve the current account of its balance of payments (1) lead to economic growth/higher standard of living (1)  may lead to more job opportunities (1) less poverty / less government payments to unemployed (1)  already twelfth biggest world producer (1) growth will give them more monopoly power (1) more power to raise price of coffee (1). Award up to 4 marks for logical reasons why it should not, which may include:  other countries produce coffee (1) these may be more competitive (1)  output may be affected by changes in weather (1) natural disasters (1) overproduction can exhaust land (1) leading to lower yields in future (1)  opportunity cost (1) resources could be used to produce other products (1) example (1) coffee workers only receive low pay (1)  world market for coffee may fall / demand is unpredictable (1) resulting in surplus capacity / wasted resources (1)  bmore dependent on other countries for imports of other (agricultural) products (1)  firms may suffer from diseconomies of scale (1) reduce profits (1). 6 Do not expect, but reward reference to absolute or comparative advantage.

Question 35

Healthcare is in the tertiary sector. Healthcare provides both private and external benefits. In 2019, there were five mergers between larg…

Accepted Answer

4(a) Define tertiary sector using an example apart from healthcare. The sector covering the provision of services (1). Example e.g. banking / car showroom / coffee shop / education (1). 4(b) Explain the difference between a private benefit and an external benefit of healthcare. Logical explanation which might include: A private benefit is enjoyed by the person consuming the product (1) e.g. a person may enjoy better health / longer life expectancy (1). OR A provider of healthcare e.g. hospital (1) and revenue / profits made (1). An external benefit is a benefit enjoyed by a third party / someone not directly involved in the consumption or production of the product (1) e.g. less risk of catching a virus when other people are vaccinated / higher output (1). 4 Question Answer Mark Guidance 4(c) Analyse why a government may prevent a horizontal merger. Coherent analysis which might include: A horizontal merger is a merger between two firms in the same industry and same stage of production (1). A government may prevent a merger if it thinks it will give the new firm monopoly power (1) and result in market failure (1). Less competition may result in higher prices (1) lower quality (1) there may be a substantial loss of jobs (1) through rationalisation (1). A government may be concerned that the new firm may be too large (1) may experience diseconomies of scale (1) example (1) may become less internationally competitive (1) lower exports (1). A government may want to avoid a reduction the number of suppliers (1) resulting in less choice for consumers / less innovation (1). 6 Note: need both same industry and same stage of production to get the mark for horizontal merger. Question Answer Mark Guidance 4(d) Discuss whether or not a foreign multinational company (MNC) will continue to produce in a host country for many years. In assessing each answer, use the table opposite. Why it might:  may earn a high revenue / profit due to high demand  may experience low costs due to low wages / low raw material costs in the country  may have access to high quality labour due to good education and training in the country  may be subsidised by the host country’s government. Why it might not:  natural resources it was extracting may run out  tax in the host country may increase  a rise in the host country’s foreign exchange rate may increase the price of its exports  there may be industrial action undertaken by trade unions in the host country  more profitable opportunities may occur in other countries  may be changes in regulations. 8 See Guidance table at the end of the mark scheme.

Question 36

Approximately 95% of students in Macao, a special administrative region of China, attend a private school. Internationally, competition for…

Accepted Answer

3(a) Define privatisation. 2 Privatisation is the sale / transfer of assets (1) from the public sector (1) to the private sector (1). 3(b) Explain how technological innovation can benefit firms. 4 One mark for each identification and one mark for each relevant explanation. Logical explanation which might include: • technological innovation can lead to new / better technology (1) increasing efficiency / productivity (1) • higher levels of output (1) economies of scale / reducing average cost (1) leading to lower prices (1) attracting consumers (1) leading to higher profits (1) • improved / faster capital equipment / IT systems / software (1) producing better quality products (1) • more capital-intensive firms (1) reduced labour costs (1) reduced errors (1). 3(c) Analyse the effects of increased competition amongst 6 Accept lower quality (1) due to firms reducing costs (1) firms. Coherent analysis which might include: • lower price (1) as firms try to attract more consumers (1) this will benefit consumers (1) but could cause firms to close down (1) • improved quality / innovation (1) such as longer-lasting products / products that provide more satisfaction to consumers / products that consumers want to buy (1) • increased choice (1) consumers can to choose between different firms for products (1) • reduced profits for firms (1) costs may increase because of the need to improve quality (1) each firm will have fewer consumers since demand will be distributed between more firms (1). • firms may need to spend more on advertising / marketing (1) increasing costs (1) this may cause external costs e.g. pollution (1) but may provide better information to consumers (1). 3(d) Discuss whether or not improving education can help a 8 Level Description Marks government achieve its macroeconomic aims. 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 • a more skilled / productive workforce attracts more clear and logical analysis to investments leading to higher total demand and evaluate economic issues and economic growth situations. One side of the • improved education can make finding work easier and argument may have more depth may lead to full employment / lower unemployment than the other, but overall both • high productivity could lead to lower average cost of sides of the argument are production leading to more stable prices / low inflation considered and developed. There • higher level of exports leads to more balance of is thoughtful evaluation of payments stability economic concepts, terminology, • education could give everyone the chance to get a well- information and / or data paid job leading to a more equal redistribution of appropriate to the question. The income. discussion may also point out the possible uncertainties of Why it might not: alternative decisions and • improving education requires increased government outcomes. expenditure leading to higher total demand and may cause inflation • improved education in the country could lead to emigration of skilled workers, causing lower economic growth • there might not be enough jobs for those highly qualified leading to increase unemployment amongst graduates / underemployment • better education might only be accessible to those on higher incomes, therefore increasing inequality in income distribution 3(d) • a better educated workforce may demand higher wages 2 A reasoned discussion which 3–5 causing increase costs of production, decreasing price makes use of economic competitiveness, worsening the current account of the information and clear analysis to balance of payments evaluate economic issues and • the gains from improved education are long term, not situations. The answer may lack short term. 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.

Question 37

The Peruvian government is under pressure from its industries to improve the country’s transport system. Peru’s third largest industry is t…

Accepted Answer

5(a) Identify two examples of labour employed in the tourism 2 Also accept skilled and unskilled. industry. Do not accept driver or car driver on their own. Could accept Two from e.g. e.g. a driver who transports tourists, • tour guides • hotel manager / hotel worker • travel agent • flight attendant • coach / bus driver 5(b) Explain two reasons why countries with a good 4 One mark each for each of two reasons identified and one transport system often have a high GDP. mark for each of two explanations. Logical explanation which might include: Accept: increase accessibility. Lower firms’ costs of production (1) cheaper to move goods/imports/exports / move goods/raw materials//imports/exports more efficiently / increase international competitiveness and so increase exports / higher income / increase size of markets / higher total demand (1). Reduce wastage (1) food etc more likely to arrive fresh and so increase earnings for sale of e.g food / higher profits (1). Increase labour mobility / easier to get to work (1) reduce unemployment / increase productivity (1). Less congestion (1) less stress / less time lost (1). Increase (earnings from) tourism (1) cheaper / easier to move around the country (1). Attract MNCs/FDI / increase investment (1) increase employment (1) increase productive capacity (1). Fewer accidents (1) avoid loss of workers / avoid loss of working hours (1). Less pollution (1) healthier labour force (1). 5(c) Analyse the benefits consumers may gain from a 6 competitive market. Coherent analysis which might include: A competitive market has a large number of firms producing the product / no barriers to entry (1) substitutes available (1). Low prices (1) as firms try to gain a larger share of the market / attract consumers / increase purchasing power (1). High quality (1) as competition can increase efficiency (1) increase innovation (1). Choice (1) different versions of the product may be produced / greater range of products / greater variety (1). Responsive to changes in consumer demand (1) consumer sovereignty (1). 5(d) Discuss whether or not an increase in trade union Maximum of L2 4 marks if candidate answers in reverse membership will benefit an economy. based on a misinterpretation – an increase in trade union fees. In assessing each answer, use the table opposite. Level Description Marks Why it might: • rise in wages and improved working conditions may 3 A reasoned discussion which 6–8 increase productivity accurately examines both sides of the • higher wages may increase total demand which may economic argument, making use of increase real GDP economic information and clear and • improved working conditions would increase living logical analysis to evaluate economic standards issues and situations. One side of the • by providing a channel of communication, it may reduce argument may have more depth than conflicts between workers and employers the other, but overall both sided of the • by helping with training may raise output. argument are considered and developed. There is thoughtful evaluation of economic concepts, Why it might not: terminology, information and/or data • higher wages may increase inflation appropriate to the question. The • may take industrial action e.g. strikes which could lower discussion may also point out the output / GDP possible uncertainties of alternative • may resist job losses / introduction of new technology decisions and outcomes. which may prevent increases in efficiency. 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. 5(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.

Question 38

Luxembourg is a country with a high level of economic development. Its government intervenes in an attempt to overcome some of the disadvan…

Accepted Answer

2(a) Identify two influences on the proportion of income 2 These are the most common influences. Give credit for other saved by households. relevant influences. Two from: Accept any two from the first three responses. • rate of interest • level of (disposable) income / earnings / wealth / taxation • confidence / economic outlook • advertising / availability of saving schemes • strength of financial institutions • age of / number of dependents in household • social convention / culture • cost of living / spend on basic necessities / inflation. 2(b) Explain two characteristics of monopoly. 4 One mark each for each of two characteristics identified and one mark for each of two explanations. Logical explanation which might include: • only firm (1) dominant market share / no effective competition / substitutes / controls the market (1) • high barriers to entry (1) difficult for new firms to enter industry (1) • price maker (1) able to set the price / demand is inelastic / only choice for consumers (1) • can control supply (1) causing higher prices / makes high profits (1) • unique product (1) result of profits reinvested in R&D (1) • large size (1) benefits from economies of scale / low average costs (1). 2(c) Analyse the causes of migration between countries. 6 Note: apply a limit of three marks for simply identifying causes with no analysis given. Coherent analysis which might include: Pull factors: • people may move to gain higher income / move to high- income countries / countries with higher wages (1) move to countries with more job opportunities / lower unemployment (1) people move to increase goods and services they can consume / higher standard of living (1) • people may move to gain better healthcare (1) to increase life expectancy / quality of life (1) • people may move to gain better education / attend university (1) to increase their children’s chance of gaining employment (1) and high pay (1) • may have family members in another country (1) example of why move to be with family members (1). Push factors: • people may move to countries to escape conflict / high crime / high corruption (1) racial and religious intolerance (1) famine (1) pollution (1) climate change / better environment (1) escape poverty (1) high taxes (1) to increase safety (1). 2(d) Discuss whether or not government intervention can 8 Level Description Marks overcome the disadvantages of a market economic system. 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: governments to evaluate economic issues and situations. One side of the argument may • provide merit goods which may be under-consumed have more depth than the other, but • restrict demerit goods which may be over-consumed overall both sides of the argument are • provide public goods which would not be supplied by considered and developed. There is the private sector thoughtful evaluation of economic • may provide products or benefits for those with low concepts, terminology, information and/or purchasing power data appropriate to the question. The • may regulate monopolies / prevent mergers discussion may also point out the • may address external costs such as pollution possible uncertainties of alternative • set price ceiling to keep prices low decisions and outcomes. • set minimum wages to reduce exploitation of workers. 2 A reasoned discussion which makes use 3–5 Why it might not of economic information and clear analysis to evaluate economic issues and • may be government failure situations. The answer may lack some • government may lack accurate information depth and development may be one- • may take time to make decisions / bureaucratic sided. There is relevant use of economic • may reduce incentives concepts, terminology, information and • may be corruption. 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.

Question 39

Estonia’s factors of production are employed in a range of industries including education. In 2022, the country experienced a shortage of t…

Accepted Answer

3(a) Define factor of production. 2 No marks for examples. A resource / input (1) used to produce goods and services / used in the production process (1). 3(b) Explain two reasons why building workers may not become 4 One mark each for each of two reasons teachers. identified and one mark each for each of two explanations. Logical explanation which might include: If more than two reasons given, consider the May lack skills (1) occupationally immobile (1). first three. May not have the necessary qualifications / may not have sufficient education / may lack training / may lack willingness or ability to undertake training (1). May be paid more as building workers (1) a more physically demanding / more dangerous job (1) enjoy a higher standard of living as building workers may be in more demand than teachers (1). May be geographically immobile (1) unable to move to where the teaching jobs are (1). May not like the working conditions experienced by teachers (1) e.g. may want flexible working hours / less stress (1). May be unaware of job vacancies (1) information failure (1). May lack job vacancies (1) demand for teachers may fall (1). May enjoy working outside / gain more job satisfaction from working as a builder (1) benefit of fresh air (1). 3(c) Analyse how a small firm can compete successfully with a large 6 Two relatively easy marks to gain are ‘lower firm in the same industry. prices’ and ‘higher quality’. Coherent analysis which might include: It may provide a personal service / customised service (1) specialist product / unique product (1) catering for a niche part of the market (1). It may build up a relationship with customers / develop consumer loyalty / have a good reputation (1) more aware of their customers’ requirements (1) good location (1) may be easy to manage (1). It may be subsidised by the government / given a government grant (1) may be charged a lower rate of (corporate income) tax (1) more revenue / lower cost (1) this could enable it to charge a low / competitive price (1). It may have a good relationship with workers / good communication with staff (1) increase their motivation (1) May be innovative (1) produce a high quality product (1). It may be more flexible (1) responding quickly to changes in market conditions (1). A large firm may experience diseconomies of scale (1) example of a diseconomy of scale (1) higher average cost / higher cost of production (1) higher prices (1). 3(d) Discuss whether or not an increase in the money supply will benefit 8 Level Description Marks an economy. 3 A reasoned discussion 6–8 In assessing each answer, use the table opposite. which accurately examines both sides of the Why it might: economic argument, • raise consumer expenditure / government spending / investment making use of economic • reduce interest rate information and clear and • increase total demand logical analysis to evaluate • increase economic growth and employment economic issues and • increase bank lending situations. One side of the • provide finance for firms to expand. argument may have more depth than the other, but Why it might not: overall both sides of the • cause demand-pull inflation / fall in internal value of money argument are considered • increase imports and developed. There is • current account deficit may increase / current account surplus may thoughtful evaluation of fall economic concepts, • may cause a fall in the rate of interest terminology, information • increase in bank lending may result in some households and firms and/or data appropriate to getting into debt. the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 3(d) Level Description Marks 2 A reasoned discussion 3–5 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 attempt 1–2 at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 0 A mark of zero should be 0 awarded for no creditable content.

Question 40

In 2022, Paraguay’s production possibility curve (PPC) shifted to the right. Paraguay has a mixed economic system. Its government provides …

Accepted Answer

3(a) Identify what is measured on the axes of a production 2 Two types of products may be shown on the axes on a PPC possibility curve. diagram for two marks. (Output of) two types of product (2). If more than two items are given, consider the first three. Output (1) one type of product (1) another type of product (1). 3(b) Explain, with an example of each, the difference 4 One mark for an explanation of a merit good and one mark between a merit good and a public good. for an example of a merit good. One mark for an explanation of a public good and one mark Logical explanation which might include: for an example of a public good. A merit good is under-consumed / underproduced / Accept but do not expect reference to non-rejectable / zero consumers do not appreciate its full value / has external cost of producing an extra unit for a public good. benefits / can be produced by the private sector / can be produced by the private sector and the public sector / is a Allow public park. private good / is rival and excludable (1) e.g. education / healthcare / fruit (1). No mark for roads unless qualified by e.g. uncrowded roads A public good would not be produced by the private sector / with many entry and exit points. is (usually) supplied / produced by the government / funded by the government (1) non-excludable / non-rival (1) e.g. street lighting / defence / flood control (1). 3(c) Analyse how division of labour can benefit firms. 6 Coherent analysis which might include: • Workers can specialise (1) in what they are best at producing (1) save time / speed up production (1) reduce waste (1) reduce mistakes (1) increase productivity /skill / efficiency (1) increase output / supply (1) lower (average) cost (1). • Increase quality (1) lower prices (1) raise demand / increase sales (1) increase revenue (1) increase profits (1). • Make it easier to mechanise production (1) reduce labour required (1). • Reduce training / training costs (1) as reduce tasks undertaken / division of labour involves breaking production down into different tasks (1). 3(d) Discuss whether or not consumers would benefit from 8 Level Description Marks only one firm producing shampoo. 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 • one firm may be able to benefit from economies of scale analysis to evaluate economic issues • lower average cost may lead to lower prices and situations. One side of the argument • firm may spend a large amount on research and may have more depth than the other, but development due to high profits and security overall both sides of the argument are • quality of product may be high considered and developed. There is • less time / less effort choosing shampoo. thoughtful evaluation of economic concepts, terminology, information Why they might not: and/or data appropriate to the question. • lack of competition may drive up prices The discussion may also point out the • lack of choice possible uncertainties of alternative • if quality is poor, cannot switch to substitutes decisions and outcomes. • firm may experience diseconomies of scale. 2 A reasoned discussion which makes use 3–5 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(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 no 0 creditable content.

Question 41

The public sector in Andorra is focusing on developing the healthcare, biotechnology and sports industries. Andorra has the natural advanta…

Accepted Answer

3(a) Define public sector. 2 Sector which is owned / managed / economic decisions made (1) by the government (1). 3(b) Explain two types of mergers. 4 Accept, but do not expect, explanation of lateral mergers. Logical explanation which might include: Allow vertical backwards and vertical forwards as two • Horizontal merger (1) where two or more firms in the different types of merger. same industry at the same stage of production merge / relevant example (1). • Vertical merger (1) where two or more firms in the same industry but different stage of production merge / relevant example (1). • Conglomerate (1) where two or more firms in different industries merge / relevant example (1). 3(c) Analyse how differences in healthcare can lead to 6 The question can be analysed from either poorer or better differences in economic development between healthcare provision in one country compared with another countries. but the same point should not be rewarded twice. Coherent analysis which might include: If healthcare is better in one country than another, workers will be healthier / take less time off sick (1) the productivity of labour may be higher (1) leading to higher incomes of workers (1) improved standard of living (for workers) (1) longer life expectancy / lower death rate (1) higher HDI (1). Firms may gain higher profits (1) due to lower average cost / higher revenue (1) higher quality output (1) productivity capacity of the economy will increase (1) leading to economic growth (1) exports may increase due to higher competitiveness (1) investment may increase (1) creating more jobs (1) reducing unemployment (1) increasing incomes and reducing (child) poverty (1) may increase spending on education (1). 3(d) Discuss whether or not competitive markets are 8 Level Description Marks beneficial for consumers. 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 • more firms in the market leads to lower price analysis to evaluate economic issues • higher quality and situations. One side of the argument • more choice may have more depth than the other, but • firms may be smaller and so may not experience overall both sides of the argument are diseconomies of scale considered and developed. There is • more innovation in terms of production methods and thoughtful evaluation of economic products concepts, terminology, information and/or data appropriate to the question. Why it might not: The discussion may also point out the • lower profits for firms – less innovation and quality possible uncertainties of alternative improvement decisions and outcomes. • too many choices – takes up consumer time and effort • firms may spend on advertising, increasing their costs 2 A reasoned discussion which makes use 3–5 and prices of economic information and clear • lower quality due to race to the bottom analysis to evaluate economic issues • firms may be smaller and may not experience and situations. The answer may lack some depth and development may be economies of scale • competition may lead to resource depletion / negative one-sided. There is relevant use of economic concepts, terminology, externalities information and data appropriate to the question. 3(d) 8 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 no 0 creditable content.

Question 42

(a) Calculate the total financial sector contribution (in $) to Switzerland’s GDP. [1] (b) Identify two microeconomic policy measures. [2] …

Accepted Answer

Question Answer Marks Guidance 1(a) Calculate the total financial sector contribution (in $) to 1 Accept $73 billion or 73 billion. Switzerland’s GDP. $72 720 000 000. 7.27  1010 $72.7 billion 1(b) Identify two microeconomic policy measures. 2 Accept organising mergers. maximum prices (1) If more than two suggested measures are given, consider subsidies (1) the first three. 1(c) Explain one reason why overdependence on foreign 2 One mark for the reason and one mark for an explanation. markets is a disadvantage to the Swiss economy. Makes it more exposed to external shocks (1) as anything that happens in other countries could also affect the Swiss economy, for example reduced exports / increased import prices / potential shortages (1). 1(d) Draw a demand and supply diagram to show how a 4 subsidy to solar energy producers would affect the market for solar energy. D&S 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 and Q1 and P2 and Q2 or equilibrium points marked as E1 and E2 (1). 1(e) Explain two reasons why Switzerland had a current 4 One mark each for each of two reasons identified and one account surplus. mark each for each of two explanations. Logical explanation which might include: If more than two reasons are given, consider the first three. • low inflation (1) price of Swiss exports relatively lower, leading to increased exports / price of domestically produced goods relatively lower leading to decreased imports (1) • high-quality products (1) demand for Swiss exports higher, leading to increased exports / demand for domestically produced goods higher, leading to decreased imports (1) • strong currency (1) has kept cost of imported raw materials in Switzerland low, reducing costs of production (1). 1(f) Analyse the relationship between the global GDP 5 Responses do not have to be in the format suggested but growth rate and the change in the value of the Swiss they should address the expected / normal relationship, offer Franc. supporting evidence of that, highlight any exceptions to that, and analyse the overall data. Coherent analysis which might include the following. Expected relationship: generally negative / inverse relationship (1) as the global growth rate falls, the value of the Swiss Franc rises / as the global growth rate rises, the value of the Swiss Franc falls (1). Supporting evidence: fall in global growth rate led to rise in the value of Swiss Franc from 2018–2019 or 2019–2020 (1), rise in global growth rate led to fall in the value of Swiss Franc from 2020–2021 (1). Analysis: Swiss Franc’s status as a “safe haven” currency (1) when investors are unsure about the economy, they usually keep their money in Swiss francs (1). Exception: 2021–2022 (1) where global growth was falling but Swiss Franc was stable / rising only slightly (1). Analysis for exception: Other reasons could affect the value of Swiss Franc (1), for example Switzerland was also affected by the Covid–19 pandemic (1). 1(g) Discuss whether or not an increase in interest rates will 6 Falling profits can only be rewarded once. harm the Swiss economy. Apply this example to all questions with the command Award up to 4 marks for logical reasons why it might, which word DISCUSS (1g, 1h, 2d, 3d, 4d and 5d). may include: Each point may be credited only once, on either side of an • cost of borrowing increases for firms (1) increasing total argument, but separate development as to how / why the costs (1) reducing profits (1) outcome may differ is rewarded. • firms may invest less (1) may have to shut down (1) • unemployment rises (1) decreasing incomes Generic example Mark (1)decreasing total demand (1) decreasing economic growth (1) Tax revenue may decrease… 1 • consumers may borrow less (1) save more (1) less spending (1) demand for goods and services decreases ...because of reason e.g. incomes may be 1 (1) as returns from savings increase (1) decreasing lower. revenues of firms (1) decreasing profits (1) • Government borrowing costs more (1) leaving less Tax revenue may increase because 0 funding available for e.g. education / health (1). incomes may be higher i.e. reverse of a previous argument. Award up to 4 marks for logical reasons why it might not, which may include: Tax revenue may increase because of a 1 different reason i.e. not the reverse of a • hot money inflows strengthen the Swiss Franc (1) previous argument e.g. government reduce cost of e.g. imported raw materials (1) reducing spending on subsidies may stimulate the inflation (1) increasing export competitiveness (1) economy more than spending on education. • reduced demand-pull inflationary pressures (1) as cost of borrowing increases (1) decreasing demand for loans (1) increasing saving / decreasing consumption (1) investment (1) decreasing total demand (1) firms may reduce prices (1) increasing affordability of goods and services for consumers (1). • costs of production may decrease (1) reducing cost- push inflationary pressures (1). 1(h) Discuss whether or not a bank merger will benefit Swiss 6 Award a maximum of 4 marks if candidates only mention consumers and workers. one of consumers or workers. Award up to 4 marks for logical reasons why it might, which Reward, but do not expect reference to inelasticity of may include: demand in monopoly. • to avoid one of them collapsing (1) reducing confidence in the whole banking system (1) greater job security (1) less chance of bank customers losing their savings (1) • economies of scale (1) as output increases (average) costs fall (1) prices may decrease (1) goods and services more affordable for consumers (1) • the merged firm may make higher profits (1) able to pay higher wages to workers who remain employed (1) • workers in merged firm can share skills (1) improving efficiency (1). Award up to 4 marks for logical reasons why it might not, which may include: • monopoly power may increase (1) restricting supply (1) decreasing consumer choice (1) increasing prices (1) decreasing quality (1) • workers may lose their jobs (1) as the bank might shut down some operations / reduce duplication (1) increasing unemployment (1) • the merged firm may be too large / experience diseconomies of scale (1) example (1) reducing efficiency (1).

Question 43

A Swiss multinational food manufacturer increased prices for its products by an average of 8% in 2022. It increased its prices in the USA b…

Accepted Answer

2(a) Define multinational company. 2 No mark for an example of an MNC. A firm that is based / has its headquarters in one country (1). Operates / produces / sets up / works (1) in another country or countries (1). 2(b) Explain two reasons why a firm may charge a different 4 One mark each for two reasons identified and one mark price for the same product in two different countries. each for two explanations. Logical explanation which might include: If more than two reasons are given, consider the first three. • demand may be higher / lower in one country (1) Note: There will be other relevant reasons. To get the resulting in higher / lower prices (1) development mark there must be a justification of why that • supply maybe higher / lower in one country (1) resulting factor will affect prices. in lower prices (1) • higher income / GNP per head in one country (1) means Do not accept answers based on foreign exchange rate. more able to afford to pay higher price (1) • price elasticity of demand may vary (1) more power to raise price where demand is inelastic (1) • greater competition in one country / more substitutes (1) leads to lower prices to be competitive (1) • indirect tax rates may vary e.g. higher GST / VAT / import tariffs (1) will lead to higher price (1) • government subsidies may be given in some countries (1) lowering price (1) • local material costs / wages may be lower in one country (1) lowering costs of production mean lower prices (1) • different transport costs (1) may be cheaper to transport to countries close by (1) • quality of good may be higher (1) enable firm to charge a higher price (1). 2(c) Analyse how opportunity cost influences the decisions 6 Maximum of 4 marks if candidates do not cover at least two made by consumers, workers and producers. out of consumers / workers / producers. Coherent analysis which might include: • opportunity cost is the (next) best alternative (1) forgone / given up (1) • example of consumers e.g. must decide between buying different products (1) due to limited income (1) • example of workers e.g. must decide between different jobs or between work and leisure (1) as time is limited (1) • example of producers / firms e.g. must decide what to make / how to make it / where to locate (1) as they have limited (financial) resources (1). 2(d) Discuss whether or not consumers would benefit from 8 Level Description Marks an increase in the number of small firms in an industry. 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 analysis • more competition, lower price, higher quality to evaluate economic issues and • small firms may provide a more personal service situations. One side of the argument may • may produce niche products have more depth than the other, but • may be more flexible / react quickly to consumer needs overall, both sides of the argument are • may introduce new ideas / new varieties of products considered and developed. • may be easier access – consumers may not have to travel so far. There is thoughtful evaluation of economic concepts, terminology, Why they might not: information and/or data appropriate to • may be wasteful duplication the question. The discussion may also • may waste consumers time with too much information to point out the possible uncertainties of process alternative decisions and outcomes. • may have higher costs as unable to take advantage of economies of scale 2 A reasoned discussion which makes use 3–5 • may reduce profits of larger firms, reducing their of economic information and clear spending on research and development analysis to evaluate economic issues • may not stay in business for long. 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) 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 no 0 creditable content. L1 and up to 2 marks for an understanding of consumers, small firms or industry.

Question	Answer	Marks	From
1	see sheet	20	0455/21 May/June 2017
2	see sheet	20	0455/22 May/June 2017
3	see sheet	20	0455/23 May/June 2017
4	see sheet	20	0455/21 Oct/Nov 2017
5	see sheet	20	0455/21 Oct/Nov 2017
6	see sheet	20	0455/23 Oct/Nov 2017
7	see sheet	30	0455/21 May/June 2018
8	see sheet	20	0455/22 May/June 2018
9	see sheet	20	0455/22 May/June 2018
10	see sheet	20	0455/23 May/June 2018
11	see sheet	20	0455/22 Oct/Nov 2018
12	see sheet	20	0455/22 Oct/Nov 2018
13	see sheet	20	0455/22 Feb/March 2019
14	see sheet	30	0455/21 May/June 2019
15	see sheet	20	0455/21 Oct/Nov 2019
16	see sheet	20	0455/22 Oct/Nov 2019
17	see sheet	20	0455/22 Feb/March 2020
18	see sheet	30	0455/21 May/June 2020
19	see sheet	20	0455/22 May/June 2020
20	see sheet	30	0455/21 Oct/Nov 2020
21	see sheet	20	0455/23 Oct/Nov 2020
22	see sheet	20	0455/22 Feb/March 2021
23	see sheet	20	0455/23 May/June 2021
24	see sheet	20	0455/23 Oct/Nov 2021
25	see sheet	20	0455/23 Oct/Nov 2021
26	see sheet	20	0455/22 Feb/March 2022
27	see sheet	30	0455/22 Oct/Nov 2022
28	see sheet	20	0455/23 Oct/Nov 2022
29	see sheet	20	0455/22 Feb/March 2023
30	see sheet	20	0455/21 May/June 2023
31	see sheet	20	0455/22 May/June 2023
32	see sheet	20	0455/23 May/June 2023
33	see sheet	20	0455/22 Oct/Nov 2023
34	see sheet	30	0455/21 May/June 2024
35	see sheet	20	0455/21 May/June 2024
36	see sheet	20	0455/21 Oct/Nov 2024
37	see sheet	20	0455/22 Oct/Nov 2024
38	see sheet	20	0455/23 Oct/Nov 2024
39	see sheet	20	0455/22 Feb/March 2025
40	see sheet	20	0455/22 May/June 2025
41	see sheet	20	0455/23 May/June 2025
42	see sheet	30	0455/21 Oct/Nov 2025
43	see sheet	20	0455/23 Oct/Nov 2025

Questions16 pages

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