A Level Economics Paper 4

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Economics Topical Paper 4 (All variants unsolved with mark schemes) (2002-2017) Article No. 150

Editorial Board

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

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Title

Economics P-4 AS Level Topical

Author

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

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Preface This book provides a thorough exercise of paper 4 for students taking Cambridge International Examinations A-Level Economics. Structured essays from past examinations are sorted into relevant chapters which will enable students to practice their understanding systematically.

We appreciate our students and fellow teachers who helped us to improve this book. Your suggestions and comments will be highly appreciated.

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Contents SECTION B (ESSAYS) UNIT: 1

UTILITY & BUDGET LINE ........................................................................................................................ 8

1.1 1.2 1.3

UTILITY THEORY & CONSUMER EQUILIBRIUM .........................................................................................................8 BUDGET LINE .................................................................................................................................................19 INDIFFERENCE CURVE ANALYSIS & TYPES OF GOODS ...............................................................................................20

UNIT: 2

PRODUCTION & COST ......................................................................................................................... 26

UNIT: 3

MARKET STRUCTURES ......................................................................................................................... 36

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8

RULES OF FIRM’S BEHAVIOUR ..........................................................................................................................36 PRICE AND OUTPUT IN MARKET STRUCTURES .........................................................................................................37 COMPARISON OF MARKET STRUCTURES ...............................................................................................................38 NORMAL & ABNORMAL PROFITS .......................................................................................................................50 CONVERSION OF PERFECT COMPETITION TO MONOPOLY .......................................................................................51 OBJECTIVES OF FIRMS......................................................................................................................................55 PRICE DISCRIMINATION ....................................................................................................................................60 CONTESTABLE MARKETS ...................................................................................................................................62

UNIT:4 4.1 4.2 4.3 UNIT:5 5.1 5.2 5.3 5.4 5.5

ECONOMIC EFFICIENCY AND MARKET FAILURE ................................................................................... 64 EXTERNALITIES, CONCEPTS & EFFECTS.................................................................................................................64 ECONOMIC EFFICIENCY AND MARKET FAILURE ......................................................................................................66 POLICIES TO IMPROVE EFFICIENCY ......................................................................................................................84 LABOUR MARKET ................................................................................................................................ 88 INDIVIDUAL’S SUPPLY OF LABOUR ......................................................................................................................88 WAGE DETERMINATION IN PERFECT AND IMPERFECT MARKETS...............................................................................89 WAGE DIFFERENTIALS ....................................................................................................................................102 ROLE OF TRADE UNIONS ................................................................................................................................109 ECONOMIC RENT AND TRANSFER EARNINGS ......................................................................................................114

UNIT:6

INEQUALITY AND POLICIES TO REDISTRIBUTE INCOME ..................................................................... 116

UNIT:7

NATIONAL INCOME ACCOUNTING .................................................................................................... 118

7.1 7.2 7.3 UNIT:8 8.1 8.2 8.3 8.4 8.5 UNIT:9 9.1 9.2 9.3

NATIONAL INCOME CALCULATIONS ...................................................................................................................118 PROBLEMS OF CALCULATING NATIONAL INCOME ................................................................................................119 CHARACTERISTICS OF ECONOMIC RECESSION......................................................................................................120 ECONOMIC GROWTH AND DEVELOPMENT ....................................................................................... 122 STANDARD OF LIVING ....................................................................................................................................122 SOURCES & POLICES OF ECONOMIC GROWTH ....................................................................................................126 EFFECTS OF ECONOMIC GROWTH .....................................................................................................................127 CHARACTERISTICS OF DEVELOPING ECONOMIES ..................................................................................................134 POLICIES TO PROMOTE ECONOMIC DEVELOPMENT..............................................................................................144 THEORY OF INCOME & EMPLOYMENT .............................................................................................. 156 DETERMINANTS OF INVESTMENT .....................................................................................................................156 NATIONAL INCOME EQUILIBRIUM .....................................................................................................................157 INFLATIONARY & DEFLATIONARY GAP ...............................................................................................................158

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9.4 9.5 9.6

MULTIPLIER PROCESS & ACCELERATOR .............................................................................................................158 STRENGTH OF MULTIPLIER..............................................................................................................................165 PARADOX OF THRIFT .....................................................................................................................................166

UNIT:10

INTEREST RATE DETERMINATION AND CHANGES.............................................................................. 168

LIQUIDITY PREFERENCE THEORY ....................................................................................................................................168 UNIT:11

MACROECONOMIC POLICES .............................................................................................................. 178

FISCAL, MONETARY & SUPPLY-SIDE POLICIES ..................................................................................................................178 UNIT:12 12.1 12.2 12.3

UNEMPLOYMENT .............................................................................................................................. 194 CAUSES OR TYPES OF UNEMPLOYMENT .............................................................................................................194 EFFECTS OF UNEMPLOYMENT ..........................................................................................................................198 MEASUREMENT OF UNEMPLOYMENT ...............................................................................................................198

UNIT:13

CONFLICT OF MACROECONOMIC AIMS ............................................................................................. 202

UNIT:14

GENERAL QUESTIONS ........................................................................................................................ 212

1.

UTILITY & BUDGET LINE .................................................................................................................... 224 O/N 11/P41/Q1 .....................................................................................................................................................224 O/N 10/P43/Q1 .....................................................................................................................................................226 O/N 09/P42/Q1 .....................................................................................................................................................227

2.

PRODUCTION COST & MARKET STRUCTURES .................................................................................... 229 O/N 17/P43/Q1 .....................................................................................................................................................229 M/J 17/P41/Q1 ......................................................................................................................................................230 M/J 15/P43/Q1 ......................................................................................................................................................233 O/N 14/P42/Q1 .....................................................................................................................................................235 O/N 14/P41/Q1 .....................................................................................................................................................237 M/J 14/P41/Q1 ......................................................................................................................................................239 O/N 13/P42/Q1 .....................................................................................................................................................241 O/N 13/P41/Q1 .....................................................................................................................................................243 M/J 13/P42/Q1 ......................................................................................................................................................245 M/J 13/P41/Q1 ......................................................................................................................................................247 O/N 12/P43/Q1 .....................................................................................................................................................249 M/J 12/P42/Q1 ......................................................................................................................................................251 O/N 10/P41/P42/Q1 ..............................................................................................................................................253 O/N 06/P4/Q1 .......................................................................................................................................................255 O/N 04/P4/Q1 .......................................................................................................................................................257 M/J 03/P4/Q1 ........................................................................................................................................................259

3.

MARKET FAILURE .............................................................................................................................. 261 M/J 16/P43/Q1 ......................................................................................................................................................261 O/N 15/P43/Q1 .....................................................................................................................................................263 M/J 07/P2/Q1 ........................................................................................................................................................265 O/N 05/P4/Q1 .......................................................................................................................................................267 O/N 02/P2/Q1 .......................................................................................................................................................269

4.

LABOUR MARKET .............................................................................................................................. 271 O/N 03/P4/Q1 .......................................................................................................................................................271

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5.

ECONOMIC GROWTH & DEVELOPMENT ............................................................................................ 273 O/N 17/P42/Q1 .....................................................................................................................................................273 M/J 17/P43/Q1 ......................................................................................................................................................275 M/J 16/P42/Q1 ......................................................................................................................................................277 O/N 15/P42/Q1 .....................................................................................................................................................279 O/N 15/P41/Q1 .....................................................................................................................................................281 M/J 15/P42/Q1 ......................................................................................................................................................283 M/J 15/P41/Q1 ......................................................................................................................................................285 O/N 14/P43/Q1 .....................................................................................................................................................287 M/J 14/P42/Q1 ......................................................................................................................................................289 O/N 12/P42/Q1 .....................................................................................................................................................291 O/N 12/P41/Q1 .....................................................................................................................................................293 M/J 12/P41/Q1 ......................................................................................................................................................295 O/N 11/P43/Q1 .....................................................................................................................................................297 O/N 11/P42/Q1 .....................................................................................................................................................299 O/N 09/P41/Q1 .....................................................................................................................................................301 M/J 09/P4/Q1 ........................................................................................................................................................303 O/N 08/P4/Q1 .......................................................................................................................................................305 M/J 08/P4/Q1 ........................................................................................................................................................307 O/N 07/P4/Q1 .......................................................................................................................................................309 M/J 07/P4/Q1 ........................................................................................................................................................311 M/J 06/P4/Q1 ........................................................................................................................................................313 M/J 05/P4/Q1 ........................................................................................................................................................315 M/J 02/P4/Q1 ........................................................................................................................................................317

6.

MACROECONOMIC POLICIES ............................................................................................................. 319 M/J 17/P42/Q1 ......................................................................................................................................................319 M/J 16/P41/Q1 ......................................................................................................................................................322 O/N 16/P43/Q1 .....................................................................................................................................................324 O/N 16/P42/Q1 .....................................................................................................................................................326 O/N 16/P41/Q1 .....................................................................................................................................................328 O/N 13/P43/Q1 .....................................................................................................................................................330 M/J 11/P42/Q1 ......................................................................................................................................................332 M/J 11/P41/Q1 ......................................................................................................................................................334 M/J 10/P41/Q1 ......................................................................................................................................................336

7.

KEYNESIAN THEORY OF INCOME & EMPLOYMENT ............................................................................ 338 M/J 10/P42/Q1 ......................................................................................................................................................338

9.

UNEMPLOYMENT .............................................................................................................................. 340 O/N 17/P41/Q1 .....................................................................................................................................................340 MAR 16/P42/Q1 .....................................................................................................................................................342

Unit -1

7

UNIT 1

Utility & Budget Line

Syllabus 2019 –21 Topics

UTILITY AND BUDGET LINE A2 Level Economics Topical Paper 4 Imran Latif Cell: 0300-44-10-900 Imranlatifmalik@gmail.com

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

1. Utility Theory & Consumer Equilibrium 2. Budget Line 3. Indifference Curve Analysis & Types of Goods

Unit -1

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Utility & Budget Line

UNIT: 1 UTILITY & Budget Line 1.1 Utility Theory & Consumer Equilibrium O/N 17/P43/Q2/b ‘The only criticism of demand theory is that the consumer is not rational.’ Consider whether you agree with this statement.

[13] Mark Scheme: Discussion of consumer theory; is it likely that consumers behave irrationally, is it possible to construct indifference curves, calculate marginal utility, elasticity, price equilibrium.

L4 for a sound discussion and comment with good illustrations and a clear understanding of the principles involved. 10 max no conclusion. 9–13 L3 for a competent but less developed discussion idea of rationality or a more limited debate about the realism of the demands of the theory. 7–8 L2 for a correct but undeveloped explanation with some attempt at analysis but only brief discussion with no conclusion. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4 M/J 17/P43/Q3/a Explain how utility theory can be used to determine the downward slope of a demand curve. [12] Mark Scheme: Explanation of utility, assumption of given tastes, income, relation to price, equilibrium point and quantity purchased, result of changes in price to construct demand curve.

Level 4 (9–12 marks): for a reasoned and clear explanation, logically presented dealing with each point and an accurate explanation of the derivation of the curve.

Level 3 (7–8 marks): for a fair but undeveloped explanation probably concentrating on the equilibrium condition but not fully explaining the shape of the whole curve.

Level 2 (5–6 marks): for a briefer explanation, probably not fully explaining the equilibrium and with a link to only one point on the curve.

Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

M/J 17/P41/Q2/b Discuss whether the existence of (i) inferior goods and (ii) advertising invalidates the underlying assumptions of those theories of demand.

[13] Mark Scheme: Inferior goods would result in a different outcome when prices change from the outcome of a normal good, but they do not invalidate the underlying assumptions of the theory. Indifference curve theory can show more precisely why the difference occurs using income and substitution effects. Advertising does not necessarily invalidate the theory but it could be that persuasive advertising results in more being purchased at a higher price – this could still be explained using the theory as either utility is perceived as changing, or can be shown using the indifference curve diagrams. The assumptions have not changed.

Level 4 (9–13 marks): for a reasoned and clear discussion, logically presented dealing with income, substitution, inferior and advertising.

Level 3 (7–8 marks): for a fair but undeveloped discussion probably concentrating on income, substitution of inferior goods or persuasive advertising, but still with a conclusion.

Unit -1

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Utility & Budget Line

Level 2 (5–6 marks): for a briefer discussion of both inferior and advertising.

Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

O/N 16/P42/Q3/a A number of consumers are deciding whether to buy a product. How far does economic theory explain the determination of the market demand curve for that product?

[12] Mark Scheme: Explanation of DMU and its link to equilibrium price and through changes in price to the demand curve for the individual. Accept Indifference Curve analysis. Market demand is derived from summation of individual demand curves.

L4 For a sound explanation of the analysis and a clear understanding of the link to individual and then market demand. Need to provide some evaluative comment for L4. [9–12].

L3 For a competent comment but with limited development of the analysis, maybe with weak link to the market demand, or weak link between utility and demand. [7–8].

L2 For a brief explanation of utility but no link between DMU, changes in price and hence the demand curve.

[5–6].

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4].

O/N 16/P42/Q3/b Discuss whether that theory is still valid if the producer decides to advertise the product, and consider the effects of the advertising on the demand curve for the product.

[13] Mark Scheme: Advertising would alter the demand curve in two possible ways. It could cause an increase in the quantity demanded, represented by a shift of the curve outwards to the right. Also, it might make the demand for the product more inelastic. This would change the shape of the demand curve. The theory of diminishing utility is still valid.

L4 For a sound discussion with good explanation of the analysis and a clear understanding of how advertising can both change the shape of the demand curve and also the shift of the demand curve, with a conclusion. [9–13].

L3 For a competent comment but with limited development of the analysis of both or deals with only one.

[7–8].

L2 For a brief explanation and with a weak explanatory link between advertising and the demand curve. [5– 6].

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4].

M/J 16/P42/Q3/a With the help of diagrams, use indifference analysis to: explain what is meant in economic theory by consumer equilibrium and how it is related to a consumer’s demand curve.

[12] Mark Scheme: Explanation of consumer equilibrium, using indifference curves and budget lines, as point of maximum satisfaction with given income and given prices. Derivation of a point on the demand curve from the equilibrium point. The rest of the demand curve is only obtained by a change in the equilibrium.

Unit -1

10

Utility & Budget Line

L4 For a sound explanation of both budget lines and indifference curves and a clear link to the demand curve with accurate clear diagrams and a clear understanding of the principles involved.

L3 For an accurate reference to the question but with a more limited explanation, includes a link to the demand curve, or with minor errors in the analysis or in the diagrams.

L2 For a explanation of the equilibrium position but with no link to the demand curve; or with inaccurate diagrams and weak explanation.

L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory.

M/J 16/P42/Q3/b With the help of diagrams, use indifference analysis to: Discuss how consumer equilibrium might be affected by a government fiscal policy that raises taxes on goods.

[13] Mark Scheme: Taxes on goods would be likely to raise the price. A price rise of one or more goods is reflected in a change in the budget line (pivot from point on axis of good with no price change) with a subsequent change in equilibrium. The equilibrium change involves substitution and income effects. Substitution effect would be in the opposite direction to the price change. The income effect represented by a parallel shift of the budget line is in the same direction as the substitution effect for the normal good but in the opposite direction as the substitution effect for the inferior good. Candidates may analyse the effect of tax changes on the price of two goods.

L4 For a reasoned and clear discussion, logically presented dealing with income, substitution effects, normal, inferior goods.

L3 For a fair but undeveloped discussion probably concentrating on income, substitution effects without mentioning different types of goods or vv with either a brief comment about the individual demand curve or no discussion about the market demand curve.

L2 For a limited discussion with a lack of development of both income/substitution and normal/inferior goods.

L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory.

M/J 16/P41/Q3/a Given the prices of two goods, how does economic theory analyse what is meant by ‘consumer equilibrium’?

[12] Mark Scheme: Analysis of the meaning of utility and the analysis of the equi-marginal principle which underlies an individual demand curve. Equilibrium could be explained either with reference to marginal utility/price or by using indifference curves.

L4 For a reasoned analysis linked to more than one good and clearly structured answer which deals with a relation between utility, price and a given demand.

L3 For a fair analysis of utility but an undeveloped answer which deals with more than one good but does not link equilibrium to demand.

L2 For a limited attempt which does not clearly determine the equilibrium position for more than one good.

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.

Specimen Paper 2016/P4/Q2/a Explain how a consumer should allocate expenditure in order to achieve maximum satisfaction and analyse how a rise in income might affect that allocation.

[12]

Unit -1

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Utility & Budget Line

Mark Scheme: Explanation of principle of achieving maximum satisfaction either by referring to marginal utility and equimarginal utility alone or by relating these concepts to indifference curves. With marginal utility approach, a rise in income would shift the demand curve. It may, but need not necessarily, alter its slope. With indifference curves a rise in income would move the budget line outwards. The relation between the new budget line and a new indifference curve, and hence the amount of the goods demanded would depend on whether the good was a normal good or an inferior good.

Level 4 Reasoned explanation linked to more than one good and a clearly structured answer with a conclusion about what happens as income rises depending on the type of good. 9-12.

Level 3 Fair explanation but undeveloped answer; possibly with no clarity about the equi-marginal utility ratio or no mention of different types of goods. 7-8.

Level 2 Limited attempt which concentrates on one good and does not clearly determine the equilibrium position for more than one good. Alternatively, the answer could mention more than one good but expresses it as a static model and does not consider income changes. 5-6.

Level 1 Answer has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.1-4.

Level 0 No creditable response.

O/N 15/P43/Q2/a Economic theory often uses the concept of the margin.

Explain how the concept of the margin is used in consumer theory to derive a market demand curve.

[12] Mark Scheme: Explanation of marginal utility, comparison of marginal change in utility and marginal change in price and the link between consumer equilibrium and demand. The sum of individual demand curves form the market demand curve. Whether individual utilities can be added is debatable.

L4 For a reasoned explanation linked to more than one good and clearly structured answer which includes the relationship of individual curves to the market demand. [9-12].

L3 For a fair explanation but undeveloped answer that may concentrate on individual demand, has more than one good but does not link to the market; or tries to mention the market but does not deal with more than one good for individual equilibrium. [7-8].

L2 For a more limited attempt that deals briefly with utility and mentions the margin but does not show the equilibrium, nor more than one good and does not link to the market. [5-6].

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1-4] O/N 15/P42/Q2/a Consumers decide what they wish to buy and as a result direct the market. Producers develop new products, which they then promote by advertising, in order to maximise profits. Without producers there would be no products to buy.

Explain how economic theory predicts what a rational consumer decides to buy.

[12] Mark Scheme: Candidates should explain marginal utility theory and the allocation of expenditure between products.

L4 For a reasoned and clear explanation of the analysis mentioning the equilibrium position of the consumer involving more than one product. Explanation of change in equilibrium. [9-12] L3 For a competent comment but with a limited elaboration of the analysis. Condition of equilibrium stated.

[7-8]

Unit -1

12

Utility & Budget Line

L2 For a brief explanation concentrating on one product with only limited reference to the equilibrium position of allocation between different products. [5-6] L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.[1-4] M/J 15/P43/Q2/a Economic theory often refers to the concept of equilibrium.

Identify two areas of microeconomic theory that use the concept of equilibrium and explain how in each case that equilibrium is achieved.

[12] Mark Scheme: Accept any relevant two, for example, demand/supply; consumer utility; equilibrium of the firm; employment of labour.

L4 (9-12) For a sound explanation of the analysis and a clear understanding of the principles involved.

L3 (7-8) For a competent comment but with limited elaboration and discussion of how equilibrium is achieved.

L2 (4-5) For a correct explanation of part of the analysis, with little development.

L1 (1-3) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.

M/J 15/P41/Q3 With a perfect market and a given income, economic analysis explains how a rational consumer decides the quantities of which products to demand. It cannot, though, explain what happens when incomes change or when businesses in imperfect markets manipulate prices.

Discuss whether you agree with this opinion about the economic analysis of consumer behaviour.

[25] Mark Scheme: There are three aspects to consider. Candidates should explain utility theory and consumer equilibrium.

They should then consider whether the theory allows for account to be taken of a change in income and whether the existence of imperfect markets and price fixing might be included in the theory. (Both can be included). They should then consider whether the overall conclusion of the argument is correct.

L4 (18-25) For a thorough explanation of the theory and a reasoned discussion of the results of a change in income and of imperfect markets. A conclusion should be given.

L3 (14-17) For a competent explanation of the theory but a more limited discussion of the other elements in the statement. Probably the income aspect will be better dealt with than the imperfect markets. There should still be a conclusion.

L2 (10-13) For a correct but undeveloped explanation of the theory and only a brief discussion of the other elements to the question. There will not be a conclusion.

L1 (1-9) For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer is mostly irrelevant.

O/N 14/P43/Q2 The link between marginal utility and price has a similar significance for the consumer as the link between marginal cost and price for the producer.

Consider whether this statement is an accurate reflection of the economic analysis of consumer and producer equilibrium.

[25] Mark Scheme: Explanation of consumer equilibrium MUa / Pa = MUb / Pb. Explanation of equilibrium for the firm MC = MR. MR and price only the same in perfect competition.

Unit -1

13

Utility & Budget Line

Here there may be a similarity in the equilibrium. The significance mentioned in the statement is not correct in other market structures. [25] L4) For a thorough explanation of the analysis, a clear discussion of the possible link between the two situations, a discussion of the lack of link in imperfect markets.

A reasoned conclusion. 18 – 25 L3) For a competent explanation of the analysis but with more limited discussion and less clarity about the similarity/differences. The evaluation will not be fully developed or extensive. 14 – 17 L2) For an accurate, though, undeveloped explanation with some attempt at analysis but only limited evaluation, possibly concentrating on perfect competition. No conclusion. 10 – 13 L1) For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial. 1 – 9 O/N 14/P42/Q2 ‘The purchases a consumer makes are based upon marginal utility. It is this alone that determines market equilibrium in perfect competition. Supply has no relevance.’

Is this true?

[25] Mark Scheme: Explanation of marginal utility analysis and the link between utility and the demand curve. Individual demand curves can be used to achieve market demand curves. Discussion of the importance of supply.

Market equilibrium in perfect competition cannot be obtained from market demand curve alone.

L4 For a clear explanation of the link between utility and demand, cost and supply, the construction of market equilibrium, a clear assessment of the assertion in the quote and a reasoned conclusion. [18–25].

L3 For a competent explanation which does not fully analyse the link between utility and market demand or the link between cost and supply. There will be some discussion but the evaluation will not be extensive with some limited conclusion. [14–17].

L2 For an accurate, though, undeveloped explanation of utility and supply but with only limited evaluation and no conclusion. [10–13].

L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–9] M/J 14/P43/Q3, M/J 14/P41/Q3 A consumer’s demand is sometimes influenced by advertising and sometimes influenced by impulse buying. This means that the economic theories of consumer demand based on utility are of no relevance to a firm trying to determine its likely revenue.

Do you agree with this argument?

[25] Mark Scheme: Candidates should form a structured answer which first debates whether demand is influenced by advertising or impulse buying. Persuasive advertising/impulse buying could still be related to a belief in potential utility and could still be the result of a rational decision. Candidates should then consider the link between potential demand and revenue, mentioning elasticity. Firms hope to create an increase in demand by advertising. However, this may mean future demand is more unpredictable and, therefore, potential revenue more uncertain, than with known – maybe annual – expectations of change.

L4 (18–25) For a thorough explanation of the terms, a clear discussion of the parts of the argument, including an analysis of utility, with a discussion of the conclusion of the argument.)

Unit -1

14

Utility & Budget Line

L3 (14–17) For a competent discussion which does not fully analyse the parts of the argument and does not fully develop a link leading to a conclusion but makes an attempt at an evaluation. (No analysis of utility L3 max).

L2 (10–13) For an accurate though undeveloped explanation with some attempt at analysis but with only a limited evaluation.

L1 (1–9) For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer contains irrelevances and errors of theory M/J 14/P42/Q2 ‘The analysis of marginal utility as an explanation of consumer equilibrium can only be related to the purchase of one good, cannot be used if incomes increase, and is not applicable if advertising causes a change in tastes. It is, in practice, not a useful guide to consumer behaviour’.

Assess this opinion.

[25] Mark Scheme: Candidates should consider the argument presented. They should explain the concept of consumer equilibrium and the construction of a demand curve using marginal utility. They should consider whether the theory only relates to one demand curve or whether it can be applied if the shape of the curve changes, or if the curve shifts. They should present a conclusion to the argument [25].

L4 (18–25) For a thorough explanation of equilibrium and utility and a consideration of the argument in the question. A reasoned conclusion should be presented.

L3 (14–17) For either a competent but more limited comment on both equilibrium and utility, and a comment about the change in the curve, or a full explanation but little comment on changes in the curve.

There should still be some judgement on the conclusion in the question.

L2 (10–13) For an undeveloped explanation of equilibrium/utility with very little discussion of changes in the curve. It is likely that no overall comment on the conclusion will be given in the answer.

L1 (1-9) For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer contains irrelevancies and errors of theory.

O/N 13/P41/Q2/a Choice is an essential part of the analysis in economic texts.

Explain how economic analysis suggests that consumers make a choice when buying products and how they react to price changes.

[12] Mark Scheme: Explanation of the meaning of utility and the analysis which underlies an individual demand curve. When prices change, consumers’ choice changes.

L4 For a reasoned explanation linked to more than one good and clearly structured answer which deals with a changing situation.[9–12].

L3 For a fair explanation of utility but an undeveloped answer which deals with more than one good but makes no reference, or just passing reference, to a changing situation. [7–8].

L2 For a limited attempt which does not clearly determine the equilibrium position for more than one good and makes no reference to a changing situation. [5–6].

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.[1–4] O/N 12/P42/Q2/a A study found that demand for tickets for exhibitions at a major art gallery had unitary price elasticity.

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Explain how the concept of diminishing marginal utility may be used to construct a demand curve for the product and whether that analysis still applies in the case of demand for tickets for the exhibitions.

[12] Mark Scheme: Explanation of diminishing marginal utility and its link to a demand curve. It can still apply in the case of unitary elasticity.

L4 For a sound explanation of the analysis and a clear understanding with a conclusion [9–12].

L3 For a competent comment but with limited development of the analysis and a weaker conclusion. [7–8].

L2 For a brief explanation and with a weak comment on the possible problems and no correct conclusion [5–6].

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4].

O/N 12/P41/Q2/a Explain how the law of diminishing marginal utility might be used to construct a consumer’s demand curve for a product.

[12] Mark Scheme: Explanation of diminishing marginal utility (DMU) and its link to equilibrium price and through changes in price to the demand curve.

L4 For a sound discussion with good explanation of the analysis and a clear understanding with a conclusion [9–12].

L3 For a thorough explanation but with limited development of the analysis and a weaker conclusion. [7–8].

L2 For a brief explanation and with a weak explanatory link between DMU, changes in price and hence the demand curve [5–6].

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4].

O/N 11/P42/Q2/a Explain the link between a consumer’s expenditure and the equi-marginal principle of utility. [12] Mark Scheme: Candidates should explain marginal utility theory, the equilibrium position and the allocation of expenditure between products. [12].

L4 For a reasoned and clear discussion of the analysis mentioning the equilibrium position of the consumer for a number of products. [9–12].

L3 For a competent comment but with a limited elaboration of the whole analysis or possibly limited to one product. [7–8].

L2 For a brief explanation with only limited reference to the equilibrium position and limited to one product.

[5–6].

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] M/J 11/P42/Q3/b Analyse what is meant by the equi-marginal principle of consumer demand and whether it can be linked to the derivation of a market demand curve.

[13] Mark Scheme: Analysis of equi-marginal principle which underlies an individual demand curve. The sum of individual demand curves form the market demand curve. Whether individual utilities can be added is debatable. [13].

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16

Utility & Budget Line

L4 For a reasoned discussion linked to more than one good and clearly structured answer with a conclusion [9–13] [Low L4 maximum if there is no mention of market demand].

L3 For a fair discussion but undeveloped answer but still with a conclusion [7–8].

L2 For a limited attempt which does not clearly determine the equilibrium position for more than one good and no conclusion. [5–6].

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] M/J 10/P42/Q5 Economic theory emphasises the idea of an equilibrium position. Discuss whether the idea of an equilibrium is a useful and practical way of explaining the behaviour of a consumer.

[25] Mark Scheme: Candidates should explain the nature of the equilibrium in terms of marginal utility theory for the consumer.

They should comment on how the equilibrium is reached and then comment on the relevance of the theory. For the consumer there is the difficulty of measuring utility, comparing utility between goods, and persuasion to buy through advertising and not through consumer’s calculation of utility.

L4 For a clear discussion of the analysis using the equi-marginal principle and a good comment on the usefulness and practicality of giving a value to the equilibrium position. A conclusion should be given. [1825].

L3 For a competent discussion the analysis but a weaker evaluation of its practical usefulness. Some attempt at a conclusion will be presented. [14–17].

L2 For a brief comment on the analysis with very limited evaluation, or a fuller comment on the analysis but with no evaluation and no conclusion. [10–13].

L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer contains irrelevancies and errors of theory. [1–9].

M/J 10/P41/Q7 Economic analysis adequately explains how a rational consumer determines a pattern of consumption from a given income in a perfect market with no advertising. It does not explain the more common case of what happens if income changes or if there is advertising. The theory is, therefore, of little merit.

Do you agree with these assertions?

[25] Mark Scheme: There are three different parts to the argument. Candidates should explain utility theory and consumer equilibrium. They should then consider whether the theory allows for account to be taken of a change in income and whether the existence of advertising, which could provide more information and increases rational choice, might be included in the theory. Even if the advertising is purely persuasive the belief that it is correct might also be considered to be the basis for a rational choice. They should then consider whether the overall conclusion of the argument is correct.

L4 For a thorough explanation of the theory and a reasoned discussion of the results of an change in income and of the influence of advertising. [18–25].

L3 For a competent explanation of the theory but a more limited discussion of the other elements in the assertion. Probably the income aspect will be better dealt with than the advertising. [14–17].

L2 For a correct but undeveloped explanation of the theory and only a brief discussion of the other elements to the assertion. [10–13].

L4 For an answer which shows some knowledge but does not indicate that the question has been fully grasped, or where the answer is mostly irrelevant. [1–9].

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O/N 08/P4/Q2 Economic analysis of resource allocation assumes consumers are rational. Where advertising exists, this analysis is of little value. Do you agree with this argument?

[25] Mark Scheme: Candidates first need to consider whether economic analysis does presume what is stated. It usually does presume consumers are rational. Candidates should then discuss the role of advertising. Advertising might not mean a decrease in rationality. It might through better information make informed choices more likely.

An overall conclusion is essential.

L4 For an explanation of the terms in the statement, a clear analysis of the link between them, a discussion of the possible outcomes with a reasoned conclusion. [18–25].

L3 For a competent explanation which does not fully analyse the terms or clearly see the progression, or lack of progression in the argument. There will be some discussion but the evaluation will not be fully developed or extensive. [14–17] L2 For an accurate though undeveloped explanation of some of the terms with some attempt at seeing the links between them but with very limited evaluation and no real conclusion. [10–13].

L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–9].

O/N 07/P4/Q2/a ‘We do not ask consumers what they want. They don’t know. We decide what they will need and will want.’ Akio Morita, founder of the Sony electronics company.

Explain how, according to utility theory, consumers allocate their expenditure between different products as prices change.

[12] Mark Scheme: Candidates should explain marginal utility theory and the allocation of expenditure between products.

L4) For a reasoned and clear explanation of the analysis with a full development of the equilibrium position of the consumer. [9–12].

L3) For a competent comment but with a limited elaboration of the whole analysis. [7–8].

L2) For a brief explanation of utility but no reference to the equilibrium position of allocation between different products. [5–6].

L1) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] O/N 06/P4/Q3/a My higher income will make me happier in the short run. In the long run I will become accustomed to it and my happiness will return to the previous level. There is no point, therefore, in earning higher income.

Explain the Law of Diminishing Marginal Utility and discuss whether it supports the idea that higher incomes increase happiness.

[12] Mark Scheme: Candidates should explain and discuss the Law of Diminishing Marginal Utility and discuss whether it can be applied to money. Money has a diminishing marginal utility as does any good according to some. There are, though, exceptional goods where marginal utility increases as the quantity used/owned increases; some would argue money is in this category. Perception of utility is for a given time period and so over time the second part of the statement could be true whichever of the two views is believed. However, higher incomes allow the purchase of more, or different, goods and each of those gives utility. Whether it is

Unit -1

18

Utility & Budget Line

possible to add utilities of different goods is debatable. Extra consumption also sometimes gives utility when one’s situation is compared to that of other people. However, the externality of consumption on consumption is not easily calculated and the comparison of one person with another in terms of utility is difficult. So, the final conclusion of the argument would not be certain.

L4) For a sound explanation of each part and a clear understanding of the principles involved. [9 – 12].

L3) For a competent explanation of the Law of DMU but with limited elaboration of the analysis. [7 – 8].

L2) For a limited explanation of the Law of DMU in general but without applying it to the case of money or the precise point of the question. Candidates may also not work through the whole argument. [5–6].

L1) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4] M/J 06/P4/Q3/a The gain in happiness when someone gets an extra dollar is much smaller when the person is rich than if they are poor. So money transferred from rich to poor raises total happiness and governments should seek to make such transfers.

Explain what is meant by the Law of Diminishing Marginal Utility and consider whether the statement above is a correct application of it.

[12] Mark Scheme: Candidates should explain marginal utility and then develop the theory of diminishing marginal utility.

Money has a diminishing marginal utility as does any good according to some. There are, though, exceptional goods where marginal utility increases as the quantity used/owned increases; some would argue money is in this category. Whether it is possible to add utilities for different people to calculate total welfare is debateable, as is the possibility of comparing total utilities between people. A sub-conclusion on this section is required and then the argument should be related to the second part of the statement. If money does have diminishing utility the total happiness would be increased in theory – although even in theory it is not really possible to add utilities and form a social welfare function. In practice changes in satisfaction are pure guesswork and optimum distribution through government policy is unlikely.

L4) For a sound explanation of each part and a clear understanding of the principles involved. [9 - 12].

L3) For a competent comment but with limited elaboration of the analysis. [7 - 8].

L2) For a correct explanation of part of the analysis. Candidates might explain only two of the parts of the statement. [5 - 6].

L1) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1 - 4] M/J 04/P4/Q2/b Discuss whether marginal utility theory is a realistic piece of economic analysis in explaining consumer demand.

[13] Mark Scheme: Discussion of difficulties of interpreting marginal analysis. Measurement of utility, measurement of value of marginal unit, problem of relating marginal utility/price of various goods, difficulties of adding utilities.

Pareto is not required but the principle of someone better off without anyone worse is on syllabus – as is cost benefit analysis.

L4) For a reasoned and clear evaluative comment. 9 – 13.

L3) For a limited but acceptable attempt to consider the possible limitations of the theory.7 – 8.

L2) For a descriptive account of the theory of marginal utility. 5 – 6.

L1) For an answer which has some basic correct facts but includes irrelevancies and errors of theory. 1- 4.

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1.2 Budget Line M/J 16/P43/Q2/b Discuss whether the use of a demand curve and budget lines are similar in the way they represent what will happen if the price of a good falls.

[13] Mark Scheme: Both can be used to derive the change in consumer purchases; however, demand has price and quantity of one good bought, budget lines have quantities of two goods–price is not on the axis; cannot tell how demand will change with budget line unless also show preference lines and then need to link that to another diagram. Indifference curves have a greater possibility of showing income and substitution effects and thus are more able to distinguish between normal, inferior and Giffen goods.

L4 For a sound discussion indicating the similarities/differences.

L3 For an accurate explanation but with a less clear comparison/discussion.

L2 For a general undeveloped discussion with little comparison.

L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory O/N 14/P41/Q2/a Analyse whether there is a difference between: • the way the effects of an increase in price can be represented using a budget line, and • the way the effects of an increase in price can be represented using a demand curve based on marginal utility theory.

[12] Mark Scheme: Explanation of budget line and how an increase in price of one good causes the budget line to pivot.

Budget lines alone cannot tell what happens to quantity demanded, although they may show a split between income and price effects. Explanation of utility theory and the link to a movement along a demand curve which can show how the quantity demanded changes.

L4) For a good analysis with a reasoned comment of budget lines and demand curves/utility with a clearly structured answer and a conclusion. 9 -12.

L3) For a fair analysis but undeveloped answer or a more developed answer on either budget lines or demand/utitlity. A conclusion should be drawn. 7 – 8.

L2) For a limited but acceptable attempt to analyse the link to the theory but with inconclusive or unconvincing discussion and no overall conclusion 5 – 6.

L1) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. 1 – 4.

O/N 12/P41/Q2/b Analyse how budget lines may be used to illustrate what happens for both a normal good and an inferior good when the price of the good increases at the same time as a consumer’s income increases.

[13] Mark Scheme: Budget lines can show what happens to the relationship between the two goods. Income rises will shift the budget line in a parallel manner; price rises of one good will shift the budget line towards the origin for that good. The balance of the two changes will vary for a normal and inferior good but what precise quantity of each will be bought before and after the changes cannot be estimated from the budget line alone. Learners could explain that the quantity purchased would fall for an inferior good if income increases L4 For a sound discussion with good explanation of the analysis and a clear understanding of the different shifts with a conclusion [9–13].

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Utility & Budget Line

L3 For a thorough explanation but with limited development of the analysis and a weaker conclusion. [7–8].

L2 For a brief explanation and with a weak explanatory link between budget lines and quantity bought and with no conclusion. [5–6].

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–4].

M/J 11/P42/Q3/a Discuss whether demand schedules and budget line diagrams are similar in the way they represent the effect of (i) a rise in the price of a good (ii) a rise in a consumer’s income.

[12] Mark Scheme: A rise in the price of a good: a demand schedule has price and quantity of one good bought against price; budget line diagrams have quantities of two goods – price is not on the axis; one cannot tell how demand will change with budget line unless you also show preference lines. A rise in a consumer’s income: similarity, both move parallel out for a rise in income; but cannot tell what will be bought unless have supply line – with demand – or preference lines with budget line.

L4 For a sound discussion indicating the similarities/differences [9–12].

L3 For an accurate explanation but with a less clear comparison [7–8].

L2 For a general undeveloped explanation with little comparison. [5–6].

L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory [1–4]

1.3 Indifference Curve analysis & types of goods O/N 17/P43/Q2/a Explain why an identical price fall would result in a different demand curve for a normal good from that for an inferior good. Use indifference curve analysis to support your answer.

[12] Mark Scheme: Explanation of indifference curves, description of normal good, (positive substitution, positive income) inferior, (negative income does not outweigh positive substitution for price fall) Link to demand curve, showing possible different slope of curve and different price elasticity.

L4 for a reasoned answer with a conclusion illustrating all the points, shape of curve, equilibrium, construction of demand, change in price, change in demand, 9–12 L3 for a competent answer that deals with part of the analysis, probably only briefly linking equilibrium to demand curve 7–8 L2 for a less developed answer probably the demand curve link, or mention of elasticity 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4 O/N 17/P42/Q3/a Analyse how indifference curve theory explains why a consumer will normally buy more of a good at a lower price than at a higher price.

[12] Mark Scheme: Explanation of indifference curves, equilibrium point, b) link between indifference curves and demand curve c) discussion of how reduced price can affect equilibrium/demand for a normal product, shift of budget line.

L4 for a reasoned answer with a conclusion illustrating all the points, shape of curve, equilibrium, construction of demand curve, change in price, change in demand, 9–12

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21

Utility & Budget Line

L3 for a competent answer that deals with part of the analysis, probably only briefly linking equilibrium to demand. 7–8 L2 for a less developed answer referring to indifference curves and budget lines. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4 O/N 17/P42/Q3/b Discuss why there might be exceptions to this normal response, distinguishing the income effect from the substitution effect. Consider the relevance of these exceptions to firms and the government.

[13] Mark Scheme: Discussion of inferior, (negative income does not outweigh positive substitution for price fall) GIffen goods, (negative income outweighs positive substitution for price fall). Effect on likely revenue to the firm, on tax revenues to government, relevance of price, income elasticity.

L4 for a sound explanation and discussion with good illustrations and a clear understanding of the principles involved with accurate links and a reasoned evaluation referring to firms and government.. 9–13 L3 for a competent explanation of the terms with accurate but limited discussion with some analysis of the links. 7–8 L2 for a correct but undeveloped explanation with some attempt at analysis but only brief discussion. 5–6 L1 For an answer that has some basic correct facts but includes irrelevancies and errors of theory 1–4 O/N 17/P41/Q3 Use indifference curves to distinguish between the income and substitution effects of a price change. Discuss whether the distinction might be important for a manufacturer.

[25] Mark Scheme: Explanation of indifference curves, income, substitution of a price change. These can then be related to a demand curve to show the effect on demand of a price change and determine the possible change in revenue, and maybe profits, depending on the type of good.

L4 for a reasoned and clear discussion, logically presented dealing with income, substitution, link to the demand curve, and clear link to importance for manufacturers. Maximum 21 with no conclusion. 18–25 L3 for a fair but undeveloped discussion probably concentrating on income, substitution effects without a clear link to demand, or without a clear analysis of the possible effect on manufacturer’s revenue through elasticity. 14–17 L2 for a briefer comment on income/substitution, no link to demand, no pertinent comment on revenue/elasticity or normal/inferior goods 10–13 L1 for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant. 1–9 M/J 17/P43/Q3/b Discuss, using indifference curve analysis, why a decrease in a sales tax on all goods and services might have a different impact on demand for a normal good than for an inferior good.[13] Mark Scheme: Decrease in sales tax lowers price, shifts budget line. As the tax applies to all goods the budget line will shift outwards, not necessarily parallel. Reward a discussion of a reduction in tax/price on one good.

Level 4 (9–13 marks): for a reasoned and clear discussion, logically presented dealing fully with effect on demand for inferior and normal good. An inferior good that is also a Giffen good will result in a fall in demand. Clear conclusion.

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Utility & Budget Line

Level 3 (7–8 marks): for a fair but undeveloped discussion with probably some confusion over inferior good.

Inferior good may result in a fall in demand if it is a Giffen good, but not otherwise.

Level 2 (5–6 marks): for a briefer discussion with some inaccuracies.

Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

M/J 17/P42/Q2 Choice is an essential part of economics. Sometimes consumers change their choices either when shops have special offers on previously very expensive luxury products, or when advertising persuades them to change their preferences.

Analyse how the economic theory of indifference curves can be used to construct a consumer’s demand curve. Discuss whether this theory can explain the above changes in choice.

[25] Mark Scheme: (i) Explanation of indifference curves, equilibrium point, (ii) link between indifference curves and demand curve, (iii) discussion of how reduced price can affect equilibrium/demand for a luxury product, shift of budget line, income substitution effects, (iv) advertising, change in tastes would change the shape of the indifference curve.

Level 4 (18–25 marks): for an answer illustrating all the 4 elements of the question, equilibrium, construction of a demand curve, change in demand, and change in shape of indifference curve and a conclusion. No conclusion max. 22, 18–19 marks if 3 elements well done with a conclusion.

Level 3 (14–17 marks): for a less developed answer that deals with 3 points.

Level 2 (10–13 marks): for a limited answer that deals with only 2 points.

Level 1 (1–9 marks): for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant.

M/J 17/P41/Q2/a Compare the derivation of a demand curve for a product using the marginal utility theory with the derivation using indifference curve theory.

[12] Mark Scheme: Indifference curve theory shows the quantities of two goods bought as price changes; requires a separate diagram for each good to show the quantity bought at each price. Utility theory compares the total and marginal utility to the price, the quantity bought can be shown on the same diagram.

Level 4 (9–12 marks): for a sound explanation of both budget lines and indifference curves and a clear link to the separate demand curve, sound explanation of link between utility, price and demand, with accurate clear diagrams and a clear understanding of the principles involved.

Level 3 (7–8 marks): for an accurate reference to the question but with a more limited explanation, perhaps omitting a clear explanation of utility or a clear link to the demand curve, or with minor errors in the analysis or in the diagrams.

Level 2 (5–6 marks): for a briefer explanation of the equilibrium position but with no link to the demand curve; or with inaccurate diagrams and weak explanation.

Level 1 (1–4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.

O/N 16/P43/Q3 ‘The use of indifference curves to establish a consumer’s equilibrium is purely a theoretical tool.

They show the relation between two goods; they do not show prices or income and, therefore, cannot be used to determine a demand curve.

How far do you agree with this statement?

[25]

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Utility & Budget Line

Mark Scheme: The answer should consider the initial proposition – there is a premise concerning the theoretical analysis.

The curves do show the relation between goods and although levels of income and prices are not shown on the diagrams the analysis rests on the assumption of a given income and given prices. Changes in either can be reflected in the analysis and can be linked to a demand curve. [25] L4 For a reasoned and clear discussion with accurate development of theory and good links to the statement together with a reasoned conclusion. [18–25] L3 For a competent comment together with limited elaboration of the analysis or imprecise links to the statement. There will be some discussion but the evaluation will not be fully developed or extensive. There should still be a conclusion. [14–17] L2 For a brief explanation but weak or ill-explained links to the statement. The explanation will be undeveloped with some attempt at analysis but only limited evaluation. [10–13] L1 For an answer which shows some knowledge but does not indicate that the question has been fully grasped. The answer will have some correct facts but include irrelevancies. Errors of theory or omissions of analysis will be substantial. [1–9] O/N 16/P41/Q3/a Explain the meaning of an indifference curve and show to what extent indifference curves can be used to determine a consumer’s demand curve for a product.

[12] Mark Scheme: Explanation of the construction of an indifference curve and determination of equilibrium with given income and given prices using budget lines. Derivation of a point on the demand curve from the equilibrium point.

L4 For a sound explanation of indifference curves and a clear link to the demand curve with accurate clear diagrams and a clear understanding of the principles involved [9–12].

L3 For an accurate reference to the question but with a more limited explanation, perhaps omitting a clear link to the demand curve, or with minor errors in the analysis or in the diagrams [7–8].

L2 For a briefer explanation of indifference curves and equilibrium position but with no link to the demand curve; or with inaccurate diagrams and weak explanation. [5–6].

L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory [1–4].

O/N 16/P41/Q3/b Consider whether indifference curves can be used to analyse the effects of a fall in the price of a good on the demand for both a normal good and a Giffen good.

[13] Mark Scheme: A price fall is reflected in a change in the budget line (pivot from point on axis of good with no price change) with a subsequent change in equilibrium. The equilibrium change involves substitution and income effects.

Substitution effect would be in the opposite direction to the price change. The income effect represented by a parallel shift of the budget line is in the same direction as the substitution effect for the normal good but in the opposite direction, and greater than, the substitution effect for the Giffen good.

L4 For a reasoned and clear discussion, logically presented dealing with income, substitution, normal, Giffen and linked to demand. [9–13].

L3 For a fair but undeveloped discussion probably concentrating on income, substitution without mentioning different types of goods with either a brief comment about the individual demand curve or no discussion about the demand curve [7–8].

L2 For a limited explanation with a lack of development of both income/substitution and normal/Giffen goods [5–6].

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24

Utility & Budget Line

L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory [1–4].

M/J 16/P43/Q2/a Economists write about indifference analysis when studying consumer choice. Does this theory of consumer behaviour mean that a consumer is always indifferent when choosing between two products?

[12] Mark Scheme: Explanation of meaning of indifference with reference to extra utility lost/gained. Principle of diminishing marginal utility. Analysis of comparison of one indifference curve with another; and also comparison of utility with price.

L4 For a reasoned analysis dealing with the shape of curve, different curves and link to the price.

L3 For a fair analysis but undeveloped answer but still with a conclusion.

L2 For a limited attempt which does not clearly determine the link between two curves of the importance of marginal utility.

L1 For an answer which has some basic correct facts but includes irrelevancies and errors of theory.

M/J 16/P41/Q3/b Suppose the price of one of the goods falls. Use indifference curve analysis to discuss whether consumers would always buy more of the good when its price falls.

[13] Mark Scheme: Discussion of income and substitution effects and resulting demand. Both normal and inferior goods lead to consumers buying more of the product but not the same amount extra. Fewer items would be bought with a Giffen good.

L4 For an good discussion of income/substitution effects linked to normal, inferior and Giffen goods and clearly structured answer with a conclusion about what happens as prices change.

L3 For a fair discussion but undeveloped answer probably dealing with two of the types of good, or not clearly distinguishing income and substitution effects but still with some comment about what happens when prices change.

L2 For a limited attempt which does not determine the differences between the types of good or does not show the income and substitution effects.

L1 For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.

M/J 15/P42/Q2/a Describe how consumer theory suggests a rise in income will cause a consumer’s demand to change for a normal good and for an inferior good.

[12] Mark Scheme: A rise in income will cause an increase in demand for a normal good; the extent of the increase will depend on the income elasticity and will vary between a necessary good and a luxury good. Rise in income will not cause a rise in demand for an inferior good but a switch away from the good.

L4 (9-12) For a sound description of the analysis and a clear understanding of the principles involved.

L3 (7-8) For a competent comment but with limited elaboration, probably of elasticity, and description of how equilibrium is achieved.

L2 (5-6) For a correct description of part of the analysis, with little development.

L1 (1-4) For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.