Ch: CLASSIFICATION OF GOODS AND SERVICE
1. With the help of examples, explain the difference between free goods and public goods and consider
the view that public goods can never be provided in a market economy. [8]
[Nov 2023/22]
AO1 Knowledge and Understanding (max 3 marks)
Free goods are not scarce and have zero opportunity cost/no prices as no factors of production are required to
produce them (1)
Public goods have two main characteristics of non-excludability and non rivalry with a brief explanation of
both terms (1)
Provide accurate examples of both e.g., fresh air and street lighting respectively (1)
AO2 Analysis (max 3 marks)
Explanation of why each of the two characteristics of public goods lead to the free rider problem
(1 + 1) and why this makes it impossible/unrealistic to charge a price for them so the market economy would
not supply them and therefore they must be provided by the government (1)
AO3 Evaluation (max 2 marks)
Although most candidates recognised the free rider problem, this was often not well explained in the context
of the two characteristics and was occasionally asserted as a problem
Consideration of the view that pure public goods can never be provided in a market economy unless they are
directly funded by the government (1)
Or could be considered to be quasi or semi-public goods in which case a price could be charged, and they
could be provided by a market economy (1)
Reserve one mark for a justified conclusion (1)
2. The provision of merit and demerit goods differs from the provision of other private goods. Assess
the view that the consequences of imperfect information are more serious in a market economy than in
a mixed economy. [12]
[nov 2023/22]
AO1 Knowledge and understanding and AO2 Analysis
• An analysis of how private goods (which include merit and demerit goods) are allocated within an
economy through the demand and supply mechanism.
• An explanation of the existence of imperfect information with respect to merit and demerit goods and the
associated problems of under or overconsumption.
• An explanation of how this is likely to lead different methods of allocation for both merit and demerit
goods than for other private goods, (how other private goods are allocated and how this differs from the
provision of merit and demerit goods and any other problems that may be associated with their allocation.)
• Analysis should consider the consequences of imperfect information in both a market and a mixed
economy for the provision of merit and demerit goods compared to other private goods.
• Answers which do not compare the provision of merit/demerit goods in both a market economy and a
mixed economy cannot gain more than L2
AO3 Evaluation Points to consider include.
• Likewise, the distinction between the two different types of economy was often given limited attention.
• Merit goods and demerit goods need government intervention because of the issues of under and over
consumption due to imperfect information, so the market economy fails to operate efficiently. Other types
of private good can be efficiently provided by the market economy without government intervention but
the process of allocation may mean e.g., low-income groups do not have the same access to certain goods.
• Leading to a justified conclusion answering the question of whether the consequences of imperfect
information are more serious in a market economy than a in mixed economy. Accept all valid responses.
3. Explain why the provision of bus and local rail (mass transit) services in cities is classified as a
private good not a public good and consider why such services might only be provided by the private
sector [8]
[Nov 2023/23]
AO1 Knowledge and understanding (max 3 marks)
• Explanation of what is meant by excludability/non excludability (1)
• Explanation of what is meant by rivalry/non rivalry (1)
• Correct application to private and public goods (1)
AO2 Analysis (max 3 marks)
• As the non-excludability and non-rivalry characteristics lead to the free rider issue and hence the reason
why it is only public goods that are unlikely to be produced by the private sector. Because they have the
characteristic of rivalry and because it is possible to exclude consumers from using them by charging a
price, they are private goods.
• Why is a mass transit service a private good with reference to both characteristics and therefore only
provided by the private sector? (up to 2 marks)
• Why is a mass transit service not a public good with reference to both characteristics and therefore not
provided by the public sector? (up to 2 marks)
AO3 Evaluation (max 2 marks)
• Assessment of whether a mass transit service might only be provided by the private sector with 1 mark
reserved for a justified conclusion However, the conclusion should be that this does not mean that they can
only be offered by the private sector and will depend on the objectives of the public sector. Although this
will differ from country to country, in terms of economics, this has to be the approach taken by candidates.
4. With the use of examples, explain the difference between public goods and merit goods and consider
whether markets will always provide enough of both goods. [8]
(June 2024/21)
AO1 Knowledge and Understanding (max 3 marks)
• For the use of accurate examples of BOTH merit goods and public goods (1).
• For clearly explaining the characteristics of public goods i.e., non-rivalry and non-excludable (1).
• For clearly explaining the characteristics of merit goods i.e., better than people realise and under consumed
/ underproduced due to information failure (1).
AO2 Analysis (max 3 marks)
• A market economy is less likely to produce enough of both goods due to the lack of a profit motive unless
heavily subsidised.
• A mixed economy may produce enough due to government involvement and the welfare motive but may
be constrained by limits on government spending.
Note: Analysis should consider at least 2 markets. If only 1 market is analysed, then 2 marks maximum for
analysis and 0 for evaluation.
AO3 Evaluation (max 2 marks)
• Offers a valid evaluation of whether enough of both types of good can be produced in at least 2 markets (1)
reaching a valid conclusion (1).
5. Assess whether education should be classified as a public good rather than classified as a merit good.
[12]
[June 2023/21]
AO1 Knowledge and understanding and AO2 Analysis
• Education is classified as a merit good because it is a private good with the characteristics of being both
rival and excludable; it can therefore be provided through a market because it is possible to charge a price
for it, although it can also be provided by the state.
• A public good is distinct from a private good because it has the characteristics of being both non-rival and
non-excludable; it is therefore difficult, if not impossible, to charge a price for it due to the existence of the
free rider problem; it therefore has to be provided by the state.
AO3 Evaluation
• Public goods can only be provided by the state.
• Merit goods will be under provided in the free market and governments should intervene to increase
provision.
• However, if the demand for education is extremely low in a country, when provided through a market, a
government could decide to provide it entirely through the state.
• In conclusion, education should be classified as a merit good rather than as a public good.
6. Explain why demerit goods are over-consumed and merit goods are under-consumed. [8]
[ Nov 2022/23]
For knowledge and understanding of the difference between demerit goods and merit goods e.g., demerit
goods are those that are thought to be undesirable for consumers / worse for them than they realise (1) and
merit goods are those that are thought to be desirable for consumers / better for them than they realise (1) For
application that explains that demerit goods are often overconsumed because of imperfect information (1)
giving an example (1) with further development e.g., also because of low income, poor education, low prices
of demerit goods, addiction (1) For application that merit goods are often underconsumed because of
imperfect information (1) giving an example (1) with further development e.g., also because of low income /
high prices of merit goods (1)
Demerit goods are over-consumed because of imperfect information on the part of those who consume them.
They are not aware of the risks to health of over consumption. The positive side effects of consuming merit
goods are not appreciated by all consumers due to imperfect information. We cannot expect any discussion
regarding costs and benefits including externalities, private costs and benefits, social costs and benefits as
these are not on the AS syllabus but these may be rewarded if included.
7. Explain, using examples, why merit goods are classified as private goods rather than public goods.
[8] [June 2022/21]
Private goods: • economic goods that are consumed by an individual for their own benefit • there is rivalry in
consumption, i.e., when a product is consumed by one person, it cannot be consumed by another • there is
excludability in consumption, i.e., when a product is consumed by one person, all others are excluded from
it. Public goods: • are non-rival • are non-excludable • are non-rejectable Examples of merit goods: •
education • healthcare Examples of public goods: • street lighting • defence • police
8. A government has decided to spend money building a new barrier to prevent flooding across a city.
Explain why this flood defence barrier is likely to meet the characteristics of a public good. [8] [June
2022/23]
• For knowledge and understanding of the difference between a private good and a public good by reference
to the characteristics of excludable (1 mark) and rivalry (1 mark)
• For application, explain that a flood defence system is a public good (1 mark), why it is non excludable (1
mark), why it is non rival (1 mark)
• For application, explain that it cannot be a private good (1 mark) by accurate reference to both
excludability and rivalry (1 mark) and the free rider problem (1 mark)
• Public goods have two key characteristics. These are that they are non-excludable and non-rival. Both need
to be explained and the explanation applied to a new flood defence barrier. Better answers will then point
out the free rider problem in the provision of public goods and why it would be difficult for funding to be
from the private sector as a private good. even for those candidates who could explain why flood defences
were a public good, the same logic was not applied to explain why it could not be a private good.
9. Education and healthcare are considered to be merit goods. Discuss why merit goods are provided
by both the private sector and the public sector. [12]
Merit goods have positive side effects when consumed. They are provided because of information failure
which can lead to under consumption and under production. Consumers of things like education and
healthcare do not perceive the true benefits usually because they do not have either any information or true
information. Therefore, the government often provides merit goods. Merit goods in many countries are
provided by the private sector as well as the public sector. This is often because the cost of provision to the
public sector is too great or because the cost cannot be met in full. The case of healthcare is important in
most low and middle income countries.
The significance of information failure and therefore underconsumption and under provision was often
ignored in favour of merit goods ‘being good for you’. An understanding of this, together with the cost of
provision
10. Explain whether private goods, free goods and public goods will all be sold in a free market
economy. [8] [June 2021/21]
Free goods are not sold in a free market economy: • are not scarce and so do not have a market price attached
to them • the supply equals the demand at zero price • have no property rights associated with them • require
no factors of production for their enjoyment Private goods are sold in a free market economy: • economic
goods that are consumed by an individual for their own benefit • there is rivalry in consumption, i.e. when a
product is consumed by one person, it cannot be consumed by another • there is excludability in
consumption, i.e. when a product is consumed by one person, all others are excluded from it Public goods
are not sold in a free market economy: • are non-rival • are non-excludable • are non-rejectable. Examples of
free goods: air, sunshine Examples of private goods: most products in an economy, such as food and
clothing; can include examples of merit goods/demerit goods Examples of public goods: street lighting,
defence and police
11. The government raises taxes to provide a toll road bridge and streetlights in a country. Explain
how an economist would classify each of these provisions. [8] [ March 2020/12]
The classification relies upon whether the goods are excludable and rival in consumption. It does not matter
how they are paid for. Reference to merit goods should still conclude that these are private goods in terms of
excludability and rivalry. Successful responses explained that a toll bridge was excludable because free riders
could be excluded through the imposition of a toll, whereas streetlights were classified as a public good
because free riders could not be excluded and there was no rivalry in consumption For knowledge and
understanding of the characteristics that allow the classification of goods i.e. excludability (1 marks) and
rivalry in consumption (1 marks) (KU: up to 2 marks) For application that • classifies a toll road bridge as a
private good (3 marks) • and streetlights as a public good (3 marks)
Ch: PRODUCTION POSSIBILITY CURVES
1. Use a production possibility curve (PPC) diagram to explain how a government in a mixed economy
might allocate more resources to consumption and less resources to investment and consider a
limitation of this approach to resource allocation. [8] (June 2024/23)
AO1 Knowledge and understanding (max 3 marks)
• For a fully accurate diagram that is clearly labeled as consumer goods and capital goods with the curve
touching both axes. (1)
• The diagram must show the movement from capital goods to consumer goods e.g., by means of an arrow
(1)
• Accompanied by an explanation that this is a movement along the curve (rather than a shift). (1) AO2
Analysis (max 3 marks Of how a government might allocate more resources to consumption and less to
investment e.g.:
• • By reducing taxes on income / consumer expenditure. (1)
• • By increasing government expenditure to provide subsidies for consumers. (1)
• • By reducing government support to businesses for investment. (1) (Maximum of 2 marks overall)
• • PLUS 1 mark if shown on a diagram as either a movement along the curve or shift within the curve that
is clearly explained.
• AO3 Evaluation (max 2 marks) For a clear assessment of the limitations of this approach including an
assessment of time lags, the possible response of businesses and consumers etc. Reserve 1 mark for a
justified conclusion Please use a text box to show the mark split e.g., 3 2 1
With the help of a diagram, explain the difference between the causes of a movement along, and a shift
of, a production possibility curve (PPC) and consider which is likely to have the most immediate
impact on an economy.[8] [june 2023/21]
AO1 Knowledge and understanding (3 marks maximum)
An understanding of a PPC shown through an accurate diagram, with correctly labelled axes (1), a
movement along a PPC showing a trade-off between production on the two axes (1), and a shift of a PPC
showing an increase in production of two goods with no trade-off. (1)
AO2 Analysis (3 marks maximum)
Uses the PPC to explain that a movement along a PPC is caused by a reallocation of resources (1), as
resources are shifted between the two types of product, involving an opportunity cost (1), but a shift of a PPC
is caused by an increase in the quantity and/or quality of resources, allowing more of both goods to be
produced. (1)
AO3 Evaluation (2 marks maximum)
Offers a valid judgement on whether a movement along, or a shift of, a PPC is likely to have the most
immediate impact on an economy (1) to reach a conclusion. (1)
Explain, with the use of a diagram(s), how the production possibility curve of an economy could be
affected by a decrease in the quantity of labour available, but an increase in its quality. [8] [Nov
2022/21]
Production possibility curve:
A PPC is based on a two-product economy
a PPC shows the range of combinations of two products that may be produced if the existing level of
resources in an economy is being fully utilised
A decrease in the quantity of labour: this would lead to a reduction in the productive potential of an economy
(1)
Diagram: • correct labelling of axes and PPC drawn in such a way that it touches both axes (it can be straight
or curved) (1)
The PPC shifts to the left (1)
An increase in the quality of labour: this would lead to an increase in the productive potential of an economy
(1) Diagram: • correct labelling of axes and PPC drawn in such a way that it touches both axes (it can be
straight or curved) (1) • the PPC shifts to the right (1)
Explain how a production possibility curve can be used to demonstrate scarcity, choice and
opportunity cost. [8][Nov 2022/22]
For knowledge and understanding of a production possibility curve (Up to 2 marks)
e.g. a curve that shows the maximum level of output that an economy can achieve (1) given its current level
of resources / technology (1)
For application that demonstrates a clear understanding of what is meant by scarcity (1) and explains how
this would be shown on a PPC (1)
For application that demonstrates a clear understanding of what is meant by choice (1) and explains how this
would be shown on a PPC (1)
For application that demonstrates a clear understanding of what is meant by opportunity cost (1) and explains
how this would be shown on a PPC (1)
Candidates are likely to provide a diagram although this is not essential if it is clear that the basis of a PPC is
understood.
If a diagram is used to demonstrate knowledge and understanding without an accompanying explanation then
this is acceptable BUT it must be correctly labelled as 2 different goods (i.e., not X and Y or P and Q) and the
curve itself must touch both axes for both marks.
Scarcity is shown through the PPC as a production frontier and not a position outside the curve. Choice must
be shown as a movement along the curve.
Opportunity cost is shown as the next best alternative foregone as one product is sacrificed to produce the
alternative. A diagram may be used to demonstrate scarcity, choice and opportunity cost but must be
accompanied by appropriate explanation to gain marks. However, a diagram is not essential. The application
for scarcity, choice and opportunity cost must be clearly separated
Explain with the help of a production possibility curve diagram(s) how a decision to re-allocate
resources in an economy to produce more capital goods and fewer consumer goods would affect
consumers in both the short run and the long run. [8] [ March 2022/22]
For knowledge and understanding of production possibility curves showing an accurate diagram labelled
consumer goods and capital goods or equivalent (up to 2 marks).
For application showing a movement along the curve in the short run (1 mark) meaning fewer consumer
goods and services available for consumption (1 mark) leading to less choice / higher prices / lower living
standards in the short run (1 mark).
For application showing an outward shift of the curve in the long run (1 mark) perhaps leading to more
consumer goods and services due to an expansion of capacity in the economy (1 mark) and an increase in
living standards etc (1 mark).
The PPC diagram should show consumer goods and capital goods on the axes.
These terms do not have to be used, but it must be clear that the candidate understands the distinction
between the two.
The significance of the reallocation should be clearly understood. In the short run the consumer will have
less goods and services available to consume. In the long run there may be a shift outward in the PPC as
more capital goods are produced and the economy’s capacity expands. An accurate diagram must include
accurate labels with the PPC touching both axes.
With the help of a production possibility curve diagram(s) compare growth in the productive capacity
of an economy and growth that results from a reduction in the quantity of unused resources in an
economy. Explain one reason that might cause each to occur. [8] {June 2022/22]
For knowledge and understanding of a PPC shown through an accurate diagram i.e., a concave or straightline curve that meets both axes (1mark) with appropriate and correctly labelled axes (1 mark). For
application, identification of a reason why there may be a growth in the productive capacity of an economy
(1 mark) clearly explained (1 mark) using a fully accurate diagram to correctly illustrate a growth in the
productive capacity of an economy shown by a shift outward in the PPC (1 mark) (3 marks maximum) For
application, identification of a reason why there might be a reduction in the quantity of unused resources in
an economy (1 mark) clearly explained (1 mark) using a fully accurate diagram to correctly illustrate a
reduction in the quantity of unused resources in an economy shown by a movement from within the curve to
a point nearer the curve or onto the curve. (1 mark) (3 marks maximum)
Knowledge and understanding marks may only be given for an accurate diagram and not a written
explanation. Axes must be labelled correctly for the second KU mark i.e., not P and Q and not X and Y
although good X and good Y are acceptable. A growth in the productive capacity of an economy is
represented by a shift outward in the PPC. It can be caused by an improvement of technology or an increase
in productive resources. A reduction in the quantity of unused resources in an economy is represented by a
movement from within the PPC towards the curve. It can be caused for example by increased aggregate
demand or by an improvement in the aggregate supply that makes the labour market more efficient. This may
be illustrated on one diagram or more.
With the aid of a diagram, compare what happens to an economy’s resources to cause a movement
along its production possibility curve with what happens to an economy’s resources to cause a shift of
its production possibility curve. [8] {Nov 2021/21]
The shift of the PPC can be to the right or to the left or both A movement along a PPC shows different
combinations of outputs that can be produced from the given resources; this movement along a PPC from
one point to another will involve a re-allocation of those resources A shift of a PPC, say to the right, comes
about as a result of an increase in the quantity and/or quality of resource/s, leading to an expansion in the
productive capacity or potential output of an economy, allowing more of one/both goods to be produced
Use a diagram(s) to explain how a production possibility curve can be used to show opportunity cost
and why such a curve is usually drawn with increasing opportunity costs. [8] {Nov 2021/22]
Clearly the candidate only needs to draw one diagram to answer this question However, if the only diagram
used shows a straight line PPC, then the maximum mark must be 5 as it cannot be used to answer the final
part of the question Note: candidates may not follow the sequence described in this mark scheme, e.g.
opportunity cost may be explained in the context of increasing opportunity cost, i.e. not separately. However,
provided this is explained using a valid diagram, i.e. a concave PPC, then both marks must be awardedAnd
application that explains how a movement along the curve illustrates opportunity cost. What opportunity cost
is with reference to the products in the diagram(1), for showing a movement along the curve and the impacts
on the output of the different products on the diagram (1) and explaining how this demonstrates opportunity
cost (1) (up to 3 marks) And an explanation of why increasing opportunity costs are expected, curve must be
concave and the significance explained (1), increasing opportunity costs clearly demonstrated on the diagram
(1) and explained, e.g. because resources cannot be easily switched between products (1)
Explain, with the aid of a production possibility curve (PPC) diagram, why scarcity makes choice
inevitable for firms and how each choice has an opportunity cost [8] [ June 2020/21]
Up to 6 marks for Application Use of the production possibility curve to explain: • scarcity (up to 2 marks) •
choice (up to 2 marks) • opportunity cost (up to 2 marks)
Use a production possibility curve diagram(s) to distinguish between the growth of an economy and a
reduction in the number of unused resources in an economy and explain one reason that might cause
each to occur. [8] { June 2020/22]
For application using a production possibility curve diagram that shows the growth of an economy illustrated
through a shift outward of the curve with a valid example (1 mark) and explanation (1 mark) of what might
cause this to happen (Up to 3 marks) • For application using a production possibility curve diagram that
shows a reduction in the number of unused resources illustrated through a movement from within the curve
to a point on or nearer to the curve together (1 mark) with a valid example (1 mark) and explanation (1 mark)
of what might cause this to happen (Up to 3 marks)
Ch: Demand and Supply Curves
1. Excluding the price of electric cars, explain the determinants of demand for electric cars and
consider which of these determinants is likely to be of greatest significance at the present time. [8]
(June 2024/23)
AO1 Knowledge and Understanding (max 3 marks) Knowledge and understanding of income, price and
availability of substitutes and fashion, taste and attitudes. For an explanation of what is meant by the role of
income, price and availability of substitutes, complements, fashion, taste, and attitudes as determinants of
demand. (1x3) AO2 Analysis (max 3 marks) For analysis of the significance at the present time of at least 2
of these determinants. e.g., attitudes may have a great significance because of an increased awareness of the
impact on the environment. e.g., income may have a great significance if economies are in recession. e.g., if
petrol prices rise leading to a fall in demand for petrol-driven cars then the demand for electric cars may rise.
Up to 2 marks for any developed point. AO3 Evaluation (max 2 marks) For a clear consideration which of
the determinants is likely to be the most significant at the present time. Reserve 1 mark for a justified
conclusion
2. With the help of a diagram, explain what could cause an increase in demand for a product and
consider whether the impact of an increase in demand on the price of the product will be the same in
the short run and the long run. [8] (Nov 2023/ 21)
AO1 Knowledge and understanding (max 3 marks) An understanding of the demand for a product, shown
through an accurate diagram, with correctly labelled axes (1), correctly labelled demand and supply curves
and a correctly labelled shift of the demand curve to the right (1) and with equilibrium positions in terms of
both price and quantity clearly shown or a movement from E1 to E2. (1) AO2 Analysis (max 3 marks) Uses
the diagram to explain what could cause a shift of the demand curve to the right for a product and analyses
the causes of an increase in demand for a product. AO3 Evaluation (max 2 marks) Offers a valid judgement
on whether the impact of an increase in demand on the price of the product will be the same in the short run
and long run (1) to reach a conclusion. (1)
Ch: Income Inequality
Explain how the Gini coefficient is used to measure income inequality and consider the relative
strength of two economic reasons suggested for such inequality in a low-income country. [8] (June
2024/22)
AO1 Knowledge and Understanding (max 3 marks) For a clear understanding of what the Gini coefficient is
e.g., it is a numerical measure of the extent of income inequality in an economy (1) if there is no inequality
the value will be zero and at the other extreme, if all income is earned by one person the value will be one (1)
For an explanation that the nearer the value is to zero income is more equally distributed and/or the nearer
the value is to one the more it is unequally distributed (1). AO2 Analysis (max 3 marks) Reasons may
include: • A lack of employment opportunities e.g., which will mean that income levels are low (1) which
may be more of a problem in low-income countries because industry may be less well developed (1). • Poor
vocational training e.g., leading to fewer people being able to develop their skills and earn a higher income
(1). This may be more of a problem in such countries because of the lack of finance to provide such training.
(1) • A lack of investment in education and health e.g., meaning that some people may not receive a better
level of education or may suffer long term health issues which will lower their potential income levels. (1)
This may be more common in such countries due to a lack of government budget (1) • Other reasons include:
• Poor infrastructure • Lack of access to loan finance Analysis must focus on the strength of two of these
reasons in a low-income country. Maximum of 2 marks if only one reason considered. One mark per reason
explained (+1) if clearly related to a low-income country. Accept any valid reason provided it is explained in
terms of economics. Maximum of 2 marks if only one reason is considered.
Up to 2 marks for evaluating the relative strength of the two reasons with 1 mark reserved for a balanced
judgement as to which may be the most likely reason in a low-income economy.
Assess the extent to which government policies to redistribute income and wealth are likely to be
successful. [12] (June 2024/ 22)
AO1 Knowledge and understanding and AO2 Analysis Policies may include: • Minimum wage rates •
Transfer payments • Progressive income taxes • State provision of essential goods and services • Investment
in infrastructure Accept any valid policies but the analysis must focus on how they may be used to
redistribute income and wealth and their advantages and disadvantages to be credited. E.g., A minimum wage
rate that is set above the equilibrium, should increase the income levels of those on the lowest levels and
therefore possibly ensure that poverty is reduced. However, if everyone’s income levels increased, this will
not have a redistribution effect. It will not impact on the self-employed. It may lead to unemployment and
more poverty leading to less redistribution if businesses cannot afford the higher rates. E.g., Progressive
income taxes should ensure that those on lower incomes pay less tax as a percentage of income than those on
higher incomes. This should have a redistributive effect. However, those on higher incomes may have the
ability to reduce their tax burden or may simply leave the country. It may also reduce incentives to earn
more. Note: if only one policy is considered, the maximum level will be Level 2.
AO3 Evaluation • Requires an assessment of the likely success of more than one government policy leading
to • A justified conclusion as to whether such policies are ever likely to be successful.
Explain the possible economic reasons for inequality of income and consider whether inequality of
income can benefit an economy. [8] [March 2023/22]
AO1 Knowledge and understanding (max 3 marks) A clear knowledge and understanding of at least two
possible economic reasons for inequality of income, such as whether a person is in employment or
unemployed (1), the skills, qualifications and experience of different workers in various occupations and
economic sectors (1), whether workers are employed in the public sector or the private sector (1), whether
they are employed full-time or part-time (1), the provision of transfer payments (1) and the level and type of
taxation. (1) N.B. the question does not stipulate how many reasons should be referred to so two reasons well
explained can gain up to 3 marks. 1 reason explained can achieve a maximum of 1 mark. Max 3 marks AO2
Analysis (max 3 marks) The focus of this analysis must be on whether income inequality generates benefits
to an economy or not. Points may include: • Incentivising workers leading to higher levels of productivity •
Encourages enterprise • Encourages workers to retrain/reskill • Demotivates those on the lowest incomes and
an increase in crime • Increased government spending on transfer payments leading to an opportunity cost
AO3 Evaluation (max 2 marks) Offers a valid judgement on the extent to which inequality of income can
benefit an economy (1) to reach a conclusion. (1)
Ch: Consumer and Producer Surplus
With the aid of diagrams, explain how consumer surplus is affected by a decrease in the price of a
luxury product with many substitutes, and of an essential product with few substitutes. [8] [June
2021/21]
A decrease in the price of a product will increase the consumer surplus as more consumers are willing to pay
the lower price. The extent of this will depend on the price elasticity of demand for a product. In the case of a
luxury product with many substitutes, PED will be elastic. In the case of an essential product with few
substitutes, PED will be inelastic.
For Knowledge and Understanding For correct diagram: Axes correctly labelled: P/Q (1 mark) Existence of
consumer surplus (1 mark) 2 marks maximum For Application How consumer surplus is affected by a
decrease in the price of a luxury product with many substitutes: elastic PED. (Up to 3 marks) How consumer
surplus is affected by a decrease in the price of an essential product with few substitutes: inelastic PED’ (Up
to 3 marks)
With the help of a diagram(s), explain what is meant by consumer surplus and producer surplus and
consider whether a rise in the price of a product because of higher costs of production is likely to
always reduce the consumer surplus. [8] [June 2023/22]
AO1 Knowledge and Understanding (max 3 marks) For a clear understanding of consumer surplus i.e., the
difference between the price a consumer is willing to pay for a product and its market price (1). For a clear
understanding of producer surplus i.e., the difference between the price a producer is willing to accept and
what is actually paid (1). Both clearly shown on an accurately labelled diagram (s) (1) AO2 Analysis (max 3
marks) An accurately labelled diagram(s) showing a shift to the left in the supply curve (1) which explains
and shows the extent of the change in consumer surplus for a product with an elastic price elasticity of
demand (1) compared to a product with an inelastic price elasticity of demand (1) AO3 Evaluation (max 2
marks) Following suitable analysis of PED, it can be concluded that the overall impact is that consumer
surplus will always fall (1) with a conclusion that the extent of the fall is dependent on the value of the price
elasticity of demand (1). this answer required an analysis of the impact of price elasticity of demand, and it is
not enough to simply state the effect of e.g., an inelastic PED on consumer surplus, rather this must be
explained in terms or the percentage change in demand as a result of a percentage change in price
When the price of a product changes, it usually changes the consumer surplus in the market. Assess
how variations in price elasticity of demand for a product determine the extent of changes in consumer
surplus in a market. [12] [July 2023/23]
AO1 Knowledge and understanding and AO2Analysis (max 8 marks) • Knowledge and understanding of
consumer surplus • Accurate labelled diagram of consumer surplus • Explanation of effects on consumer
surplus when the price of a product increases • Explanation of the effects on consumer surplus when the
price of a product decreases • Explanation of the change in consumer surplus for a product with a price
elastic PED • Explanation of the change in consumer surplus for a product with a price inelastic PED •
Comparison of changes in consumer surplus where there are variations in the PED for a product Level 2 max
for 1 sided answers i.e. those that analyse the impact of elastic or inelastic PED AO3 Evaluation (max 4
marks) • Change in consumer surplus depends on the relative extent of the price change • Change in
consumer surplus also depends on the coefficient of PED • It is assumed that a price change is the only factor
that determines a change in consumer demand for a product
Explain what is meant by consumer surplus and use diagrams to assess the impact on consumer
surplus when an indirect tax is imposed on a good with price-elastic demand compared with the
impact when the demand is price-inelastic. [8] [Nov 2021/22]
For knowledge and understanding of consumer surplus, the difference (1) between the price a consumer is
willing to pay for a product and its market price/price actually paid (1) (up to 2 marks) And application using
a diagram to show the impact of an indirect tax on the consumer surplus when the demand for a good is
price-elastic. An accurately labelled diagram that clearly shows a flatter/elastic demand curve and the shift to
the left of the supply curve (1), the impact on the price and quantity (1), and the fall in consumer surplus (1)
(up to 3 marks) And application using a diagram to show the impact of an indirect tax on the consumer
surplus when the demand for a good is price-inelastic. An accurately labelled diagram that clearly shows a
steeper/inelastic demand curve and a shift to the left of the supply curve, and the impact on price and
quantity (1). The impact on consumer surplus should be clearly shown and compared with that of a priceelastic good (1) and possible reasons for the difference, e.g. degree of substitutability, addictive nature of the
good, etc. (1)
Ch: Price, Cross, Income Elasticity of Demand
With the help of a formula, explain what is meant by the income elasticity of demand for a product
and consider the extent to which demand for the product will always rise at the same rate as the
income of its consumers [8] (June 2024/21)
AO1 Knowledge and Understanding (max 3 marks) For an accurate formula of YED (1). For clear and
accurate knowledge and explanation of what is meant by YED (1) including the difference between elastic
and inelastic YED (1). AO2 Analysis (max 3 marks) For a clear understanding and explanation that this
depends on the coefficient value of YED (1) and analysis of the different outcomes depending on whether the
product is normal (positive coefficient) (1) or inferior (negative coefficient) (1). AO3 Evaluation (max 2
marks) For a considered evaluation of the possible outcomes (1) leading to a valid conclusion (1).
Assess whether cross elasticity of demand is likely to be more important in determining the demand
for electric cars than income elasticity of demand . [12] (June 2024/23)
AO1 Knowledge and understanding and AO2 Analysis • Explanation of what is meant by cross elasticity of
demand. • The significance of the price and availability of substitute models of both petrol and electric cars
and their complements e.g., petrol and charging points etc. • The weaknesses of the concept. • Explanation of
what is meant by income elasticity of demand. • The significance of income in the decision to purchase an
electric car including the relationship of changes in income to changes in demand. • The weaknesses of the
concept. AO3 Evaluation That clearly assesses the extent to which cross elasticity of demand is likely to be
more important than income elasticity of demand in determining the demand for electric cars by comparing
the significance and weaknesses of both concepts and reaches a justified conclusion. A one-sided response
cannot gain any marks for evaluation. Please use a text box to show the mark split e.g., L2 5 L1 2
With the help of a formula, explain the meaning of income elasticity of demand and consider the extent
to which a rise in income will increase the consumption of all goods and services.[8] [March 2024/22]
AO1 Knowledge and Understanding (max 3 marks) formula + definition in terms of percentage or
proportionate responsiveness + a clear distinction between the responsiveness of demand for normal and
inferior goodsAn accurate definition of income elasticity of demand (1) and accurate formula (1).
Understanding of the difference between normal and inferior goods with appropriate exmaples (1). AO2
Analysis (max 3 marks) Normal goods have a positive value (1). Uses a diagram (upwards sloping income
demand curve) or the formula to show why an increase in income increases the consumption of such goods
(1) – this should be justified with an appropriate example .referred back to the formula or an explained
diagram to provide more developed analysis or the significance of the positive coefficient when explaining
the responsiveness of normal goods. (1). AO3 Evaluation (max 2 marks) One mark for a valid explanation
that if the good is inferior good then the demand for the good will fall when incomes rise (1) as consumers
adjust their spending habits and consumer more normal/luxury goods. The second mark is for a justified
conclusion. . For evaluation, many candidates simply stated that the existence of inferior goods meant that a
rise in income leading to a decrease in their consumption proved that not all goods and services experienced
a rise without developing this point. This should have been developed to explain that this was due to a switch
to normal goods for credit together with a justified conclusion as to the extent of the shift.
Assess whether price elasticity of demand (PED) or income elasticity of demand (YED) is likely to be
of greater importance to a firm producing cars. [12] [nov 2023/21]
AO1 Knowledge and understanding and AO2 Analysis • An understanding of the meaning and formula of
PED. • An understanding of the meaning and formula of YED. • An analysis of how each of these concepts
can be applied to the specific context of a firm producing cars. Guidance: A clear comparison of the strengths
and weaknesses of these two concepts in the context of car production needed to get into Level 3. (Up to 8
marks) AO3 Evaluation • PED should be easier for a firm to calculate than YED. • PED will indicate whether
price should be increased or decreased. • However, a firm will need to take into account the availability of
substitutes, the amount spent on the product and the time period under consideration. • YED will be helpful
in giving a firm an indication of the extent to which a change in income may affect spending on cars. •
However, a firm will need to take into account whether a car is seen as a normal or an inferior good, the
proportion of income that is spent on the car and whether an economy is experiencing an upturn or a
downturn. • In conclusion, PED is likely to be of greater importance than YED, but YED will still be of some
use.
With the help of a formula, explain what is meant by the term price elasticity of demand for a product
and consider the extent to which it allows an entrepreneur to determine the effect of price changes on
the total expenditure on their product [8] [Nov 2023/22]
AO1 Knowledge and Understanding (max 3 marks) For a clear understanding of the meaning of price
elasticity of demand (1) plus an accurate formula (1) plus a clear understanding of what is meant by price
elastic and price inelastic that refers to relative proportionate or percentage changes rather than large or small
changes (1) AO2 Analysis (max 3 marks) Up to 2 marks for clear analysis of how total expenditure on a
product is affected by price changes if the demand is price elastic. Up to 2 marks for clear analysis of how
total expenditure on a product is affected by price changes if the demand is price inelastic. Note: as the
question refers to price changes it is expected that answers should consider both price increases and price
decreases. If either part of the analysis only considers a price rise or a fall, then a maximum of 1 mark for
that part of the analysis. If both parts of the analysis consider a price rise or fall then a maximum mark of 2
i.e., 1 + 1. AO3 Evaluation (max 2 marks) Up to 2 marks for considering the extent to which the concept can
help the entrepreneur and making a judgement. • Consideration of the accuracy of the measure and the ease
of calculation for an entrepreneur • Consideration of other factors which may affect total expenditure on a
product when price changes. • Reserve 1 mark for a conclusion that focuses on the extent to which it allows
the entrepreneur to determine the effect of price changes.
Assess whether the concept of price elasticity of supply or cross elasticity of demand will be more
useful to a business wanting to increase its total sales in a growing economy. [12] [nov 2023/22]
Analysis of the concept of price elasticity of supply may explain its use in increasing a business’ total sales
by examining the following. • Usefulness depends on the type of goods and whether decisions need to be
made in the short run or long run. • It may help businesses with regards to stock holding and decisions about
which products to focus on • It may help businesses make decisions about productive capacity and whether
e.g., to invest in new technology BUT • It depends on the accuracy of the data used to produce the value. •
This may change over time and the value may have little value in a growing economy. • Some products, such
as agricultural/perishable products, will naturally have a more price inelastic supply and knowledge of the
value may have little use. Analysis of the concept of cross elasticity of demand may explain its use in
increasing a business’s total revenue by examining the following. • It will mean the business understands the
relationship between its product and others i.e., whether they are complements or substitutes. • It also
measures the closeness of the relationship and informs decisions about how quickly and the extent to which
it should react for example if a competitor changes its prices. • It should assist a business to develop a pricing
strategy that maximises opportunities to generate more sales BUT • The usefulness depends on the accuracy
of the data and in a growing economy, it may not be possible to keep the value up to date. It is therefore often
dependent on estimates that may be inaccurate. • Businesses may not be able to act on the data by changing
prices if their cost structure cannot be easily changed. • Other variables other than cross elasticity of demand
may be more important for example non price determinants such as brand loyalty AO3 Evaluation •
Consideration of the likely effectiveness of both measures in increasing total sales in a growing economy that
assesses which is most likely to be effective. If there is no direct/implicit reference to a growing economy,
then L1 upper maximum. • Candidates may consider an alternative concept e.g., YED to assess whether sales
would actually grow in these circumstances, • A justified conclusion which is most likely to be effective
Assess whether knowledge and understanding of price elasticity of demand (PED) or cross elasticity of
demand (XED) is likely to be more useful to a producer of smartphones. [12] {nov 2023/23]
AO1 Knowledge and understanding and AO2 Analysis • Analysis of the benefits of using PED for a
smartphone producer e.g., for raising / decreasing the price to maximise revenue. • Analysis of the limitations
of the use of using PED e.g., the figures are only estimates and may change over time. • Analysis of the
benefits of using XED for a smartphone producer e.g., to determine whether it is a complement or a
substitute for a product produced e.g., by a different business to enable it to react to competitor pricing
decisions. • Analysis of the limitations of using XED e.g., other factors may have a greater influence e.g.,
brand loyalty to a competitor. If limitations of only one measure are analysed then L3 mid-point maximum.
If only one measure is analysed or no reference to smartphone producers then L2 maximum. AO3 Evaluation
• Assessment of whether PED or XED is more useful to the producer. • Need to use other sources of
information in decision-making – e.g., YED. • Justified conclusion.
SAMPLE ANSWERS- 2b) price elasticity of demand (PED) is a numerical measure of responsiveness of
demand to a change in price. Cross elasticity of demand (XED) is a numerical measure of responsiveness of
the quantity demanded of A to a change in price of product B. Knowledge about PED may be very beneficial
to a manufacturer. It will allow the producer to set prices and change them in order to raise revenue. For
example, if demand is elastic, a firm will want to maintain low prices or further lower prices from existing
levels as it will increase revenue. This is because change in demand will be higher than change in price.
Information about PED will even help a firm implement a price discrimmination policy to different
consumers based on differences in their PED. So, this will allow the smartphone producer to maximise
revenue from every consumer group. For example, children/elderly are likely to have elastic demand,
charging them lower for smartphones and business people may have inelastic demand, encouraging
producers to charge them higher. Knowledge about XED will help a business identify its competitors. It will
help the smartphone producer understand the effect of a change in competitors strategies, to that of sales of
their smartphone marketing and promotional strategies and help understand how effective they will be when
compared to that of competitors. XED will even help producers understand complements of their
smartphones like earphones, chargers, encouraging them to expand their production and profits. But, both
PED and XED calculations are based on the ceteris paribus assumptions which may not stand true in real
life. Also, they are based on past calculations, which may not be accurate representations of future market
conditions, given the dynamic structure of the markets. Overall, for a smartphone manufacturer, I believe
knowledge of XED will be of greater importance as it is something that the smartphone producer doesn’t
have control over. However, PED is something the producer has direct control over, in terms of how they
devise their pricing strategies. They do not have control over their competitors actions.
With the help of a formula, explain the meaning of cross elasticity of demand and consider which
determinants are most important in establishing the size and sign of its coefficient. [8] [ June 2023/21]
AO1 Knowledge and understanding (3 marks maximum) An understanding of what the cross elasticity of
demand measures (1), the formula for cross elasticity of demand (1) and the distinction between positive and
negative XED. (1) AO2 Analysis (3 marks maximum) Explanation of why XED can be positive (substitutes)
(1), explanation of why XED can be negative (complements) (1) and explanation of determinants
establishing its magnitude (the closer the relationship between two products, whether substitutes or
complements, the greater the magnitude of the value of XED). (1) AO3 Evaluation (max 2 marks) Offers a
valid judgement on the relative importance of the determinants that influence the magnitude of XED and
whether it is positive or negative (1) to reach a conclusion. (1). The analysis was generally quite good in
terms of the distinction between substitutes and complements, but relatively few candidates made any
attempt to offer an evaluation on the relative importance of the determinants that influenced the size and sign
of the coefficient.
Explain, with the help of examples, the significance of the size and sign of the coefficient of income
elasticity of demand for the classification of a good and consider how confident you are of this
classification. [8] [ June 2023/23]
AO1 Knowledge and Understanding (max 3marks) Knowledge of what is meant by income elasticity of
demand (1) Formula for calculation of income elasticity of demand (1) Meaning of elastic/inelastic income
elasticity of demand (1) AO2 Analysis (max 3 marks) Analysis of the significance of the size and sign of the
coefficient for normal goods with relevant examples (1) Analysis of the significance of the size and sign of
the coefficient for necessity goods with relevant examples (1) Analysis of the significance of the size and
sign of the coefficient for inferior goods with relevant examples (1) Analysis of the significance of the size
and sign of the coefficient for superior goods with relevant examples (1) Award maximum of 1mark for two
types of good but with no examples. Award maximum of 2 marks for three types of good but with no
examples. AO3 Evaluation (max 2 marks) For a brief comment such as • Classification is dependent on
income level of individual/household in case of inferior goods or necessities or superior goods • A necessity
for a low-income household could be a normal good for another household • YED is an estimate calculated
over separate time periods
Explain two factors that will determine the price elasticity of demand for a particular brand of car and
how this price elasticity of demand may change over time. [8] [Nov 2022/21]
For Knowledge and Understanding: For a correct definition of price elasticity of demand For a correct
formula of price elasticity of demand. (Up to 2 marks) 2 marks maximum For Application: Application of
one factor affecting the PED for a particular brand of car, taking into account how this may change over
time. (Up to 3 marks) Application of a second factor affecting PED for a particular brand of car, taking into
account how this may change over time. (Up to 3 marks) 6 marks maximum
Definition of PED: the measurement of the extent to which a change in price leads to a change in quantity
demanded Formula of PED: percentage change in the quantity demanded of a product divided by the
percentage change in the price of a product. Factors affecting PED: • the availability and price of substitutes:
the market contains many firms and so PED for a particular brand of car is likely to be relatively elastic • the
price of the product relative to income: the higher the relative proportion of income accounted for by a
particular brand of car, the more elastic the PED is likely to be, although this could change over time as
incomes rise • loyalty: if consumers have a strong loyalty to a particular brand of car, this will tend to make
PED relatively inelastic • need or want: the degree to which a particular brand of car is seen as a necessity or
a luxury • the time period: the PED for any particular brand of car is likely to increase over time, so it is
more likely to be relatively elastic in the LR than in the SR
Discuss whether knowledge of price elasticity of demand or income elasticity of demand would be of
greater use to a business that produces cars. [12] [ nov 2022/21]
The usefulness of knowledge of price elasticity of demand: • the business will be able to predict the effect of
a change in the price of a car on demand reasonably accurately • if demand is price elastic, a fall in price will
lead to an increase in revenue • if demand is price inelastic, a fall in price leads to a decrease in revenue • if
PED is unitary elastic, a change in price will not lead to a change in revenue
The usefulness of knowledge of the income elasticity of demand: • the business will benefit from knowing
about the effect of changes in income in an economy, e.g. as incomes increase, production can shift from a
basic car • knowledge of YED will enable the business to plan for the future, e.g. having the resources to
meet demand • increases in income in an economy may lead the business to produce better and more
luxurious cars with more features and functions (luxuries have a YED of more than 1 and so the business
will be able to know whether to produce more luxury goods)
With the help of diagrams, use the concept of income elasticity of demand to explain the impact of a
fall in incomes on the equilibrium price and equilibrium quantity of a normal good and an inferior
good. [8] [June 2022/22]
For knowledge and understanding of the meaning of income elasticity of demand (1 mark) together with an
accurate formula (1 mark) Note: the correct KU of the meaning of income elasticity may be rewarded with 1
mark if it is clear within the application even if it was initially incorrect within an opening statement /
definition. For application that explains the meaning of a normal good (1 mark) and uses a diagram to
illustrate that the demand curve will shift to the left (1 mark) leading to a fall in equilibrium price and
quantity demanded which is clearly shown on the diagram (1 mark). For application that explains the
meaning of an inferior good (1 mark) and uses a separate diagram to illustrate that the demand curve will
shift to the right (1 mark) leading to a rise in equilibrium price and quantity demanded which is clearly
shown on the diagram (1 mark).
For a normal good, at a time when incomes are falling, demand will be expected to fall resulting in a shift to
the left of the demand curve. For an inferior good, at a time when incomes are falling, demand will be
expected to rise resulting in a shift to the right of the demand curve. This will result in a fall and rise
respectively in the equilibrium price and quantity demanded which should be clearly shown on two separate
diagrams as required by the question Do not reward application where one diagram is used to illustrate the
effects on both types of goods. The maximum mark that this type of response could score is [2+3+1]
Diagrams showing the relationship between income and q demanded for normal and inferior goods must not
be rewarded (unless solely used as part of the explanation of the meaning of what normal and inferior goods
are) as they clearly do not show the changes in equilibrium price and quantity. The only diagrams that may
be accepted here are normal supply and demand diagrams that clearly show the appropriate shifts in demand
and the resulting changes in equilibrium price and quantity demanded. The explanation was intended to arise
from the use of appropriate diagrams, i.e., more than one. Candidates who used only one diagram or used the
income / quantity demand slope diagrams, were unable to demonstrate the impact effectively so therefore
lost marks. Even among good answers though, much time was lost by also describing the impact of a rise in
incomes, examples of inferior, normal, and even luxury goods and even discussions about whether the goods
were income elastic or inelastic. Such descriptions were irrelevant and possibly wasted valuable time.
Pleasingly though, few candidates mixed up price elasticity of demand with income elasticity of demand.
Discuss the difficulties that businesses might have when they try to control the factors that determine
the price elasticity of demand for a product and consider whether attempts to control these factors are
likely to be successful. [12] [June 2022/22]
For analysis that considers the difficulties a business might have in attempting to control a factor that
influences the price elasticity of demand. (Up to 4 marks per factor analysed) (8 marks maximum) For
evaluation that considers whether the difficulties in controlling the factors can be overcome (3 marks) and
arriving at a reasoned conclusion (1 mark)
Factors include whether the good is a necessity, whether it is habit forming, the availability, attractiveness of
substitutes, the proportion of income taken in the purchase of the good, and the time period. Responses that
simply explain the factors that determine PeD without any references to the difficulties that business might
have in controlling these factors should not be rewarded. Candidates must consider at least two factors to
score full marks for analysis or they can consider more than two factors and their difficulties in less depth.
Discuss whether decisions made by a business are more likely to be influenced by knowledge of the
price elasticity of demand for its product or by knowledge of the price elasticity of supply of its
product [12] [Nov 2021/21]
Potential usefulness of PED: • it can be helpful in giving a business an indication of the extent to which a
change in price may affect revenue • this will show that to increase revenue, the price of an elastic good
should be reduced and the price of an inelastic good should be increased • however, to be able to make
appropriate calculations, a businessman will need to take into account the availability of substitutes, the
width of the definition of the product, the amount spent on the product and the time period under
consideration
Potential usefulness of PES: • it can be helpful in giving a business an indication of the extent to which a
change in the price of a product can lead to a change in the quantity supplied of a product • it can help a
business to make decisions about how much stock to hold • it can help a business decide on the extent of
spare capacity to provide for • it can help a business decide on the factors of production it is going to need
Discuss whether cross elasticity of demand or income elasticity of demand is likely to be more useful in
assisting a firm in its pricing decisions. [12] [Nov 2021/23]
For an analysis of price changes on the market for substitutes and complements (up to 4 marks but a max. of
3 if only complements or substitutes are considered) For an analysis of price changes on normal/luxury
goods and inferior goods when incomes change (up to 4 marks but a max. of 3 if only normal/luxury or
inferior goods are considered) 8 marks maximum For an evaluation of which of the two measures is likely to
be most useful to the firm in its pricing decisions (up to 4 marks
Using the concept of price elasticity of demand, explain why increasing the price of the product is: (i) a
bad idea for a firm producing a product that constitutes a large proportion of household income, and
(ii) a good idea for a firm producing a product that constitutes a small proportion of household
income. [8] [Nov 2021/23]
Where PED is elastic, an increase in price will lead to less revenue A firm with an inelastic PED will
experience an increase in its revenue if it increases the price of its product Note: simple explanations of the
impact of elasticity should not be credited, e.g. an increase in price leads to a large fall in demand/no change
in demand. The answer must refer to % or proportional changes
For knowledge and understanding, meaning of PED (1) plus an accurate formula (1) (up to 2 marks) And
application: For explanation of the effects on revenue where PED is elastic (i). For a product that constitutes
a large proportion of household income this means that the PED will most likely be elastic (1) which means
(1) so revenue is likely to fall (1) (up to 3 marks) For explanation of the effects on revenue where PED is
inelastic (ii). For a product that constitutes a small proportion of household income this means that the PED
is likely to be inelastic (1) which means (1) so revenue is likely to rise (1)
Explain how you would use the concept of cross-elasticity of demand to measure the impact on the
demand for cars when there is a rise in the price of fuel for cars and when there is a rise in the price of
public transport. [8] {March 2021/22]
For knowledge and understanding of cross elasticity of demand. What it measures (1) Formula (1) (Up to 2
marks) For application using the concept to explain the impact of a rise in the price of petrol on the demand
for cars • For stating that since cars and fuel are complements the coefficient will be negative (1) • For
explaining why a negative coefficient will result when there is a rise in the price of fuel (1) • For explaining
that the impact will be greater and the coefficient will be higher the closer the relationship (1) (Up to 3
marks) For application using the concept to explain the impact of a rise in the price of public transport on the
demand for cars • For stating that since cars and public transport are substitutes the coefficient will be
positive (1) • For explaining why a positive coefficient will result when there is a rise in the price of public
transport (1) • For explaining that the impact will be greater and the coefficient will be higher the closer the
relationship (1) (Up to 3 marks) The better answers were differentiated by a closer examination of the size of
the coefficient and not just whether it would be negative or positive
Explain how the concept of cross-elasticity of demand can be used to distinguish between goods that
are substitutes, those that are complements and those that have no relationship. [8] [June 2021/22]
For knowledge and understanding, the candidate must display an awareness of the idea of ‘responsiveness’ as
well as an accurate formula
For knowledge and understanding of the concept of cross elasticity of demand. What it measures (1 mark)
and the formula (1 mark) And application explaining that a positive value indicates a substitute (1 mark) and
explains why (1 mark) And explains that a negative value indicates a complement (1 mark) and why (1
mark) And explains that a value of zero indicates unrelated goods (1 mark) and why (1 mark)
An economy is experiencing a fall in average incomes during a severe recession. Discuss the extent to
which the concepts of income elasticity of demand and price elasticity of demand might be useful to an
entrepreneur in this economy and consider which would be more useful. [12]
Income elasticity of demand would be useful to an entrepreneur because it would indicate those goods that
are likely to experience a decrease in demand and those that should experience a rise in demand i.e. normal
goods and inferior goods respectively Price elasticity of demand will inform an entrepreneur of the
possibility of changing prices to increase revenue. The estimates might be used by an entrepreneur or firms
for sales forecasting, investment decisions, production planning, location and new markets.
For analysis that explains the usefulness of income elasticity of demand to an entrepreneur when incomes are
falling. (Up to 4 marks) For analysis that explains the usefulness of price elasticity of demand to an
entrepreneur when incomes are falling (Up to 4 marks) And for evaluation that clearly compares the
usefulness of each concept (3 marks) that leads to a reasoned conclusion as to which is the most useful (1
mark)
Market research has estimated that the cross-elasticity of demand for hotels in Barbados with respect
to the price of flights to Barbados is –2.5, and that the cross-elasticity of demand for flights to Antigua
with respect to the price of flights to Barbados is +0.5. (a) Explain what is meant by cross-elasticity of
demand and what these values mean in terms of the effect of changes in the price of flights to
Barbados on (i) the demand for hotels in Barbados, and (ii) the demand for flights to Antigua. [8]
[June 2021/23]
For knowledge and understanding of the concept of cross elasticity of demand. What it measures (1 mark)
and the formula (1 mark) (i) Identify that this would suggest hotels are a complement to flights due to the
negative sign (1 mark) explain why the value is negative (1 mark) with reference to the size of the coefficient
(1 mark) (up to 3 marks) (ii) Identify that this would suggest that flights to Antigua are a substitute for flights
to Barbados due to the positive sign (1 mark) explain why the value is positive (1 mark) with reference to the
size of the coefficient (1 mark) (up to 3 marks). An increase in the price of flights to Barbados will lead to a
larger percentage fall in demand for hotel accommodation (complements) and a smaller percentage increase
in demand for flights to Antigua (substitutes). In the explanations, reference must be made to the significance
of the size of the coefficient for the third mark
Ch: Price Elasticity Of Supply
Assess the extent to which price elasticity of supply or cross elasticity of demand is most useful to
businesses. [12] (June 2024/21)
AO1 Knowledge and understanding and AO2 Analysis • An assessment of the usefulness of PES e.g., it
estimates how quickly a business will take to respond to changes in demand, levels of stock it can hold etc.,
but this is only an estimate and may change. • An assessment of the usefulness of XED e.g., it tells the
business whether their product is a substitute (positive XED) or a complement (negative XED) and how
close the relationship is and hence its sensitivity to the actions of other businesses, but the speed of change
may mean it is quickly out of date. Level 1 responses will be assertive and lacking in explanations / mainly
descriptive and/or or mainly lacking in relevance to the question. Level 2 responses may contain some
inaccuracies and will be one sided. Analysis will be explained at least in part and will be largely relevant to
the question. Level 3 responses will consider alternative policies / concepts etc. and will be balanced.
Explanations of points raised will be offered and will be accurate and relevant to the question. AO3
Evaluation • For a full evaluation of the usefulness of both measurements compared with each other leading
to: • A valid conclusion Accept all valid responses
Assess whether an estimate of the price elasticity of demand for a product is likely to be more useful to
a firm than an estimate of its price elasticity of supply.[12] [march 2024/22]
AO1 Knowledge and understanding and AO2 Analysis • The meaning of the terms PED/PES • How PED
estimates would be useful to business owners –it would indicate the likely changes to revenue in response to
changes in the price of a product. • An explanation of the limitations of PED estimates – does not consider
the prices of complements/substitutes; income level of the consumer; trends; ignores the relevance of costs
so changes to profits are uncertain. • An explanation of how PES estimates would be useful to business
owners - the potential to invest in spare capacity which can be used if demand rises; increase overtime
payments to increase production; whether or not to outsource to other firms who can meet supply. • An
explanation of the limitations of PES estimates – e.g., practical ability to increase the PES; the associated
costs in making supply more elastic/responsive
AO3 Evaluation • Consideration that fully assesses the relative effectiveness of both PED/PES estimates and
their implications for business decision-making and arrives at a reasoned conclusion concerning which
concept (or otherwise) is most useful.
The price elasticity of supply (PES) for a new smartphone is estimated to be 0.8 in the short run and
1.8 in the long run. Explain what these estimates mean for producers and consumers of smartphones
and consider why the estimates differ. [8] [Nov 2023/23]
AO1 Knowledge and Understanding (max 3 marks) Meaning of price elasticity of supply (1) an accurate
formula (1) an explanation of what is meant by elastic/inelastic based on the responsiveness of changes in
supply to changes in price (1). AO2 Analysis (max 3 marks) Analysis of why the values may differ due to
e.g., the time period, level of stock, changes in the production process etc. Up to 2 marks for each reason
explained. Maximum of 3 marks overall AO3 Evaluation (max 2 marks) An assessment as to why the impact
on consumers and producers may differ according to these different estimates e.g., on availability, pricing
and investment decisions
SAMPLE ANSWER- In the short run, producers expect the PES of the new smartphone to be 0.8, which
means it is inelastic. This means that change in price is greater than change in quantity supplied. The PES
may be inelastic in the short run because producers may not be flexible. This may occur as suppliers may not
have access to advanced technology and productive labour. This makes it difficult for producers to quickly
respond to change in demand and price, making PES inelastic. Also, in the short run, it will be difficult to
alter the productive capacity of the firm as only the quantity of labor can be changed. Supply may be more
inelastic if there is little/no spare capacity for the producer to increase production of smartphones in the short
run as it is difficult to increase the productive capacity of the firm. But, in the long run, producers expect the
PES for this smartphone to be, 1.5, elastic in nature. This means that a change in price is lesser than change
in quantity supplied. The PES may be elastic in the long run due to technological advancements. Access to
advanced technology may make the production process more efficient and flexible, allowing producers to
quickly respond to changes in demand and price. Also, in the long run, more producers may enter the market,
increasing competitive pressure and encouraging them to be more responsive to change in demand and price,
making PES elastic. Furthermore, supply may have become elastic as factors of production may have
become more geographically and occupationally mobile, making it easier for producers to quickly alter
production by employing more resources.
Explain two factors that determine the price elasticity of supply of a manufactured product. [8] [June
2022/21]
Definition of price elasticity of supply: • percentage change in the quantity supplied of a product divided by
the percentage change in the price of a product Factors affecting the price elasticity of supply of a
manufactured product: • the number of producers: many such products will be produced in a market with
many producers, but this is not always be the case, e.g., a monopoly • the existence of spare capacity: if there
is spare capacity, PES will be more elastic than would otherwise be the case • the ease of storing stocks: this
should be easier with manufactured products than perishable products, so PES will be relatively elastic • the
time period: if more firms join the industry over time, PES will be relatively elastic • the factor mobility: the
easier it is to move resources into the production of manufactured goods, the more elastic PES will be• the
time taken to produce a product: the shorter the time, the more elastic supply will be
Ch: Resource Allocation
Assess whether a planned economic system should always switch to a mixed economy. [12] (June
2024/21)
AO1 and AO2 out of 8 marks. AO3 out of 4 marks.
AO1 Knowledge and understanding and AO2 Analysis • Analysis of both the potential advantages and
disadvantages of a planned economic system including the emphasis on welfare and provision of public and
merit goods. However, the lack of competition may mean a lack of efficient allocation of goods etc. •
Analysis of both the potential advantages and disadvantages of a mixed economy including the fact that it
possibly contains the best features of both a planned and a market economy, but this depends on how mixed
it actually is. This may also include an assessment of the ease of the switch itself. Level 1 responses will be
assertive and lacking in explanations / mainly descriptive and/or or mainly lacking in relevance to the
question. Level 2 responses may contain some inaccuracies and will be one sided. Analysis will be explained
at least in part and will be largely relevant to the question. Level 3 responses will consider alternative
policies / concepts etc. and will be balanced. Explanations of points raised will be offered and will be
accurate and relevant to the question. AO3 Evaluation • For an evaluation of both the advantages and
disadvantages of planned and mixed economies leading to: • A valid conclusion.
Explain the functions of price in resource allocation and consider the importance of these functions in
relation to the potential effectiveness of a market economy. [8] [March 2023/22]
AO1 Knowledge and understanding (max 3 marks) A clear knowledge and understanding of at least two
functions of price in resource allocation: • rationing (1) • signalling (transmission of preferences) (1) •
incentivising (1) Two functions well explained can gain 3 marks; 1 function explained can achieve a
maximum of 1 mark. AO2 Analysis (max 3 marks) An analysis of the importance of rationing (1), signalling
(transmission of preferences) (1) and incentivising (1) to the operation of a market economy. Note: this must
be in the context of a market economy. the role price plays in resource allocation, i.e. the functions of
rationing, signalling and transmission of preferences and providing incentives to producers AO3 Evaluation
(max 2 marks) Offers a valid judgement on the importance of at least two functions in relation to the
potential effectiveness of a market economy (1) to reach a justified conclusion. (1)
Assess whether all market economies should become mixed economies. [12] [March 2023/22]
AO1 Knowledge and understanding and AO2 Analysis • NO: Explanations of why market economies should
remain as they are e.g., because there is no (or minimal) government intervention, decisions are taken on the
basis of demand and supply, competition is encouraged and so production is more efficient, and consumers
and producers act on their own self-interest. • YES: Explanations of why market economies should become
mixed economies e.g., because in a market economy there is non-provision of public goods, the underconsumption of merit goods, the overconsumption of demerit goods and the existence of markets where
prices are too low, too high, or too unstable. A one-sided response can only gain a maximum of Level 2. AO3
Evaluation Evaluation of whether all market economies should become mixed economies leading to a
justified conclusion. Points to consider may include whether governments should provide public goods, merit
goods, reduce the provision of demerit goods, intervene in the price mechanism etc. A one-sided response
cannot gain any marks for evaluation. Accept all valid responses
Discuss whether the transition from a planned economy to a market economy will always be better for
consumers. [12] [March 2022/22]
The transition to a market economy will represent a movement towards consumer sovereignty. If there is
imperfect information however there will be an underproduction of merit goods and an overproduction of
demerit goods. Candidates are required to consider the advantages and disadvantages of a market economy
and then to exercise some judgement about whether the transition will always be better for consumers. For
analysis of the potentially positive consequences of the transition for consumers OR the advantages and
disadvantages to consumers of a planned economy. For an analysis of just one (3 max). (Up to 4 marks) For
analysis of the potentially negative consequences of the transition for consumers OR the advantages and
disadvantages to consumers of a market economy. For an analysis of just one (3 max). (Up to 4 marks) 8
marks maximum For evaluation that considers the ‘will always’ element of the question. (Up to 3 marks) to
arrive at a reasoned conclusion. (1 mark)
Discuss the advantages of a mixed economy and whether it is always preferable to a planned economy.
[12] {June 2022/21}
Advantages of a mixed economy: • the price mechanism is allowed to operate in many areas, facilitating its
functions of rationing, signalling and the transmission of preferences • a government is able to intervene in a
market, e.g., through a maximum price or a minimum price • some industries may be nationalised by the
government Disadvantages of a mixed economy: • the workings of the price mechanism may be adversely
affected by a government, e.g., taxes and subsidies • possibility of market failure Advantages of a planned
economy: • a government may decide to directly provide certain goods and services Disadvantages of a
planned economy: • greater role for a government leads to more bureaucracy and less efficiency • the lack of
competition could lead to poorer quality and restricted choice
Discuss the disadvantages of a planned economy and consider whether the transition to an economy in
which many resources are allocated by market forces is likely to be of overall benefit. [12] [June
2022/22]
Disadvantages of a planned economy may include a lack of consumer sovereignty. A lack of profit motive
which may lead to less efficiency. It may therefore lead to surpluses and / or shortages. It may lack incentives
e.g., to invest which may lead to a lack of innovation and a reduction in consumer choice. The transition to
an economy in which many resources are allocated by market forces may counter the disadvantages of a
planned economy through market forces but it may also lead to the overproduction of demerit goods and the
underproduction of merit goods together with a lack of public goods. It may lead to greater inequality.
Evaluation may include a consideration of the time period. Weaker answers tended to be assertive and very
generalised and therefore gained very little credit, e.g., planned economies tend to produce goods of a lower
quality without any explanation why this may be the case. Analysis requires underpinning explanation to
gain credit and effective evaluation must make direct use of this analysis to answer the question, i.e., whether
the transition would be of overall benefit
Discuss whether the advantages of a transition from a planned economy to a market economy always
outweigh the disadvantages. [12] {Nov 2021/21]
Advantages of a transition from a planned economy to a market economy: • existence of price mechanism •
prices operate as signals to indicate consumer preferences • private sector ownership/decision making with
no or very little government intervention • competition between firms can lead to greater efficiency
Disadvantages of a transition from a planned economy to a market economy: • some products will be underprovided and under-consumed • some products will be over-provided and over-consumed • some products
will not be provided or consumed at all • there will be consequences of information failure In addition to the
market failures outlined above, there could also be negative consequences of a market economy, including: •
a higher level of unemployment • a higher level of inflation
Explain how the fundamental economic problem is addressed in a planned economy and in a market
economy. [8] {Nov 2021/23]
The fundamental economic problem is tackled by means of market forces in a market economy. In a planned
economy it is in the hands of government to ensure that resource allocation is equitable and possible. For
knowledge and understanding of fundamental economic problem, scarce resources (1) but unlimited wants
(1) (up to 2 marks) And application that explains how this problem is addressed in a planned economy.
Central planning, government allocation of resources, welfare, etc. may be discussed (up to 3 marks) And
further application how this problem is addressed in a market economy. The role of the price mechanism, e.g.
rationing, signalling, interaction of demand and supply, etc., may be discussed
Discuss the view that in a mixed economy the only role of government should be to provide public
goods and the supply of merit goods should be left to the private sector. [12] [Nov 2021/23]
Merit goods such as health provision, education and childcare are usually provided by both private and
public sectors in a mixed economy. When provided by the private sector, a charge is usually but not always
made at the point of use Government provision is funded through taxation; consumers will be charged a
subsidised price or no charge at all. Much depends upon efficiency and how governments view the benefits
of merit goods provision Without the involvement of government, some merit goods may be underprovided –
may be used as an evaluative comment
Discuss whether the transition of an economy from one that is centrally planned to one in which
resources are allocated through the free market is likely to be of overall benefit to the citizens of that
economy. [12] [ june 2020/12]
Up to 8 marks for Analysis • For analysis of the way in which resources are allocated in a centrally planned
economy with due reference to the problems of resource allocation that arise in such an economy. (Up to 4
marks) • For analysis of the way in which resources are allocated in a free market with due reference to the
problems of resource allocation that arise in such an economy. (Up to 4 marks) Up to 4 marks for Evaluation
• For evaluative comment and a reasoned conclusion on the ‘overall benefit’
Ch: Interaction of Demand and Supply
With the help of a diagram(s), explain what is meant by equilibrium in a market and consider the
extent to which the equilibrium price and equilibrium quantity are likely to change for a product
following an increase in the wages for labour across the whole economy. [8] [june 2023/22]
AO1 Knowledge and Understanding (max 3 marks) The equilibrium point is where the quantity demanded
equals the quantity supplied (1) and there is no tendency to change in a market (1) with an accurately
labelled diagram showing the equilibrium price and equilibrium quantity (1) AO2 Analysis (max 3 marks)
Note: there are two possible approaches to answering this question. If both the approach focused on demandside (inferior and normal goods) and the supply-side approach are attempted, then only the best response
should be marked including marks for evaluation. EITHER: The demand curve will be expected to shift in
this situation. Whether it shifts to the left or to the right will depend on the nature of the product and will
shift to the left if it is an inferior good or to the right if it is a normal good. This should be the basis of the
discussion. For an accurately labelled diagram demonstrating at least one of the appropriate shift(s) in the
demand curve i.e., to the right and / or the left (1) that clearly shows the change in the equilibrium price and
the equilibrium quantity for both a normal and inferior good (1) and is accompanied by a clear explanation of
both shifts (1) If only one shift (normal or inferior goods) is explained, then a maximum of 2 marks. Note: it
is acceptable to use the same diagram for both knowledge and understanding and analysis OR: The supply
curve will be expected to shift to the left in this situation. For a fully accurately labelled diagram that is
clearly micro based and focused on the impact on a single product (1) that is used to clearly explain the
resulting change in the price depending on whether demand is price elastic or price inelastic) (1) and quantity
supplied (depending on whether supply is price elastic or price inelastic/use of buffer stocks/ effect of
improved productivity) (1) There were two distinct ways to approach AO2 analysis for this question. One
method was to assess the impact of the increase in income from the demand side and focus on the influence
of income elasticity of demand. The second was to focus on the influence of the increase in costs of
production and the possible changes in QD and QS. Where both were discussed, the quality of explanation
was used to determine the final mark EITHER: The extent of the change will be determined by whether the
good is a normal good or an inferior good / the value of ped / the value of YED / the value of PES / the size
of the actual change in income. A discussion focused on the extent of change (1) followed by a justified
conclusion (1) OR: The extent of the change will depend on the importance of wage costs to an individual
firm / the significance of PES (1) A discussion focused on the extent of change followed by a justified
conclusion (1)
Explain what is meant by equilibrium price and quantity in the market for a good and how price and
quantity will be affected by both a rise in the wage rate paid to the workers producing the good and a
rise in wages paid to all workers in the economy. [8] [ March 2021/22]
For knowledge and understanding of the meaning of equilibrium price and quantity. • For knowledge that
this occurs in a market where supply is equal to demand (1) • For understanding that equilibrium price and
quantity is when there is no tendency to change (1) (Up to 2 marks) For application showing the impact of a
rise in the wage rate • For a diagram (or explanation) showing a shift in the supply curve to the left (1) • For
an explanation of why this will occur in terms of the rise in costs (1) • For explaining (or illustrating) that the
equilibrium price will rise and the equilibrium quantity will fall (1) (Up to 3 marks) For application showing
the impact of a rise in the wages in the economy in terms of a shift in the demand curve to the right • For a
diagram (or explanation) showing a shift in the demand curve to the right (or left in the case of an inferior
good) (1) • For an explanation of why this will occur in terms of the rise in incomes (1)
Discuss whether the direct provision of goods and services by the government prevents the price
mechanism from working effectively. [12] {June 2021/21}
The effect of direct provision of goods and services by the government: • does it prevent the price
mechanism from rationing? • does it prevent the price mechanism from signalling? • does it prevent the price
mechanism from transmitting preferences? The direct provision of goods and services by the government
will be financed through the tax system, e.g. education and health care, and so will not be allocated through a
price mechanism. However, education and health care can also be provided through a price mechanism and
in this situation the mechanism can function as a rationing and signalling device and as a way of transmitting
preferences
Explain what determines the change in equilibrium price and equilibrium quantity of a good when
there is a rise in incomes in an economy. [8] {march 2020/12]
The effect of a rise in incomes in an economy on the equilibrium price and equilibrium quantity of a good is
determined by the nature of the good. In the case of normal goods, the rise in incomes will cause an increase
in demand represented by a shift to the right of the demand curve and a rise in equilibrium price and
equilibrium quantity. An inferior good, which has a negative income elasticity of demand will see a shift to
the left of the demand curve and a fall in equilibrium price and quantity. Goods classified as necessary will
see a limited increase in demand and the increase in equilibrium price and quantity is determined by the
degree of necessity.