Smart Edu Hub

Q: Explain the economic problem and why it is always likely to exist. [4]

• Mark Scheme:
• The economic problem is finite / limited resources (1).
• And infinite / unlimited wants / wants exceed resources (1).
• Scarcity (1).
• It is always likely to exist as wants grow faster than resources / wants are increasing (1).
• There will never be enough resources to produce all the products people would like to have (1).
• People are living longer / population is increasing (1).
• More resources are needed / some resources are being depleted (1).

• Q: Define a free good. [2]
• Mark Scheme:
  • No marks for an example.
  • No opportunity cost (1).
  • A good that takes no resources/factors of production to produce / naturally abundant in supply / does not use scarce resources (1).

Q: State a factor of production and identify an example of it from the extract. [2]

• Mark Scheme:
  • Land (1): scarce land in Manhattan / New York (1).
  • Labour (1): finance industry workers / wages (1).
  • Capital (1): stock exchange (1).
  • Enterprise (1): new business start-ups (1).

Q: Analyse, using a production possibility curve (PPC), the opportunity cost to an economy of producing more consumer goods. [6]

• Mark Scheme:
  • Up to 4 marks for the diagram:
    • Axes correctly labelled with capital/consumer goods (1).
    • Curve drawn as a curve/line sloping downward to the axes (1).
    • Movement along the curve/along the axes (1).
    • Reduction in capital goods/increase in consumer goods shown by numbers or letters or arrows (1).
  • Up to 2 marks for coherent analysis:
    • Opportunity cost is the (next) best alternative forgone (1).
    • Resources used to produce consumer goods cannot be used to produce capital goods (1).
    • Producing more consumer goods now may mean fewer consumer goods in the future (1).
    • As there may be fewer capital goods to make them (1).

• Q1: Discuss whether or not an economy would benefit from allocating more of its resources to agriculture.
• Mark Scheme:
  • Why it might:
    • Specialisation may increase efficiency, raise output, increase exports.
    • May improve the current account of the balance of payments.
    • Imports of food may be reduced, reducing reliance on other countries for basic necessities.
    • Health and safety standards may be maintained.
    • The industry is labour-intensive in some countries and so may reduce unemployment.
  • Why it might not:
    • Wages in the industry tend to be relatively low.
    • The supply of agricultural products can fluctuate significantly due to changes in weather conditions.
    • Opportunity cost of fewer resources for manufacturing goods and for services.
    • Demand for manufactured goods and for services tend to rise more as income increases.
    • Agriculture uses up considerable amounts of water.

• Q2: Define market disequilibrium. [2]
• Mark Scheme:
  • When quantity demanded does not equal quantity supplied (2).
  • When there are shortages (1) or surpluses (1) of a product.

• Q3: Identify two key resource allocation questions. [2]
• Mark Scheme:
  • What to produce / produce less of one product and more of another product / less oil and more textiles (1).
  • How to produce it / how products are made / using fewer capital goods (1).

• Q: Define ‘demand’. [2]
• Mark Scheme:
  • The willingness/desire/want (1).
  • And ability to buy a product (1).
  • In a given period (1).

• Q: Define supply. [2]
• Mark Scheme:
  • Willingness to sell a product (1).
  • And ability to sell a product (1).
  • Supply at a given price / in a given time period (1).
  • Allow one mark in total for amount produced or amount sold.
  • Need idea of selling / making available to consumers for full two marks.

• Q: Define market disequilibrium. [2]
• Mark Scheme:
  • A market where demand and supply are not equal / balanced / matched (2).
  • A market where there is a surplus / excess supply (1) or a shortage / excess demand (1).

• Q: Analyse how information on price elasticity of demand for its product can influence a firm’s pricing decisions. [6]
• Mark Scheme:
  • If a firm knows that demand for its products is price-elastic (1):
    • It will know a fall in price will cause a rise in revenue (and vice versa) / percentage price change causes a bigger percentage change in demand (1).
    • It will also know that its products probably have close substitutes (1).
  • If it knows demand for its products is price-inelastic (1):
    • It will know a rise in price will cause a rise in total revenue / percentage change in price is greater than percentage change in demand (1).
    • It will also know its products probably do not have close substitutes (1).
  • If it knows that demand for its products has unit price elasticity of demand (1):
    • It will know that its revenue will not change if it changes price (1).
  • It is difficult to calculate PED (1).
  • Firms may use other factors to determine price (1).

• Q: Identify two determinants of price elasticity of demand. [2]
• Mark Scheme:
  • Availability of substitutes (1)
  • Availability of complements (1)
  • Proportion of income (1)
  • Whether the product is a luxury or a necessity / essential (1)
  • Whether it is addictive (1)
  • Whether the purchase can be postponed (1)
  • Impact of advertising / brand loyalty (1)

• Q: Explain, using information from the extract, whether the supply of Iceland’s fish is price-elastic or price-inelastic. [2]
• Mark Scheme:
  • It is price-inelastic (1).
  • Because the quantity of fish supplied tends to change by a smaller percentage than the change in its price (1).

• Q: Discuss whether or not a market economic system benefits an economy. [8]
• Mark Scheme:
  • Why it might:
    • Profit incentive and competition may increase efficiency.
    • Wage differentials may encourage effort.
    • Price may be low and quality high.
    • Country's products may be internationally competitive.
    • Economic growth may be high.
    • Consumer choice may be high.
    • Consumer sovereignty may be high.
  • Why it might not:
    • Risk of market failure.
    • Public goods will not be provided.
    • Demerit goods are overconsumed and merit goods are under-consumed.
    • Problem of pollution and other external costs.
    • Unemployment may be high due to lack of co-ordination.
    • Some countries may lack support structures, e.g., legal systems to enforce property rights to allow market forces to work efficiently.
    • Monopolies can be created.

• Q: Define market failure. [2]
• Mark Scheme:
  • Market failure is when the market mechanism / price mechanism / demand and supply (1).
  • Does not lead to an efficient allocation of resources (1).