A Level Economics Paper 2 by readandwrite.marketing

Economics Paper 2 Topical (All variants unsolved with mark schemes) (2002-2017 according to syllabus 2019-21) Article: 149

Editorial Board

Imran Latif Saeed Afzal Muhammad Kamran Malik Waqas Iqbal Ahmed Bilal Muhammad Rafi Ms Saman

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the Publisher. Cambridge International has not provided these questions or answers and can take no responsibility whatsoever for their accuracy or suitability for the examinations. Title

Economics A-Level P-2 Topical

Author

Imran Latif Cell: +92 300 441 0900 Email: imranlatifmalik@gmail.com

Published by

Read & Write Publications

Printed by

Sadaat Printers Urdu Bazar, Lahore.

Graphics Department

Rashid Mehmood, Raja Naveed

Composing Department

Salman Bukhsh, Sharjeel Khan, Hayat, Shahab, Waqas, Awais

Edition:

2018-19

Price

Rs.495/-

For Books Order

Call Or SMS: 0336-5314141

DISTRIBUTORS 

LAHORE READ & WRITE SALE POINT Shop No. 25-28 Lower Ground Floor, Haadia Haleema Centre, Ghazni Street, Urdu Bazar, Lahore. Ph: 042 -35714038



KARACHI BURHANI BOOK CENTRE Shop # 6 Hashmi Trust Building Rotson Road New Urdu Bazar Karachi Tel 021 32212640 MARYAM ACADEMY Tayyab Ali Building, Urdu Bazar, Karachi. Tel: 021 32214243 , 021 32634243

RAWALPINDI / ISLAMABAD BOOK VALLEY Shop No. A P 4,China market 5 Brothers Plaza College Road Rawalpindi. Tel: 051 35770894, 051 35551630 Shop No. 3 4-5-6-7, Sheh re Kitab, F-7 Markaz Islamabad. Tel: 051-2650895, 0300-5292272 ASIAN BOOK STORE S hop No. 9 Lower Ground, Asian Business Centre, Bahria Town, Phase-7 Entrance, G.T Road, Rawalpindi. Ph: +92-51-4917085

Preface This book provides a thorough exercise of paper 2 for students taking Cambridge International Examinations AS-Level Economics. Structured essays from past examinations are sorted into relevant chapters which will enable students to practice their understanding systematically. We appreciate our students and fellow teachers who helped us to improve this book. Your suggestions and comments will be highly appreciated.

REVIEW BOARD 1. Lahore: Mr. Aslam Tariq , Mr. Zahid Kamal , Mr. Mian Mumtaz and Mr. Asim Ali Bukhari Mr. Ahmed Ali , Mr. Taimur K.Bandey, Saeed Afzal, Mr. Kamran Malik , Mr. Shahid Saghir, Mr. Faisal Saeed, Mr. Muhammad Rafi, Mr. Arshad Chudhary, and Mr. Ahmed Bilal. 2. Islamabad & Rawalpindi Mr. M. Zulfiqar, Mr. Hamood Rehman , Mr. Salam, Mr. Tariq Mehmood Chohan. 3.Fisalabad & Jhang Mr. Anwar-ul-Haq, Mr. Aamir Jahangir, Mr. Imran Kamal, Mr. Muhammad Sakhi Ahmad, Mr. Javed Iqbal, and Miss Kiran. 4. Sialkot and Gujranwala Mr. Imran Aslam 5. Karachi & Multan M. Asif farooq, Miss Shafaq Ahmed, Mr Siddique Ansari ,Mr. Zai , Mr. Munawar Ghazi

Imran Latif M.A. Economics M.A. Mass Communication Cell: +92 300 4410900 Email: imranlatifmalik@gmail.com

Contents SECTION B (ESSAYS) UNIT 1:

BASIC ECONOMIC IDEAS........................................................................................................................ 8

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9

SCARCITY .........................................................................................................................................................8 EFFECT OF GROWTH AND TRADE ON SCARCITY .........................................................................................................9 SHIFTS OF PPC ................................................................................................................................................9 USES OF PPC ..................................................................................................................................................11 SLOPE OF PPC .................................................................................................................................................13 CLASSIFICATION OF GOODS AND SERVICES ............................................................................................................14 BASIC ECONOMIC QUESTIONS ............................................................................................................................22 ECONOMIC SYSTEMS ........................................................................................................................................23 CONTRIBUTION OF FACTORS OF PRODUCTION .......................................................................................................28

UNIT 2:

D/S & EQUILIBRIUM ............................................................................................................................ 32

2.1 2.2 2.3

DETERMINANTS OF DEMAND .............................................................................................................................32 EQUILIBRIUM AND CHANGES IN EQUILIBRIUM........................................................................................................32 FUNCTIONS OF PRICE........................................................................................................................................35

UNIT 3:

ELASTICITY .......................................................................................................................................... 38

3.1 3.2 3.3

TYPES OF ELASTICITY ........................................................................................................................................38 PRACTICAL USES OF ELASTICITY...........................................................................................................................41 DETERMINANTS OF PED & PES .........................................................................................................................47

UNIT 4:

ROLE OF GOVERNMENT IN MICRO-ECONOMY .................................................................................... 54

4.1 4.2

CONSUMER SURPLUS .......................................................................................................................................54 ROLE OF GOVT. IN PRICE MECHANISM .................................................................................................................55

UNIT 5:

AGGREGATE DEMAND (AD) & AGGREGATE SUPPLY (AS) ..................................................................... 64

5.1

AD & AS ......................................................................................................................................................64

UNIT 6:

MONEY & INFLATION .......................................................................................................................... 66

6.1 6.2 6.3 6.4 6.5 6.6 6.7

FUNCTION OR CHARACTERISTICS OF MONEY ..........................................................................................................66 DIVISION OF LABOUR .......................................................................................................................................67 CAUSES OF INFLATION ......................................................................................................................................69 EFFECTS OF INFLATION .....................................................................................................................................74 EFFECTS OF INFLATION ON FUNCTIONS OF MONEY..................................................................................................78 MEASUREMENT OF INFLATION ...........................................................................................................................79 PROBLEMS OF MEASUREMENT OF INFLATION ........................................................................................................80

UNIT 7:

INTERNATIONAL TRADE ...................................................................................................................... 84

7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8

THEORY OF ABSOLUTE & COMPARATIVE ADVANTAGE..............................................................................................84 LIMITATIONS OF THEORY OF ABSOLUTE & COMPARATIVE ADVANTAGE........................................................................86 OBSTACLES OF INTERNATIONAL TRADE .................................................................................................................88 MEANING & CHANGES IN TERMS OF TRADE .........................................................................................................88 EFFECTS OF CHANGES IN TERMS OF TRADE ............................................................................................................89 METHODS OF PROTECTIONISM ...........................................................................................................................91 ADVANTAGES & DISADVANTAGES OF PROTECTIONISM ............................................................................................92 INTERNATIONAL ECONOMIC INTEGRATION ............................................................................................................94

UNIT 8:

EXCHANGE RATE ................................................................................................................................. 98

8.1 8.2 8.3 8.4

DETERMINATION OF EXCHANGE RATE ..................................................................................................................98 CAUSES OF EXCHANGE RATE DEPRECIATION & APPRECIATION ...................................................................................98 EFFECTS OF EXCHANGE RATE DEPRECIATION & APPRECIATION ................................................................................100 ADVANTAGES & DISADVANTAGES OF EXCHANGE RATE SYSTEMS .............................................................................103

UNIT 9:

BALANCE OF PAYMENT ..................................................................................................................... 106

9.1 9.2 9.3

BALANCE OF PAYMENTS ACCOUNTS...................................................................................................................106 CAUSES OF BALANCE OF PAYMENTS DISEQUILIBRIUM ..........................................................................................106 EFFECTS OF BALANCE OF PAYMENTS DISEQUILIBRIUM ...........................................................................................107

UNIT:10

GOVT INTERVENTION IN A MACRO-ECONOMY ................................................................................. 110

10.1 10.2 10.3

TYPES OF MACROECONOMIC POLICIES ...............................................................................................................110 POLICIES FOR BALANCE OF CURRENT ACCOUNT DEFICIT .........................................................................................112 POLICIES TO CORRECT DEMAND-PULL INFLATION..................................................................................................115

1: D/S/EQUILIBRIUM & ELASTICITY .................................................................................................................... 118 MARCH 2016/P22/Q1 .............................................................................................................................................118 NOVEMBER 2015/P21/Q1 ........................................................................................................................................120 JUNE 2015/P21/Q1 .................................................................................................................................................123 NOVEMBER 2014/P23/Q1 ........................................................................................................................................126 NOVEMBER 2014/P21/Q1 ........................................................................................................................................129 JUNE 2013/P23/Q1 ................................................................................................................................................132 JUNE 2013/P22/Q1 ................................................................................................................................................135 NOVEMBER 2012/P23/Q1 ........................................................................................................................................137 NOVEMBER 2012/P22/Q1 ........................................................................................................................................139 NOVEMBER 2012/P21/Q1 ........................................................................................................................................141 NOV 2011/P23/Q1..................................................................................................................................................143 NOV 2011/P21/Q1..................................................................................................................................................145 JUNE 2011/P21/Q1 .................................................................................................................................................147 JUNE 2010/P23/Q1 .................................................................................................................................................149 JUNE 2010/P21/Q1 .................................................................................................................................................151 NOV 2009/P21/Q1..................................................................................................................................................153 NOV 2008/P2/Q1....................................................................................................................................................155 NOV 2006/P2/Q1....................................................................................................................................................157 JUNE 2005/P2/Q1 ...................................................................................................................................................159 NOV 2003/Q1 .........................................................................................................................................................161 2: MONEY & INFLATION ..................................................................................................................................... 163 NOVEMBER 2017/P22/Q1 ........................................................................................................................................163 JUNE 2017/P23/Q1 .................................................................................................................................................165 JUNE 2015/P23/Q1 .................................................................................................................................................167 NOVEMBER 2013/P22/Q1 ........................................................................................................................................170 NOVEMBER 2013/P21/Q1 ........................................................................................................................................172 JUNE 2012/P21/Q1 .................................................................................................................................................174 NOV 2009/P22/Q1..................................................................................................................................................176 JUNE 2004/P2/Q1 ...................................................................................................................................................178 3: INTERNATIONAL ECONOMY ........................................................................................................................... 180 NOVEMBER 2017/P21/Q1 ........................................................................................................................................180 JUNE 2017/P22/Q1 .................................................................................................................................................183 JUNE 2017/P21/Q1 .................................................................................................................................................185 JUNE 2016/P23/Q1 .................................................................................................................................................188

JUNE 2016/P22/Q1 .................................................................................................................................................191 JUNE 2016/P21/Q1 .................................................................................................................................................194 NOVEMBER 2015/P23/Q1 ........................................................................................................................................196 NOVEMBER 2015/P22/Q1 ........................................................................................................................................199 JUNE 2015/P22/Q1 .................................................................................................................................................202 NOVEMBER 2014/P22/Q1 ........................................................................................................................................205 JUNE 2014/P22/Q1 .................................................................................................................................................207 JUNE 2014/P21/Q1 .................................................................................................................................................210 NOVEMBER 2013/P23/Q1 ........................................................................................................................................213 JUNE 2013/P21/Q1 ................................................................................................................................................215 JUNE 2012/P23/Q1 .................................................................................................................................................217 JUNE 2012/P22/Q1 .................................................................................................................................................219 NOV 2011/P22/Q1..................................................................................................................................................221 JUNE 2011/P23/Q1 .................................................................................................................................................223 JUNE 2011/P22/Q1 .................................................................................................................................................225 NOV 2010/P22/Q1..................................................................................................................................................227 JUNE 2009/P2/Q1 ...................................................................................................................................................229 JUNE 2008/P2/Q1 ...................................................................................................................................................231 NOV 2007/P2/Q1....................................................................................................................................................233 JUNE 2006/P2/Q1 ...................................................................................................................................................236 NOV 2005/P2/Q1....................................................................................................................................................238 NOV 2004/P2/Q1....................................................................................................................................................240 JUNE 2003/P2/Q1 ...................................................................................................................................................242

Unit - 1

UNIT 1

Basic Economic Ideas

Syllabus 2019 â&#x20AC;&#x201C;21 Topics

BASIC ECONOMIC IDEAS AS Level Economics Topical Paper 2 Imran Latif Cell: 0300-44-10-900 Imranlatifmalik@gmail.com

3-C, Zahoor Elahi Road GulbergII, Lahore 042-35714038 0336-5314141 readandwrite.publications@gmail.com readandwritepublications/Shop www.readnwrite.org

1. Scarcity 2. Effect of growth and trade on scarcity 3. Shifts of PPS 4. Uses of PPC 5. Slope of PPC 6. Classification of goods and services 7. Basic economic questions 8. Economic Systems 9. Contribution of Factors of production

Unit - 1

Basic Economic Ideas

UNIT 1: BASIC ECONOMIC IDEAS 1.1 Scarcity Nov 2014/P23/Q2/a Show how the economic problem can be explained with the use of a production possibility curve. [8] Mark Scheme: For knowledge and understanding of the economic problem and the production possibility curve. (Up to 4 marks). Candidates are required to show sound understanding of the economic problem and the production possibility curve. For application explaining how the economic problem can be illustrated through the use of the production possibility curve. (Up to 4 marks). Application marks will be awarded for good use of the production possibility curve in illustrating various aspects of the economic problem. For example a movement along the production possibility curve, shows choice and opportunity cost, that stems from the economic problem. The production frontier illustrates scarce resources and so on. June 2010/P23/Q2/a With the help of examples, explain why different economic decision makers face the problem of scarcity. [8] Mark Scheme: Scarcity results from limited resources and unlimited wants. This means choice is necessary and an opportunity cost occurs. All economic decision makers including individuals, families, firms and governments are unable to achieve all of their wants. The nature of the sacrifice may differ from case to case but the basis is the same. Examples of the decision makers and their choices must be identified. Understanding of the basis of scarcity 4 marks Explanation of the position of different economic decision makers 4 marks Nov 2002/Q2/a Explain the link between the basic economic problem of scarcity and opportunity cost.

[8]

Mark Scheme: Virtually all candidates showed good understanding of scarcity and opportunity cost. They were more likely to give a detailed account of opportunity cost and treat the aspects of scarcity briefly. The use of a production possibility curve to illustrate the ideas was a valid approach. In dealing with a ppc there was often a failure to relate its use to the task set rather than simply go through a prepared description. This meant that in some cases no additional marks were added to those already awarded for the written account. The strongest answers made the linkage clear and gained full marks. Marks in the region 5 - 7 were most common.

Unit - 1

Basic Economic Ideas

1.2 Effect of growth and trade on scarcity Nov 2011/P22/Q2/b Discuss whether the combination of improved technology and globalisation will result in solving the basic economic problem. [12] Mark Scheme: The basic economic problem is the allocation of limited resources between unlimited wants and the existence of scarcity. The need for choice and the operation of opportunity cost follow from this. Improved technology increases output by raising productivity. Globalisation brings many advantages including the benefits of specialisation. These result in a rise in the standard of living and may reduce poverty and hardship. Some groups may be harmed by the two influences. Scarcity will continue as new wants will arise and benefits may not be spread equitably. The position may improve as a result of the changes but the economic problem will continue to exist. Understanding of the basic economic problem (2 marks) .Analysis of the impact of improved technology (up to 4 marks) and globalisation (up to 4marks). 6 maximum for this part of the question. Discussion of the continued existence of the economic problem. (Up to 4 marks). Reserve 1 mark for a reasoned conclusion.

1.3 Shifts of PPC Nov 2017/P22/Q3/a Show the difference between a movement along, and a shift in, a production possibility curve. Explain what might cause each to occur. Use diagrams to support your answer. [8] Mark Scheme: For Knowledge and Understanding and Application of a movement along a PPC: For an accurately labelled diagram (1 mark) that shows a movement along a PPC curve representing a change in the composition of output (1 mark). (Up to 2 marks) And explaining that this might be caused by government direction in a centrally planned economy or through the operation of market forces in a free market economy. (Up to 2 marks) 4 marks maximum For Knowledge and Understanding and Application of a shift in a PPC For an accurately labelled diagram that shows a shift in a PPC curve (1 mark) and that this means that more (or less) of both goods can be produced (1 mark) (Up to 2 marks) And explaining that this could be caused by a change in the quantity and/or quality of resources or a change in technology. (Up to 2 marks) 4 marks maximum

Nov 2017/P21/Q4/a Use production possibility curves to explain the different impact on an economy of a rise in the unemployment rate and an increase in the working population. [8] Mark Scheme: For Knowledge and Understanding (and Application)

Unit - 1

Basic Economic Ideas

Using an accurately labelled PPC showing movement from a point on the curve to a point within the curve (2 marks) to explain that this represents a rise in unemployment (2 marks). (Up to 4 marks) For Knowledge and Understanding (and Application) Using an accurately labelled PPC showing a shift outward of the curve (2 marks) to explain that this represents a rise in the working population (2 marks). (Up to 4 marks) 8 marks maximum Nov 2015/P23/Q2/b Discuss whether an outward shift in an economy’s production possibility curve is more likely to occur in a free market economy or a centrally planned economy. [12] Mark Scheme: The extent to which free enterprise economies and centrally planned economies generate growth depends upon a range of factors. In free enterprise economies, growth will occur through the activities of entrepreneurs who are in pursuit of profit and who are responding to the wants of consumers. Entrepreneurs will be encouraged to invest in capital goods or human resources to generate profits. Some economies are short of entrepreneurs so growth is inhibited.. Whether growth will occur in centrally planned economies depends upon the policies of decision makers. They may choose for example to produce capital goods or consumer goods. This raises the question of whether they are prepared to sacrifice current living standards for future living standards. For analysis showing how growth will occur through choices made in a free market economy. (Up to 6 marks). For analysis showing how growth will occur through choices made in a centrally planned economy. (Up to 6 marks). (8 marks maximum). For evaluative judgement on whether growth is most likely to occur in one rather than another type of economy. (Up to 4 marks) June 2012/P22/Q2/b Discuss whether an economy’s production possibility curve is more likely to move inward or outward over time. [12] Mark Scheme: For a knowledge and understanding of the ‘production possibility curve’. Up to 2 marks. For analysis explaining the causes of inward and outward shifts of the production possibility curve. Up to 8 marks (up to 6 marks for analysis of each direction of shift) For evaluative comment on whether the production possibility curve is more likely to move inward or outward. Up to 2 marks June 2010/P22/Q2/a Explain how a country’s production possibility curve depends upon its factors of production.

[8]

Mark Scheme: A production possibility curve (ppc) shows the combination of outputs that a country can produce when fully employing its resources. Factors include land, labour, capital and enterprise. Some countries have greater quantities and better quality of factors. Land may include a favourable climate and valuable minerals, labour may be skilled,, capital may embody modern technology and, enterprise may be readily available. The way the factors are combined to work productively will determine the quantities of different outputs produced. This will be reflected in the absolute and relative levels of output, which may be shown as diagrams.

Unit - 1

Basic Economic Ideas

June 2009/Q2/a An economy can produce agricultural and industrial goods. Explain the possible effects on its production possibility curve if there is an increase in the productivity of its agricultural workers.[8] Mark Scheme: A ppc shows an economy’s maximum output of two goods when using all of its resources. Productivity is the measure of output per worker. Assuming the production of agricultural goods and industrial goods, the ppc would be expected to pivot outwards, as workers produce more, indicating greater quantities of agricultural goods. Further possibilities include greater production of industrial goods as well because better food supplies increase overall productivity or as restriction on agricultural total output shifts resources to industrial production, which in turn expands. June 2004/Q2/a* An economy is faced by the exhaustion of an important natural resource at a time when it is introducing improved technology. Explain how these events will affect the economy’s production possibility curve. [8] Mark Scheme: Improved technology gives greater efficiency and rising productivity(output per worker per time period) so should move the production possibility curve outwards, depending upon where the improvement impacts. The exhaustion of a resource should reduce an input and the resulting output and move the ppc inwards. The overall effect will depend on their relative strengths but results from the change in available inputs and their effect on production possibilities. These changes can be shown by diagrams. Understanding of the ppc concept up to 2 marks. Awareness of the outcomes up to 4 marks. Balance of the effects/differentiated impact up to 2 marks

1.4 Uses of ppc Nov 2017/P23/Q3/a Explain how a production possibility curve with increasing opportunity costs illustrates the consequences of a government’s choice to produce more military goods. Use a diagram to support your answer. [8] Mark Scheme: For Knowledge and Understanding: For an accurate ppc diagram with increasing opportunity costs showing military goods on one axis and some other appropriate category of goods on the other. E.g. merit goods (Up to 2 marks) For illustration showing that a movement along the ppc (1 mark) means an opportunity cost in terms of the next best alternative forgone. (1 mark) (Up to 2 marks) 4 marks maximum For Application: For a clear explanation that the ‘increasing opportunity costs’ means that the opportunity cost is rising as resources are re-allocated to the production of more military goods. (Up to 2 marks)

Unit - 1

Basic Economic Ideas

For a clear explanation of why opportunity costs will rise as resources are reallocated to produce more military goods (Up to 2 marks) 4 marks maximum Specimen Paper 2016/P2/Q2/a With the help of a diagram, explain how a production possibility curve can illustrate the concepts of opportunity cost and economic growth. [8] Mark Scheme: This question tests the grasp of some basic concepts in Economics that can be demonstrated through the production possibility curve. For knowledge and understanding of the production possibility curve supported by an appropriate diagram. Up to four marks. For application showing how production possibility curves can illustrate both opportunity cost and economic growth. Up to four marks. Nov 2014/P23/Q2/b Discuss whether an outward shift in a country’s production possibility curve will always raise the welfare of the citizens of that country. [12] Mark Scheme: For analysis explaining the causes of an outward shift in the production possibility curve and the impact in terms of goods and services produced.(Up to 8 marks). The analysis provided needs to explain possible causes of an outward shift in a ppc such as increased resources or improved technology. The impact is that total goods and services available to an economy will increase which has the potential to improve the economic welfare of that economy’s citizens. For evaluative comment on the ‘always raise the welfare’ aspects of the question (Up to 4 marks). Several evaluative points could be raised to suggest reasons why such a change will always raise welfare. For example, increased exploitation of resources might lead to excessive negative externalities, the benefits of the increased goods and services might be enjoyed by only a few citizens in the economy, the increased production might be focused upon capital goods that do not have an immediate improvement in economic welfare. June 2013/P23/Q2/a With the help of a diagram, explain how a production possibility curve can illustrate the concepts of opportunity cost and economic growth. [8] Mark Scheme: This question tests the grasp of some basic concepts in Economics that can be demonstrated through the Production Possibility Curve. For a knowledge and understanding of the production possibility curve supported by an appropriate diagram. Up to 4 marks. For application showing how a production possibility curve can illustrate both opportunity cost and choice. Up to 4 marks (allow 3/1 or 1/3 split). Nov 2011/P23/Q2/a* Explain, with the help of a diagram, how an economy can in the short-run and long run enjoy consumption beyond its current production possibility curve. [8] Mark Scheme: A production possibility curve (ppc) shows the maximum possible combination of two goods that can be produced using all its resources. Points outside of the ppc are unattainable by the economy itself. In the short run international trade enables a country to enjoy more than it can produce by running a trade deficit. In the long run technical progress and additional resources can move the ppc out beyond its current position as it achieves economic growth.Understanding of ppc and short-run limitation on production (4

Unit - 1

Basic Economic Ideas

marks). Short-run (up to 3 marks) and Long-run (up to 3 marks) ability to increase production possibility. 4 marks maximum for consideration of short run and long run. (4 marks) Nov 2011/P22/Q2/a Show how production possibility curves may be used to explain any two economic ideas.

[8]

Mark Scheme: A production possibility curve (ppc) shows the alternative combinations of two goods that can be produced when an economy fully uses its resources. Likely economic ideas are scarcity (contrast within and without curve) and opportunity cost (movement between points on curve) although unemployment and growth may also be considered. Meaning of PPC (2) and choice of two valid concepts (2). Explanation of use of PPC to illustrate each economic idea. Up to 3 marks for one idea explained well, but 4 maximum for this part of the question. Nov 2010/P21/P22/Q2/a* Explain how microeconomic and macroeconomic issues may be represented using production possibility curves. [8] Mark Scheme: Microeconomics studies individual units while macroeconomic issues involve aggregates for the economy. The production possibility curve (ppc) can show the possible combinations of two outputs that can be produced with full employment of resources. Economic growth, unemployment are macro representations while opportunity cost and scarcity can be micro applications. Some aspects can be shown either for an economy an individual firm. Understanding of micro/macro distinction and ppc 4 marks. Use of ppc to show macro and micro issues 4 marks Nov 2006/Q2/a Explain how production curve might be used to show a countryâ&#x20AC;&#x2122;s economic performance.

[8]

Mark Scheme: A ppc shows the possible combinations of two goods which can be produced by an economy when it uses all of its resources fully and efficiently. A ppc slopes down to the right and is usually drawn concave to the origin. Points within show unemployment and inefficiency, points without are unattainable. Shifts in the curve show growth or loss of productive potential. The larger the contained area the greater the level of production potential. For knowledge of a ppc up to 2 marks. For explanation of static position up to 3 marks. For explanation of move in curve up to 3 mark

1.5 Slope of ppc Nov 2012/P22/Q2/a* Explain, with the help of a production possibility diagram, how the opportunity cost of producing different combinations of goods can be measured. [8] Mark Scheme: For knowledge and understanding of the ppc and opportunity cost (Up to 4 marks. Allow 3/1 or 1/3 split). . For an analysis of how the ppc can be used to measure opportunity cost (Up to 4 marks).

Unit - 1

Basic Economic Ideas

1.6 Classification of goods and services June 2017/P22/Q2/b Discuss two methods of increasing the provision of merit goods in a mixed economy. Consider which is more likely to be effective. [12] Mark Scheme: For analysis • of any method of increasing the provision of merit goods such as direct provision or subsidies explaining the strengths and weaknesses of each approach selected (Up to 6 marks for each method) 8 marks maximum) For evaluation that assesses and compares • the relative strengths and weaknesses of each approach (3 marks) • to reach a conclusion concerning which policy is more likely to be effective (1 mark) (4 marks maximum) June 2017/P21/Q2/a Using examples, explain the difference between a merit good and a public good. Explain why a profit can be made from the provision of one of these types of good, but not the other. [8] Mark Scheme: For knowledge and understanding • of the meaning of a merit good (Up to 3 marks) • and a public good (Up to 3 marks). (4 marks maximum) For application showing • understanding of the reasons that profit can be made in the supply of merit goods, • but not in the supply of public goods. (4 marks maximum) June 2017/P21/Q2/b Discuss whether it is better to impose an indirect tax or conduct an awareness campaign to deal with the problem of demerit goods such as alcohol. [12] Mark Scheme: For analysis that explains: • The way in which an indirect tax is used to reduce the consumption of alcohol with due reference to the strengths and weaknesses of this approach. (Up to 6 marks) • The way in which an awareness campaign is used to reduce the consumption of alcohol with due reference to the strengths and weaknesses of this approach. (Up to 6 marks) (8 marks maximum) For evaluation that assesses and compares • the relative strengths and weaknesses of each approach (Up to 3 marks) • and for reaching a conclusion on which approach is likely to be most effective. (1 mark). (4 marks maximum) June 2016/P22/Q2/a Use examples to illustrate the difference between private goods and public goods and explain why only private goods will be supplied in a free market economy. [8]

Unit - 1

Basic Economic Ideas

Mark Scheme: For knowledge and understanding of the characteristics of private goods with examples and application to show why they will be supplied in a free economy. For knowledge and understanding of the characteristics of public goods with examples and application to show why they will not be supplied in a free economy. June 2016/P22/Q2/b ‘The factor enterprise and the free working of the price mechanism always ensure a satisfactory outcome for consumers even when imperfect information exists.’ Discuss this view. [12] Mark Scheme: Please note that the new syllabus does not require candidates to have knowledge of the technical framework formerly used to analyse merit and demerit goods. Analysis of these concepts now focuses upon ‘imperfect information’. Reference to private and social costs and benefits can be credited here, but is not necessary for full marks. For analysis showing how the price mechanism and the factor enterprise respond to signals from consumers to allocate resources in line with consumer preferences, and the impact of imperfect information in terms of merit goods, and demerit goods. For evaluative comment on whether this will always result in better outcomes. June 2016/P21/Q3/b Discuss why some goods and services are provided by private enterprise and others are provided by the government in a mixed economy. [12] Mark Scheme: For analysis explaining how governments and private enterprise produce: • private • merit • demerit and • public goods For evaluative comment that considers the effectiveness of government provision and provision by private enterprise. March 2016/P22/Q2/a Explain, using examples, why the prices charged for merit goods and demerit goods in a free market do not reflect the value to consumers. [8] Mark Scheme: For knowledge and understanding of merit and demerit goods (award appropriate examples). For application, using the examples, to show how the prices charged for merit goods and demerit goods do not reflect the true value to consumers as a result of imperfect information. If no examples are included 6 marks maximum. Nov 2015/P23/Q3/a Most governments provide both defence and education services. (a) Explain why defence and education services would not be provided in sufficient quantities if the government did not provide them. [8] Mark Scheme: For knowledge and understanding and application showing that defence is a public good that will not be provided at all if the government does not provide it because of the free rider problem. (Up to 4 marks). For

Unit - 1

Basic Economic Ideas

knowledge and understanding and application showing that merit goods are underprovided if not provided by the government because of incomplete information. (Up to 1marks) Nov 2015/P23/Q3/b Discuss how taxation and subsidies could improve the provision of defence and education services in an economy and consider the likely success of such policies. [12] Mark Scheme: Taxation could improve the supply of defence and education through providing the necessary funding for these products. Subsidies are more targeted and reduce price and increase quantity of the product. They are appropriate for merit good provision, but inappropriate for public goods because no price is charged. For analysis of the role of taxation and subsidies in improving the provision of defence. (Up to 6 marks). For analysis of the role of taxation and subsidies in improving the provision of education. (Up to 6 marks). (8 marks maximum). For evaluative comment on the likely success of providing defence and education through taxation and subsidies. (Up to 4 marks). June 2015/P23/Q3/b Discuss any two policies that might be used to deal with the problems caused by the consumption of demerit goods and consider which might be the more effective policy. [12] Mark Scheme: Demerit goods are over-consumed in a market because of incomplete information about their ill-effects. Policies that might be applied include indirect taxation, legislation to prohibit or restrict consumption or education campaigns. Each has problems that limit effectiveness. For example, indirect taxes have the problem that it is difficult to measure the extent of the overconsumption. Education campaigns are costly and take time to take effect and so on. For analysis of the problems caused by the consumption of demerit goods and two policies to deal with these problems. (Up to 8 marks). For evaluation of the effectiveness of each policy analysed. (Up to 4 marks). June 2015/P23/Q3/a Explain what economists mean when they describe a good as a â&#x20AC;&#x2DC;demerit goodâ&#x20AC;&#x2122; and, using a diagram, show why such goods will be over consumed in a free market. [8] Mark Scheme: For knowledge and understanding of a demerit good. (Up to 4 marks). For application showing a diagram that shows why demerit goods are overconsumed. (Up to 4 marks) June 2015/P22/Q3/a Using examples, explain the difference between merit goods and public goods and show why it is possible for profit to be made in the supply of one of these types of good but not the other. [8] Mark Scheme: For knowledge and understanding of both merit goods and public goods with appropriate examples (up to 4 marks). For an accurate definition of merit goods in terms of under-consumption through information failure (accept positive externalities), with an appropriate example. No example or incorrect example, 1 maximum (2). For an accurate definition of public goods in terms of non-excludability and non-rivalry, with an appropriate example. No example or incorrect example, 1 maximum (2). For application to show why profit could be made in supplying merit goods, but not public goods (up to 4 marks). The answer should be based upon the fact that public goods are non-excludable and this gives rise to the free rider problem meaning that no price can be charged. As result entrepreneurs cannot make a profit in the supply of public

Unit - 1

Basic Economic Ideas

goods (up to 2 marks). Merit goods are excludable and as a result a price can be charged so that entrepreneurs will produce the good in pursuit of profit (up to 2 marks). June 2015/P22/Q3/b Discuss why merit goods are under supplied in a free market economy and consider the effectiveness of one policy to deal with this problem. [12] Mark Scheme: Merit goods are undersupplied in a free market economy because of information failure. They are undervalued by consumers so the demand for them is less than it would be if the value was fully understood. Policies include subsidies, educational campaigns and state provision. Each has disadvantages such as cost and the length of the time period before the impact is felt. For analysis of the under-provision of merit goods and an appropriate policy to deal with the problem (up to 8 marks). Explaining why they are undersupplied and why a policy is needed (up to 4 marks). Explanation of any one policy to deal with this (up to 4 marks). For evaluation of the effectiveness of the policy analysed. (up to 4 marks). Nov 2014/P22/Q2/b Discuss whether prices are less important in allocating scarce resources in a mixed economy compared with a market economy. [12] Mark Scheme: In a free market economy public goods are not provided because of the ‘free rider’ problem and other goods are underprovided (merit goods) or overprovided (de-merit goods). In these cases price is not a reflection of marginal social cost and as a result there is a misallocation of resources. In a mixed economy public goods can be provided although no price can be charged and merit and demerit goods can be provided at the appropriate price through the imposition of indirect taxes on demerit goods and the subsidization of merit goods. For analysis showing the role of price in a mixed economy with reference to private goods, public goods, merit and demerit goods. (Up to 8 marks). (Up to six marks for one side allows a 6/2 or 2/6 split). (If only one side is explained then no marks can be awarded for evaluation.) For evaluative comment on the ‘less important’ aspect of the question. (Up to 4 marks). In a mixed economy it could be argued that price is more important because it helps to efficiently allocate resources when taxes and/or subsidies are imposed on demerit and merit goods. Or it could be argued that it is less important because price is the only means of allocation in a market economy. Quality of the reasoning is more important than the conclusion reached. June 2014/P21/Q3/a Explain the difference between private goods and public goods, and why it is possible for a business to make a profit in the supply of private goods but not in the supply of a public good. [8] Mark Scheme: For knowledge and understanding of the distinction between private and public goods. (up to 4 marks). Candidates need to show a firm grasp of the difference between the types of good in terms of excludability, rejectability and non-rivalry in consumption. A maximum of 2 marks for a list of distinctions that are not explained. For application to explain how it is possible to make a profit providing private goods, but not public goods based upon the free rider problem. (up to 4 marks). Application marks will be awarded for a clear explanation of the free rider problem and why this undermines the ability to make a profit through the fact that no one can be excluded from the consumption of public goods. June 2013/P21/Q2/b Discuss the policies a government might adopt to ensure the correct price for merit and demerit goods is charged in the market. [12]

Unit - 1

Basic Economic Ideas

Mark Scheme: A range of policies is available including subsidies and indirect taxes, but both have difficulties in ensuring that the correct price is charged. For analysis of at least two policies to ensure that price is changed to reflect externalities and information failure in the case of merit and demerit goods. Up to 4 marks. For evaluative comment on the likely effectiveness of these policies. Up to 4 marks. June 2013/P21/Q2/a Explain why the free market is ineffective in arriving at the correct price for merit goods and demerit goods. [8] Mark Scheme: The correct price of merit goods in Economics is one that truly reflects all the benefits of consumption. These include both private benefits and positive externalities. In the case of demerit goods, the correct price is one that reflects all the costs including private costs and negative externalities. The free market price does not reflect all costs and benefits where externalities exist because of the self-interest that motivates consumer behaviour. For knowledge and understanding of “correct price”, merit and demerit goods. Up to 4 marks. For application to show how the free market will not arrive at the correct price for merit and demerit goods. Up to 4 marks Nov 2012/P23/Q2/b Discuss why in many countries some services, such as education and healthcare, are supplied both by the government and private producers. [12] Mark Scheme: For knowledge and understanding of private goods and merit goods. (Up to 2 marks). For an analysis of government and private supply of education and healthcare. (Allow 4/2 or 2/4 split/Up to 6 marks). For evaluative comment on government and private supply of education and healthcare. (Up to 4 marks/12 marks total). June 2012/P22/Q3/b Discuss why some governments decide that it is undesirable to leave the provision of private goods such as train travel, to the private sector. [12] Mark Scheme: For a knowledge and understanding of characteristics of a ‘private good’. Up to 2 marks. For analysis explaining how leaving the provision of private goods to the private sector can result in various types of economic problem. Up to 8 marks. For evaluative comment; for example on why private sector provision remains despite these disadvantages. Up to 2 marks. Nov 2011/P22/Q3/b Discuss whether healthcare can and should be provided by the free market.

[12]

Mark Scheme: Healthcare is provided by both the private sector (free market) and the public sector. It has the properties of a private good. Within the private sector standards are often thought to be better (shorter waiting times, better conditions, efficient use of resources, little time wasting, etc.). The profit motive means that patients have to pay and it does not reflect need. This limits the availability of the healthcare and is considered inequitable. It may lead to the provision of non-essential services e.g. cosmetic surgery. Healthcare is a merit good (imperfect information) and generates positive information. This justifies free or subsidised provision by the state when the private sector does not meet the need or provides insufficient levels. Private

Unit - 1

Basic Economic Ideas

healthcare is possible but will provide limited availability so justifying government provision. Understanding of the nature of healthcare (2). Discussion of the benefits of free market provision (up to 6 marks). Discussion of the limits of free market provision (up to 6 marks). Reserve 1 mark for a reasoned conclusion. Nov 2011/P21/Q2/b Discuss whether economists would classify healthcare and national defence in the same way.[12] Mark Scheme: Usual classifications are private, merit, public and normal goods. Healthcare is a private good as it has excludability and rival, national defence is a public good being non-excludable and non-rival. Health care is a merit good based on inadequate information of the consumer and under-provision by the market and it has external benefits. Defence is not considered a merit good. While healthcare is a clearly a normal good national defence could also be considered a normal good. They might be considered the same in that government provision may be needed to obtain the appropriate level of provision. Both could be classified as services rather than goods. Understanding of the possible classifications Up to 2 marks. Application of the classifications to healthcare and defence Up to 6 marks. Discussion of the similarities and dissimilarities Up to 6 marks. Reasoned conclusion (1).Max. of 12 June 2012/P21/Q3/b Discuss the economic reasons for subsidising public transport and taxing private transport. [12] Mark Scheme: The arguments relate to externalities. Public transport may generate positive externalities by reducing congestion and pollution. A subsidy would lower price and increase output, helping to establish a market equilibrium that took social cost and benefit into account. Private transport may generate negative externalities and a tax would raise price and reduce consumption to a level more in line with the economically desirable output. A combination of the two policies should help tackle the problems that arise when a market operates in line with private cost and benefit rather than social cost and benefit. There will be costs involved for the government and problems in altering consumers preferences. Understanding of externalities up to 4 marks) max. 6. Analysis of the market outcome for transport up to 4 marks) marks. Discussion of the effect of tax /subsidies on the market 6 marks. Overall evaluation 1 mark June 2011/P23/Q2/a Discuss how the market system might be influenced by government intervention to provide appropriate quantities of goods and services. [12] Mark Scheme: Markets may fail by under-provision, over-provision or non-provision of goods and services. This relates to merit goods, demerit goods and public goods. The government can undertake state provision, subsidisation, taxation and product bans and regulation. Each method can be judged by its cost, effectiveness and side effects. State provision will make the goods available but may be costly and inefficient. Subsidisation will reduce the cost of the good but will interfere with the market mechanism and be a burden to taxpayers. Taxation regulates consumption and raises revenue but imposes burdens on producers and consumers. Bans and regulation prevent production but may lose some benefits and create unemployment and enforcement costs. Understanding of the failings of market provision 4 marks. Analysis of the nature of intervention 4 marks. Discussion of the problems of intervention 4 marks. June 2010/P21/Q3/b Discuss why certain goods and services are usually supplied directly by the government rather than through the market. [12]

Unit - 1

Basic Economic Ideas

Mark Scheme: Private goods can be supplied by the market system because of excludability and rivalry. Certain other goods will not be supplied in sufficient quantities or not at all if left to the market. Public goods, such as defence, are non-excludable and non-rival so it is not possible to charge for them and ‘free riders’ can gain benefit without paying. In this case the government provides the good or service and pays for it out of general taxation. Another case is merit goods. These provide a greater benefit than is recognised by the consumer and so will be under-consumed from society’s viewpoint. Health and education fall into this category. The government will provide the goods or services from taxation and offer them at a subsidised or at no price. In both cases the government is making the judgement that providing these will raise welfare levels in society. There will be a range of other motives for supply by the government such as prevent exploitation, natural monopolies and reduce unemployment. For understanding the nature and a discussion of public goods Max 4 marks. For understanding the nature and a discussion of merit goods Max 4 marks. For understanding the nature and a discussion of other cases Max 4 marks. June 2011/P22/Q2/b Discuss the accuracy of the definition of public and merit goods as ‘goods that must be provided by the government’. [12] Mark Scheme: Public goods are non-rival and non-excludable such as street lighting. Merit goods are goods underprovided by the market system. The consumers lack full information of the consequences of non-consumption. This might include healthcare and pension provision. Although the government provides public goods because it is not possible for the market due to free riders, merit goods are supplied to a greater or lesser extent by private providers. The government also provides other goods and services which are neither public nor merit goods. The definition fits public better than merit goods but is inadequate in itself. For an understanding of public goods and why they are provided by the government (up to 6 marks). For an understanding of merit goods and why they are provided by the government (up to 6 marks/10 marks max.). Discussion of the accuracy of the definition. (4 marks) June 2010/P22/Q3/b Discuss whether national defence or a public park is the better example of a public good.

[12]

Mark Scheme: A public good possesses the properties of non-rivalry and non-excludability. Consumption by one does not reduce the availability to others and it is not possible to restrict the benefit of the good to selected groups. Non-rejectability, that is automatically having to consume the good or service, can also apply. Defence is a classic example of a public good, as increases in population do not reduce the protection for current consumers and it is not possible to prevent consumers in some places from getting the benefit as it applies nationally. Everyone is automatically protected. A public park is non-rival up to the (unlikely) point at which its popularity causes it to become so crowded that others cannot enjoy it and the admission of others would reduce the consumption of other users . While public parks are usually free to enter, so no-one is excluded by price, it is possible to exclude people by admission systems and the enforcement of charges. No-one is forced to enjoy the existence of the public park as they are not compelled to use it. While defence always demonstrates the required qualities, a public park usually does but not always or entirely. Understanding of the properties of a public good 4 marks. Discussion of national defence as a public good 4 marks. Discussion of a public park as a public good 4 marks. Nov 2009/P22/Q3/a Explain why a lighthouse is often given as an example of a public good while a light bulb is not.[8]

Unit - 1

Basic Economic Ideas

Mark Scheme: Public goods have the characteristics of non-rivalry and non-excludability. The use by one ship of the lighthouse signal does not reduce the consumption of other ships. Once a lighthouse is indicating hazard to one ship it cannot stop other ships from being warned and it is not possible to exclude other ships from gaining the benefit. This means that charging for the service is not possible as free riders would be able to benefit. A light bulb is a private good as it can be charged for when sold (excludable) and its use within one personâ&#x20AC;&#x2122;s home prevents others from benefiting (rival). The concept of non-rejectability may also be applied. Understanding of non-rival and non-excludable 4 marks. Explanation of lighthouse as public good 2 marks. Explanation of light bulb as private/non public good 2 marks. Nov 2008/P2/Q3/a Explain the market failure which arises from the characteristics of public goods.

[8]

Mark Scheme: Public goods are non-excludable and non-rival and include defence and street lighting. The problem is that they cannot be supplied by the market mechanism as a price cannot be set because of free riders. They will be underprovided if a non market organisation does not intervene to reflect the needs of society. Knowledge of the nature of public goods up to 4 marks. Explanation of the resulting problem for provision up to 4 marks. June 2006/P2/Q2/a Explain, with examples, the difference between a demerit good and a merit good.

[12]

Mark Scheme: A demerit good, such as cigarettes, has negative externalities e.g. passive smoking. Consumption results from lack of information by the consumer of the full implications of consumption. There is overconsumption which governments are likely to discourage. A merit good, such as education, has positive externalities e.g. improved productivity. The good is under-consumed due to lack of full knowledge and governments are likely to promote consumption. Full marks require clarification of the information gap. For explanation of nature of demerit good [up to 4 marks]. For explanation of nature of merit good [up to 4 marks]. June 2006/P2/Q3/b Discuss two methods that a government might use to influence the consumption of demerit goods. [12] Mark Scheme: Governments would intend to reduce the consumption of demerit goods. The usual methods are taxation to operate through the market system, bans to remove demand, education to influence consumers behaviour through information and subsidies to substitutes. In each case issues of cost, effectiveness, side effects and individual choice may be considered. For knowledge of the methods and their operation [up to 4 marks]. For discussion of the advantages of the methods [up to 4 marks]. For discussion of the limitations of the methods [up to 4 marks] June 2005/P2/Q2/b Discuss the desirability of the direct provision of goods and services by the government.

[12]

Mark Scheme: The desirability depends upon the nature of the goods and services. Private goods and services may be most efficiently supplied by the market. However in cases of market failure the government may intervene. Public goods and merit goods may not be provided or be under-provided by the market. This would include

Unit - 1

Basic Economic Ideas

defence and education and would justify the direct provision by the government. Intervention in the provision of private goods however may result in inefficiency and reduced welfare. Governments may also use this as a way to tackle monopoly, fair prices and essential goods. Discussion of merit and public goods up to 6 marks. Discussion of private goods up to 4 marks}to max. Discussion of other government motives for provision up to 4 marks}of 6 marks. Nov 2004/P2/Q4/a Explain the meaning of ‘public good’ and private good.

[8]

Mark Scheme: A private good once used by one consumer or firm is not available to others. This covers most consumer and capital goods. Public goods have non-rivalry and non-excludability so may encounter the ‘free rider’ problem. Private goods can be supplied for profit by the market system while public goods, such as defence and street lighting, are provided by the government and funded through taxation. General comment 1 mark. Example 1 mark . Explanation of the nature up to 2 marks Nov 2002/P2/Q4/a Explain, with examples, the meaning of the terms public good and merit good.

[8]

Mark Scheme: Public goods when provided for one person are available to others. They have the properties of non rivalry and non excludability. Examples are defence, street lighting and law and order. They are not supplied by the market system. Merit goods are those which provide society with a greater benefit than enjoyed by the individual consumer. They are under-consumed through imperfect knowledge. They usually provide positive externalities and include education and health. General statement 1 mark Example 1 mark (X2) Explanation of the nature up to 2 marks

1.7 Basic economic questions June 2011/P23/Q2/a Explain the role that a government must fulfil in a mixed economy.

[8]

Mark Scheme: A mixed economy is based on private ownership, the profit motive, demand and supply etc. with a role for the government. The role is to provide the environment in which the market can operate successfully. This includes ensuring law and order, national defence, property rights and the provision of public goods and desirable merit goods. It intervenes with taxes, subsidies etc. to influence the behaviour of the private sector and markets and achieve a better allocation of resources. For a definition of the mixed economy (2 marks). For an explanation of the role of government in a mixed economy (6 marks) June 2008/Q2/a Explain the three economic questions that all economies face because of the basic economic problem. [8] Mark Scheme: The basic economic questions are what to produce (the selection), how to produce (the methods) and how to distribute (the consumers). These are the result of scarce resources and unlimited wants. Scarcity exists

Unit - 1

Basic Economic Ideas

and makes choices necessary and this is found in all types of economy. Understanding of the prevalence of scarcity up to 2 marks. Explanation of the basic economic questions up to 6 marks Nov 2007/Q3/a Explain how resources are allocated in a market economy.

[8]

Mark Scheme: Market economy means free market forces and limited government. Resources are the factors of production. The actions of producers, consumers and factor owners influence operation of market as they follow maximising behaviour. Demand and supply set price so influencing profits and affordability, which determines the employment of factors between alternative activities. Knowledge of market and factors of production 3 marks. Understanding of motives 2 marks. Explanation of link to factors 3 marks

1.8 Economic systems Nov 2017/P22/Q3/b Discuss the way in which resources are allocated in planned economies and free market economies. Consider which type of economic system is likely to have the more beneficial outcome. [12] Mark Scheme: For Analysis: That explains how resources are allocated in centrally –planned economies including the strengths and weaknesses of this system. (Up to 4 marks) That explains how resources are allocated in free market economies including the strengths and weaknesses of this system. (Up to 4 marks) 8 marks maximum For Evaluation: That exercises some judgement in considering which type of economy would have more benefit. This must make use of the analysis that is offered. There must be a conclusion for full marks. 4 marks maximum June 2017/P23/Q3/b Discuss whether resources are more effectively allocated in a planned economy or in a market economy. [12] Mark Scheme: For analysis containing: • an explanation of the way in which resources are allocated in a planned economy with due reference to the strengths and weaknesses of allocation in this type of economy (Up to 6 marks) • an explanation of the way in which resources are allocated in a market economy with due reference to the strengths and weaknesses of allocation in this type of economy (Up to 6 marks) (8 marks maximum) For evaluation that assesses and compares • the relative strengths and weaknesses of the allocation of resources in each economy (Up to 3 marks) • and reaches a conclusion on which type of economy allocates resources most effectively (1 mark). (4 marks maximum)

Unit - 1

Basic Economic Ideas

Specimen Paper 2016/P2/Q2/a Discuss whether free market economies or centrally planned economies are more likely to make choices that will maximise the benefits for consumers. [12] Mark Scheme: The candidate needs to explain that in a free market economy choices are made through the forces of demand and supply. This is likely to give a different allocation of resources compared to that in a centrally planned economy. The impact depends upon a number of factors in a market driven by market forces and the profit motive. In a centrally planned economy it depends upon decisions taken by planning committees. They may or may not choose to prioritise current consumer welfare. For analysis of how choices are made to maximise the benefit for consumers in each type of economy. Up to eight marks. For evaluative comment on the ‘more likely’ aspect of the question. Up to four marks. June 2014/P21/Q3/b Discuss the view that a market economy is always preferable to a planned economy because of the existence of the price mechanism. [12] Mark Scheme: (For an analysis of the two types of economy and the role of the profit motive in the free market economy. (up to 8 marks) Candidates should explain the difference between the two types of economy in terms of resource allocation. The role of the factor enterprise in responding to the wants of the consumer through the price mechanism in the market economy should be explained and the role of profit made clear. NB Up to a maximum of 4 marks for a general answer that does not focus on the existence of the price mechanism. For evaluative comment on the ‘always preferable’ aspect of the question. (up to 4 marks) Candidates can score for evaluative comment through an examination of the advantages and disadvantages of the free market economy and the role of the price mechanism in such an economy. Advantages include consumer sovereignty. Disadvantages include the nonprovision of public goods and the over provision of demerit goods. June 2013/P23/Q2/b Discuss whether free market economies or centrally planned economies are more likely to make choices that will maximise the benefit for consumers. [12] Mark Scheme: The candidate needs to explain that choices are made through the forces of demand and supply in a free market economy. This is likely to give a different allocation of resources compared to that in a centrally planned economy. The impact depends upon a number of factors in the market driven by market forces and the profit motive. In the centrally planned economy it depends upon decisions taken by planning committees. They may or may not choose to prioritise current consumer welfare. For analysis of how choices are made to maximise the benefit for consumers in each type of economy. Up to 8 marks. For evaluative comment on the ‘more likely’ aspect of the question. Up to 4 marks. Nov 2012/P22/Q2/b Discuss the ease with which a planned economy may be changed into a market economy. [12] Mark Scheme: For knowledge and understanding of planned and market economies (2)..For an analysis of the nature of the changes required to transform a planned economy into a market economy. (Up to 2 marks for identified

Unit - 1

Basic Economic Ideas

features with implications that they need to change). (Up to 6 marks) . For evaluative comment on the ease of transformation. June 2012/P21/Q2/b Discuss the difficulties involved in changing a planned economy to a successful market economy. [12] Mark Scheme: A planned economy relies on state control and direction while a market economy involves private activity and operation of demand and supply. To make a successful transfer, markets need to exist, as does the profit motive, competition, incentives, private property, free trade, decentralised activity, limited state intervention, the tolerance of economic failure and support for business casualties. The ease of introducing these varies, some can be done in a short time at low cost e.g. the sale of state assets, while others may take a long time and have limited success e.g. changing attitudes to risk. A range of other difficulties may be considered e.g. provision of public goods, merit/demerit goods, externalities, inequality etc. Some may result in a ‘soft landing’, others a ‘hard landing’. A partial change may face fewer difficulties. Understanding of the planned and market economy 2 marks. Analysis of the changes necessary 4 marks. Discussion of the difficulties in producing a successful outcome 6 marks. Overall evaluation 1 mark Nov 2011/P23/Q2/b Discuss the effectiveness of free market economies in raising the level of welfare.

[12]

Mark Scheme: Free market economies are based on the market system and have restricted government intervention. Their strength is in efficiency, competition and incentive which should result in lower prices, good quality and choice. Individuals are able to become wealthy and average living standards are generally high. The system has its drawbacks as the profit motive may prevent the supply of public goods and restrict the supply of merit goods. It ignores imperfect information and the existence of externalities so preventing socially optimal output. It does not guarantee employment and economic security and may result in a highly uneven distribution of income and wealth. Understanding of market economies and welfare indicators. (The technical definition of welfare is not required. Consider welfare as general well-being). (4 marks). For a discussion of how market economies might result in a rise in the level of welfare (up to 5 marks). For a discussion of how market economies might result in a lowering of the level of welfare (up to 5 marks). 8 marks maximum for consideration of impact of market economies. (1 mark should be reserved within this for a reasoned conclusion) June 2011/P21/Q2 (a) (b)

Explain the functions of an economic system. [8] Discuss possible reasons why mixed economic systems have replaced most of the former planned economic systems. [12]

Mark Scheme: (a)An economic system is the means by which a country answers the basic economic problem. Limited resources and unlimited wants result in scarcity and choices have to be made. The system allows the questions of what?, how?, and for whom? to be answered. It arranges for resources to be employed to meet demands and for producers and consumers to be satisfied. This may be done by the price system, state planning or a mixture of the two. Understanding of the economic problem 2 marks. Explanation of the role of the economic system 6 marks. (b)Planned economies are based on state control and direction while a mixed economy uses the market system supported by appropriate government intervention. Recent history illustrates the failure of the

Unit - 1

Basic Economic Ideas

planned economy to raise living standards and perform as well as mixed economies. Mixed economies proved more efficient, more innovative, more flexible and provided greater choice and higher living standards. Planned economies were unable to coordinate economic decision making, lacked incentives, lacked quality control, were slow to change and caused considerable environmental damage. Despite the attempts of planned economies to provide citizens with security and a minimum standard of living, the advantages of the mixed economy were more highly valued. Understanding of the two types of system 2 marks. Analysis of the performance of the planned system up to 6 marks. Discussion of the relative merits of the two systems up to 6 marks June 2010/P23/Q2/a Discuss why the mixed economy is the most common economic system.

[12]

Mark Scheme: A mixed economy draws features from the market and planned system. This includes private ownership, profit and incentive as well as government ownership, public goods and planning. This is meant to gain the advantages of both systems while avoiding their drawbacks. As a result there should be efficiency, choice, flexibility and progress, allied to equality, avoidance of waste, security and social welfare. Knowledge of features of a mixed economy 4 marks. Discussion of advantages of arket/disadvantages of planned 4 marks. Discussion of advantages of planned/disadvantages of market 4 marks June 2009/P21/Q2/b Discuss whether a market economy can solve the problem of scarcity more effectively than a command economy. [12] Mark Scheme: A market economy involves minimal government intervention and relies on private motives and ownership. A command economy is directed by the government with public motivation. Scarcity occurs when there is insufficient output to meet peoplesâ&#x20AC;&#x2122; wants at zero price. Scarcity arises because of limited resources and unlimited wants and is shown by the area outside of a ppc. The market economy may appear to reduce the extent of scarcity more by operating efficiently and improving the supply of goods and services, however the wants of consumers expand as more basic needs are satisfied so scarcity remains. The command economy has achieved lower living standards but with a more even distribution. Economic systems are unlikely ever to remove the problem of scarcity, although its nature may differ under different systems. For understanding of the economic systems and scarcity up to 4 marks. For analysis of the ability of each to reduce scarcity up to 6 marks. For discussion of the meaning and solution of scarcity up to 6 marks. June 2008/P2/Q2/b Discuss whether the price mechanism is an effective way to solve the basic economic problem.[12] Mark Scheme: The price mechanism is a feature of the free market and operates through demand and supply and the self interest of individuals, government action is minimised. This has the benefits of incentive, efficiency, innovation, choice and consumer sovereignty. Against this there may be market failure including inequality, lack of public and merit goods, externalities and instability. Depending upon the degree of failure the mechanism may be more or less effective. The price mechanism does not solve the basic economic problem but is thought to be effective when operating efficiently. Understanding of the price mechanism up to 4 marks Analysis of its effectiveness up to 6 marks] to max. Discussion of its limitations up to 6 marks] 10 marks [12]

Unit - 1

Basic Economic Ideas

June 2007/P2/Q2/b Discuss the desirability of the worldwide movement towards the market economy and away from the planned economy. [12] Mark Scheme: The market economy has limited government intervention and relies on the profit motive and consumer sovereignty. It has proved more successful in raising living standards, economic growth and economic efficiency. Consumers benefit from more choice and lower prices. Planned economies were state-run with economic plans and large scale government intervention. The result was low living standards although employment was usually available and a basic quality of life resulted. The move to market economies brought beneficiaries and casualties. Russia illustrates the increase in millionaires while unemployment and poverty grew. Some East European economies are making fast progress while some former USSR republics are struggling. Candidates may consider the case of China. Understanding of the features of economic systems (4). Discussion of the benefits of the transition (4). Discussion of the harm of the transition (4) Nov 2006/P2/Q2/b Discuss whether a mixed economy is the best way for a country to deal with the basic economic problem. [10] Mark Scheme: The basic economic problem concerns limited resources, unlimited wants and scarcity. A mixed economy combines features of market and planned systems. Private ownership, profit motive and markets operate as well as government ownership, service provision and market intervention. The balance between the two varies between time and place. A mixed system should benefit from the advantages of the two systems. The market system should provide incentive and efficiency while equity and market failure should be dealt with by the government. However a mixed economy may suffer from the disadvantages of both alternatives producing inequality, inefficiency and low levels of welfare. For understanding the mixed economy and economic problem up to 5 marks ] For discussion of the mixed economy's benefits up to 5 marks ] max. For discussion of the mixed economy's drawbacks up to 5 marks ] June 2005/P2/Q2/a Explain the differences in the features of a market economy and a planned economy.

[8]

Mark Scheme: Individual actions and consumer sovereignty dominate in the market economy. Motivation is self interest. Private ownership, the profit motive and the operation of market forces are central features. In a planned economy there are government ownership, planning bodies and the state direction of resources. Motivation is public interest. Decisions by the government dominate economic activity. Explanation of the features of a market economy up to 4 marks. Explanation of features of a planned economy up to 4 marks. Nov 2004/P2/Q4/b Discuss whether economic actions by individual always result in a net benefit to society.

[12]

Mark Scheme: Actions by individuals should be in their own interests and maximise their own benefit. This may contribute to maximisation of benefit to society through the incentives of the market system. The government has a role in promoting social welfare. Actions with positive externalities give a greater benefit to society than to the individual. Some actions may have harmful side-effects or negative externalities which make the cost to society greater than to the individual. Producers may be unwilling to supply some goods and services e.g. merit and public goods which society values. Understanding of private motivation and public interest up to

Unit - 1

Basic Economic Ideas

4 marks. Analysis of the benefits of individual actions up to 4 marks. Discussion of the harm of individual actions up to 4 marks June 2004/P2/Q2/b Discuss whether the operation of a market economy always produces a desirable outcome. [12] Mark Scheme: A properly functioning market economy should provide choice, quality and competition. It should make economic use of resources and avoid waste. It is an efficient system of resource allocation and has outperformed planned economies. However, it has drawbacks such as the production of externalities and demerit goods and the failure to provide public and merit goods. Knowledge of the nature of the market system up to 4 marks. Justification of desirable outcome up to 6 marks. Discussion of the failings of the market economy up to 6 marks, subject to maximum of 8 in total for this and the previous line

1.9 Contribution of factors of production June 2017/P22/Q2/a Explain the role of the factor enterprise in allocating resources in a market economy when there is an increase in the demand for a good. Use a diagram to support your answer. [8] Mark Scheme: For knowledge and understanding of the role of the factor enterprise: • For bearing the risk of production (Up to 2 marks) • For organising the other factors of production (Up to 2 marks) (4 marks maximum) For application: • An accurate demand and supply diagram will show an increase in demand, a rise in price and an extension in supply. • The diagram will have an accompanying explanation of how enterprise, motivated by profit, allocates more resources to the production of this good. (4 marks maximum) June 2015/P21/Q3/a Explain how the contribution of each factor of production differs in an agricultural economy from that in an industrialised economy. [8] Mark Scheme: For knowledge and understanding of the contribution of each factor of production in the production process. (Up to 4 marks) For application showing the how the different factors of production might contribute to the different types of economies described. (Up to 4 marks) June 2015/P21/Q3/b Discuss whether entrepreneurs or governments are more likely to cause economic growth in a mixed economy. [12] Mark Scheme: In a mixed economy it is expected that both entrepreneurs and the government would contribute to economic growth. Entrepreneurs would respond to consumer wants by investing in capital goods and

Unit - 1

Basic Economic Ideas

expanding production in pursuit of profit. Governments would invest in public goods and merit goods to ensure that these goods are sufficiently provided. Which contributes most depends upon a wide range of factors including the availability of funds for private investment, the number of entrepreneurs with the necessary skills and government budgets. For analysis of the ways in which both entrepreneurs and the government can generate economic growth (up to 2 marks can be given for an understanding of what is meant by a mixed economy). (Up to 8 marks). For evaluation of the â&#x20AC;&#x2DC;more likelyâ&#x20AC;&#x2122; issue. (Up to 4 marks)

Unit - 1

Blank Page

Basic Economic Ideas