June 2018: Paper 1

Mark scheme

Examiner's comment

In this question the focus is on having the ability to apply the concept of opportunity cost to the PPF curves as shown. There are 2 marks for application. The main issue that candidates faced here was failing to correctly read the information as presented; with some candidates identifying the original opportunity cost as 70 or not displaying a clear understanding of opportunity cost and therefore the ability to apply. This often meant that candidates were unable to achieve full marks, since it often led on to incorrect application. This answer scores the full 2 marks. The candidate has identified correctly the original and new opportunity cost. Be clear and concise in these short questions. This candidate correctly identifies 20 as the original opportunity cost to obtain one mark and provides their working as per the mark scheme. They then correctly identify that the calculation of new opportunity cost of 50 capital goods along XZ is 170-140 but then make the computational error of saying this is equal to 70 rather than 30 consumer goods. As an incorrect answer they receive 0 marks for the new opportunity cost despite having the correct working. Overall they achieve 1+0 = 1 mark. Always try to ensure you re-read your work – especially if you allow time for this at the end of the exam.

Notes from the mark scheme and report

• read across at 50 capital goods: on XY 120 - 100 = 20 consumer goods, on XZ 170 - 140 = 30
• report: some misread the PPF and gave 70 as the original opportunity cost

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Answer

D

Mark scheme

Notes from the mark scheme and report

• outward shift of the PPF on the consumer-goods axis only is a rise in potential output of consumer goods (D)
• A describes a movement from inside the PPF (W to V)
• B and C wrongly link the PPF to costs or demand

Mark scheme

Examiner's comment

Many candidates clearly identified the unemployment of resources and most gained analysis marks operating inside PPF. Marks were lost where candidates stated unemployed resources and allocative efficiency showing dual knowledge but then no analysis so they could only be awarded a single mark. This answer achieves a mark of 1/2. The response does not move beyond showing an understanding of an inefficient allocation of resources. For a 2 mark explain answer it is always advisable to provide some linked development or an example. In this case the diagram provided the opportunity to use quantitative skills by identifying that the economy could produce at either 100 or 140 consumer goods but is currently producing 80. This answer achieves a mark of 2/2. Full marks for correctly explaining position W and analysing with use of the diagram whereby it is possible to increase output of both consumer and capital goods. The candidate displays a concise grasp of the economic concepts covered. Ensure you have a clear understanding of all the economic concepts in the specification.

Notes from the mark scheme and report

• W is inside the PPF: unemployed resources or inefficient allocation
• analysis mark for more of both goods possible (could produce 100 or 140 consumer goods, producing 80)
• two knowledge points without analysis score only 1

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Mark scheme

Examiner's comment

This was a straightforward question with most candidates completing the calculation accurately however a few omitted the “million”. There are 2 marks available for application, with 2 marks awarded for the correct answer or 1 mark for the correct calculation without stating the correct answer. If candidates failed to score full marks on this question it was generally either because they had misread the data or they made a computational error. This answer achieves a mark of 2/2. This candidate achieves full marks for providing the correct answer, being £128.48 million. They have carefully shown their working – so in the absence of the correct answer due to a computational error they would have secured 1 mark for £146million or £17.52 million. Always ensure you state the correct unit of measurement. This answer achieved 1 out of 2 marks for £1.76 x 73m as per the mark scheme. It is advisable to show your working – as you may obtain a mark for working towards the correct answer.

Notes from the mark scheme and report

• (£2 - £0.24) x 73 million = £128.48 million, or £146m - £17.52m
• omitting "million" or misreading the data lost marks

Quantitative skills: QS 6 (calculate cost, revenue and profit (marginal, average, totals))

Mark scheme

Examiner's comment

In this question the marks were split as 1 mark for knowledge of cross elasticity of demand and 1 mark for explaining what 1.28 meant. Many candidates achieved the full 2 marks here. The main problem that let candidates down was not providing clear analysis about 1.28 indicating they were close substitutes or analysing that this meant an increase by 128%. This answer scores the full 2 marks for stating that: 'It resulted in a 128% rise in demand for gaming machines'. They have carefully explained their reasoning for this up to the final sentence but would have saved time by stating alone the final sentence. Ensure you know key formulas like cross elasticity of demand to enable you to provide concise answers. This answer scores 1/2 marks as unfortunately they do not move beyond their basic knowledge of cross elasticity of demand to analyse the implications of an XED of 1.28.

Notes from the mark scheme and report

• positive XED of 1.28 means substitutes, so demand for gaming machines rises
• analysis: 128% rise for a 100% lottery price rise or close substitutes
• report: many did not analyse what 1.28 means

Quantitative skills: QS 8 (make calculations of elasticity and interpret the result); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Answer

C

Mark scheme

Notes from the mark scheme and report

• the flood defence scheme is non-excludable and non-rival, a public good (C)
• B wrong as non-payers cannot be excluded
• A and D misuse excludability and rivalry

Mark scheme

Examiner's comment

Most candidates found this to be a straightforward question, gaining 2 marks for giving the correct answer of £6357 or rounded up to £6360. There are 2 marks available for application, 2 marks for the correct answer or 1 mark for providing the correct working but not the correct answer. This answer scores the full 2 marks. The candidate makes clear their final answer by double underlining £6357. In the absence of this correct answer they would have obtained 1 mark for 0.013 x 489 000. Ensure you make clear your final answer on quantitative skill questions. This answer scores zero as unfortunately the candidate doesn't have the correct percentages – in this case what 1.3% means numerically. Candidates need to develop their competence in the quantitative skills as listed in the specification.

Notes from the mark scheme and report

• 1.3% x £489 000 = 0.013 x 489 000 = £6 357
• report: some could not convert 1.3% into a decimal

Quantitative skills: QS 2 (calculate, use and understand percentages, percentage changes and percentage point changes)

Answer

C

Mark scheme

Notes from the mark scheme and report

• London price divided by North East price (C)
• A inverts the ratio (North East to London)
• B and D are computational errors

Quantitative skills: QS 1 (calculate, use and understand ratios and fractions); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme

Examiner's comment

Most candidates found this to be a straightforward question. There are 2 marks available – 1 mark for the reason and 1 mark for an explanation of that reason. If candidates failed to score full marks on this question it was generally either because they failed to provide an economic reason or they failed to explain their reason for the second mark. This answer scores 1/2 marks. The candidate identifies a difference in demand although this would have been better in relation to supply or identifying a clear reason. There is no linked development. For a 2 mark explain response it is essential to provide some linked development, ideally in context. This answer scores the full 2 marks by providing clear linked development.

Notes from the mark scheme and report

• one reason (income or wealth, employment, migration, foreign buyers, land shortage) plus linked development for the second mark, e.g. higher incomes mean larger mortgages and higher prices
• a reason with no development scores 1

Quantitative skills: QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme

Examiner's comment

In this question, candidates needed to make sure they could identify supernormal profit at a profit maximisation and revenue maximisation level of output. They then need to calculate accurately the supernormal profits and subtract to achieve a change of £117. The majority of candidates did identify the profit maximisation and revenue maximisation level of output but some had difficulties with knowing how to calculate the supernormal profits – especially at the revenue maximisation output. Full marks could be achieved for simply stating £117 or -£117. This answer achieves a mark of 3/4. They provide a model approach when showing their working and do identify accurately the change but do not calculate the change of £117 in total supernormal profit as stated in bold in the question. Ensure you provide the final answer to the question set. For stating change = -£117 the candidate obtains full marks.

Notes from the mark scheme and report

• profit max MC = MR at 25 treatments: (£17 - £8) x 25 = £225
• revenue max MR = 0 at 36: (£12 - £9) x 36 = £108
• change = -£117
• report: some could not calculate supernormal profit at the revenue-maximising output, or did not state the final change

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms); QS 6 (calculate cost, revenue and profit (marginal, average, totals))

Answer

B

Mark scheme

Notes from the mark scheme and report

• sales maximisation (AC = AR) is at a higher output than revenue maximisation, so price falls (B)
• A wrong as output rises
• C AC is higher there
• D only normal profit is made

Answer

A

Mark scheme

Notes from the mark scheme and report

• (276.7 - 352.4) / 352.4 x 100 = -21.5% (A)
• B divides by the 2015 figure
• C uses 2014 to 2015 only
• D gives the absolute fall, not a percentage

Quantitative skills: QS 2 (calculate, use and understand percentages, percentage changes and percentage point changes); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme

Examiner's comment

This was a familiar topic for many candidates and the majority scored 2 marks for a clear explanation of decreasing PC sales. Most candidates achieved full marks but a small number of candidates lost a mark as their answers lacked linked development. This answer achieves a mark of 1/2. This response is missing economic knowledge for the likely reason in the decrease in sales of PCs. Ensure you always try to draw on your economic knowledge – especially for contexts candidates can easily relate to.

Notes from the mark scheme and report

• a demand-side reason (substitutes such as tablets and smartphones, cheaper substitutes, lower global real incomes) with linked development
• answers lacking development scored 1

Mark scheme

Examiner's comment

This was a high scoring question with the vast majority of candidates gaining 2 marks, although a few only scored 1 mark as they had only calculated the total market share of the companies but had not expressed the answer as a percentage. This answer achieves a mark of 2/2. Full marks for correctly identifying 68.75% for five firm concentration ratios. Without the correct answers being provided only one mark would have been awarded for the formula provided as per the mark scheme. Ensure you clearly state your final answer.

Notes from the mark scheme and report

• sum of five largest firms' sales 190 239 / 276 700 x 100 = 68.8%
• report: a few gave the total share but not as a percentage

Quantitative skills: QS 2 (calculate, use and understand percentages, percentage changes and percentage point changes); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme

Examiner's comment

The question required candidates to explain 'one likely reason for the overall trend in the real price of gas and electricity.' Responses tended to draw on Theme 1 supply and demand knowledge with some candidates drawing diagrams – although this was not required. Theme 1 type responses needed to ensure they provided extended analysis of market forces to achieve full marks. Theme 3 type responses tended to be more concise and higher scoring. 5 out of 5 marks awarded. The answer began by providing clear analysis that prices have increased (1 AN) and applied this by saying by nearly 20% (1 APP). The knowledge mark is achieved for identifying an increase in demand (1 K) with further analysis that this is due to the growing economy (1 AN) causing an extension in supply (1 AN) to achieve the new equilibrium price. For a 5 mark response the marks for linked development requires candidates to ensure they provide extended analysis as well as application.

Notes from the mark scheme and report

• real price means adjusted for inflation
• quote the index rise (electricity about 70 to 119, gas about 58 to 121)
• 3 analysis marks need extended analysis of market forces
• report: Theme 3 answers (tacit collusion, profit seeking) were more concise and higher scoring
• a diagram was not required

Quantitative skills: QS 5 (calculate and interpret index numbers); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

For many candidates the interpretation of the question led to lower than expected scores with many offering correct economic theory but failing to apply themselves fully to the demands of the question. The majority of candidates showed a good understanding of the measures and used the data effectively to examine the measures and how effective they would be in increasing competition. Recognition of market structure was widely evident and evaluation shown in the structure used. Top scoring candidates identified that they needed to discuss the measures in Extract A but others ignored the measures and focused on the impact of increased competition. Candidates who identified the ‘database’ and/or ‘smart meters’ were usually able to develop a Level 2 or Level 3 point, most often linking either of these to information asymmetry. The issue of habitual behaviour/inertia was then a widely used evaluation point. Those who chose to use ‘price cap’ as a point rarely achieved beyond Level 1 on this, as they did not link the cap to ‘open up & increase competition’, but instead gave a generic description of a price cap. Second evaluation points tended to be fairly generic with little relevant reasoning appropriate to the context. Nearly all candidates were aware of the need to evaluate. This answer achieves a mark of 11/12. It achieves Level 3 (7/8) and Level 2 EV (4e/4e). All reasons are relevant, explained and applied to the context rather than generic. They achieve Level 3+ on KAA in the first paragraph by displaying a clear understanding of how the creation of a database helps consumers to switch and reduces barriers to entry as a result. They then go on to evaluate this measure with relevant reasoning and appropriate references to the context for a Level of 2e+. Price caps is covered here as a temporary measure until smart meters are installed – it links sufficiently towards opening up the market for a low Level 3 – by discussing the market structure. The evaluation of the price caps is worthy of L2e as it recognises different viewpoints and is critical of the evidence. This evaluation is further supported by the conclusion. Make sure you answer the question set with well-developed use of economic theory and precise use of data. Similarly, well-balanced evaluation should also be well explained and in context as in this example. The response here also benefits from a clear structure that enables the candidate to access top Level marks. How a database benefits competition achieves Level 3 but the evaluation is not relevant to competition. The response is awarded 4+0e.

Notes from the mark scheme and report

• discuss the Extract A measures (switching database, smart meters, price cap) not just the effects of more competition
• link to asymmetric information and barriers to entry (new entrants 12% share)
• price cap rarely beyond Level 1 unless linked to competition
• evaluate with habitual behaviour and inertia

Mark scheme, including the levels grid and indicative content

Examiner's comment

Most candidates went down the expected route: KAA as positives for consumers (lower prices and increased consumer surplus) and negatives for firms (less profit). These were often scoring Level 3 or Level 2. The main evaluation was linked to how consumers may suffer via less dynamic efficiency and then a generic evaluation. There were many basic analysis errors in this question; many candidates confused price and profit caps, many suggested ways which firms could increase profits after they had been capped (i.e. by increasing prices), many others lost marks through only relating their answer to a single group, usually consumers. A general point here, but which also applies to all other questions requiring evaluation (especially Level 3 evaluation), is that a large number of candidates follow a structure where they make a KAA point in a paragraph, develop it and then finish the paragraph with a sentence beginning “However, …” where they make an evaluative point. This single sentence rarely scores more than Level 1 and candidates should be encouraged to develop their evaluative points in a separate paragraph. This answer scores 6/10 marks. The candidate has addressed the poor quality service to consumers (Level 3) though cheaper prices (L1e). Supplier’s dynamic efficiency being prevented achieves Level 2 and requires further development linking to a decline in investment in power stations for example. The final paragraph is awarded Level 1 evaluation. Overall the candidate achieves L3- (5KAA) and L1 evaluation (1e). To achieve top level KAA fully integrated responses are required and thin evaluation will not escape being awarded Level 1 evaluation. The candidate addresses the negative impact on suppliers to a low Level 2 standard but the evaluation is unclear. The effect on consumers is a confused response regarding higher profits but there is reference to lower prices to access Level 1. The final evaluation is awarded a low Level 1 evaluation. This answer achieves a mark of 4/10 (3KAA + 1ev).

Notes from the mark scheme and report

• profit cap of 1.25% of revenue against current 7%
• Level 3 must cover consumers AND suppliers
• report: many confused price and profit caps or said firms would raise prices after the cap
• evaluate with lower investment and dynamic efficiency
• a one-sentence "However" scores only L1e

Mark scheme, including the levels grid and indicative content

Examiner's comment

Two possible reasons for the change in price elasticity of demand in context with either two evaluative comments per reason, or one evaluation point well developed was required here. Weaker responses tended to not spot that the PED became less price inelastic in the long run and explained that it became more price inelastic with inevitably wrong reasons scoring at most 2 marks for identifying that demand was price inelastic (1) and for evaluation remains inelastic (1). Candidates seemed to have acted on the advice from last year and did usually provide two separate reasons as covered in the mark scheme; although energy prices becoming a larger proportion of income in light of falling real incomes and rising prices as illustrated in figure 1 was also a common reason. Unfortunately, with the latter there was some confusion with some candidates incorrectly stating that demand becomes less price inelastic as electricity bills take up a smaller proportion of income. Few candidates considered switching from electricity to gas and given the nature of Extract A and the majority of responses: taking time to switch demand, leave a contract or switch to substitutes such as solar panel implicitly meaning going off grid – was allowed as valid KAA. There was no mark for providing a definition but this does normally enable candidates to move their thinking and correctly respond to the question set. In this case they incorrectly defined price inelastic but by identifying electricity as price inelastic they secure one application mark and a further application mark for 70% not switching as per Extract A. Using more appliances does not answer the question indicating that they may not have been aware of what the numerical change in PED meant and its associated determinants. Ensure you carefully study and understand the entire specification – understanding of the numerical value of price elasticity of demand and its determinants was weaker than it should have been.

Notes from the mark scheme and report

• PED moved from -0.35 to -0.85: demand becomes less inelastic in the long run as consumers switch suppliers or to substitutes (gas, solar), contracts end and smart meters inform them
• use 70% not switching
• report: weaker responses said demand became more inelastic

Quantitative skills: QS 8 (make calculations of elasticity and interpret the result); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question clearly differentiated candidates between those explaining and evaluating business and government policies to improve mobility in the energy sector and those providing more generic policies that were often one-sided in looking at government policies alone. Most candidates got some balance to their KAA, with education/training the top choice, and recruiting overseas workers or improving the image of the industry being widely used. Many candidates scored Level 2 or Level 3 if they developed these ideas. The evaluation was generally weak as, although solid points were raised (time, opportunity cost etc.), there was often not enough development to warrant a L2e, let alone L3e. This answer achieves a mark of 12/15. This candidate achieves Level 3 +L2e for the government subsidising training in the energy sector – they would have obtained L3e with perhaps a little more development in context, for example energy sector jobs being highly skilled. The next two paragraphs also cover government policies to a Level 3+2e standard but at this point the answer remains unbalanced and not able to access a Level 3 response. Thankfully they then move on to looking at business measures of improving image to a Level 3+L2e standard. Overall the candidate achieves 8+4e. As in 6(c) a large number of candidates follow a structure where they make a KAA point in a paragraph, develop it and then finish the paragraph with a sentence beginning “However,…” where they make an evaluative point. This single sentence rarely scores more than L1e and candidates should be encouraged to develop their evaluative points in a separate paragraph. Centres are encouraged to carefully look at the Level 3 Evaluation descriptor. This answer achieves a mark of 14/15. Use this as a model for your writing, along with other high scoring responses. The evaluation is better balanced here although it was felt that the first evaluative paragraph was worthy of two separate L2e rather than one L3e. The second evaluative paragraph was awarded L3e. Ensure your evaluation is well-balanced against what you have previously written.

Notes from the mark scheme and report

• Level 3 needs at least one business AND one government policy applied to the energy sector: training and apprenticeships, overseas recruitment, improving the industry image for women, retaining older workers
• report: evaluation (time lags, opportunity cost) was generally weak and underdeveloped

Mark scheme, including the levels grid and indicative content

Examiner's comment

This was the less popular of the two essay questions, although it was still completed by several thousand candidates. Diagrammatic analysis was required and when done well was accurate, well labelled and well explained with a solid chain of reasoning to access a Level 4 response. Poor diagrammatic analysis was evident with some careless labelling errors, most often mixing MSC and MPC. High scoring responses were well-structured and at times provided clear evidence of planning. Weaker responses ignored private costs entirely or seemed confused as to exactly what they were. In addition, candidates did not always move on to the third party effects associated with the external cost. As with 6(c) and 6(e), evaluative comments were often tagged on to the end of a paragraph. Top level evaluation often referred to difficulties in measuring the monetary value to private costs and external costs as well as linked evaluation of external benefits offsetting the external costs. Effective sustained judgement balanced the size of the external costs against the private costs and whether these could be offset by benefits to make a judgement call. 18 out of 25 marks awarded. The candidate started by unpacking the demands of the question and then provided an accurate diagram to a Level 3+ standard, as it was accurately labelled and included the social optimum and welfare loss diagram, which was then integrated into their written explanation. This was a valid approach laying the foundations for what could have been a well-structured response. The likely external cost was awarded Level 3+ but would have achieved Level 4 if the candidate had developed further by looking at specific third party effect(s). The paragraph on private costs was well-structured, demonstrating a logical and coherent chain of reasoning in context to a Level 4 standard. Evaluation was focussed on long run external costs in comparison to coal, which was awarded L2e. Likewise the external benefits as evaluation was awarded L2e+ however, whilst being substantial it needed to be linked more tightly to the question in offsetting the external costs or reducing the welfare loss to be awarded L3e. The final bit of evaluation attempted to address private costs but lacked clarity thus achieving L1e. Overall the response lacked judgement and was awarded Level 3+ (12) + L2e+ (6e). Plan to evaluate as you work through your response to better ensure relevant reasoning in context. Higher awarded responses tended to offer a paragraph evaluating private costs having just covered private costs, then likewise for external costs. This was then followed by a substantial conclusion offering judgement or informed judgements were made explicitly throughout. This answer achieves a mark of 19/25. A clear explanation is offered followed by an accurate diagram which is well explained. External costs gets to the third party effect (Level 4)+ but the private costs analysis is thin (Level 2) achieving overall Level 3+ KAA (12). The evaluation is concise but sophisticated in both context and theory as well as offering an attempt at judgement in the conclusion to achieve L3e- (7e). Explaining private costs was a weak spot for many candidates. Try to ensure you can demonstrate precise knowledge and understanding of all the concepts, principles and models.

Notes from the mark scheme and report

• Level 4 needs an accurate MPC/MSC diagram with market and social optimum and welfare loss, and both private AND external costs
• report: MSC and MPC labels mixed up, private costs ignored or misunderstood, third-party effects not developed
• evaluate by measuring costs and offsetting external benefits

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question was the more popular of the two essay questions. Question 8 focused on the impact on consumers of one firm having high market share. Many candidates correctly identified that this question focused on monopoly power and were able to accurately draw technical diagrams. Some candidates failed to refer back to consumers and instead focused purely on the advantages and disadvantages of high market share. Many candidates used the stimulus on Apple and showed awareness of the firm and the impacts it has on consumers. This was not necessary in order to achieve full marks but those who applied to Apple did score highly. Other candidates applied to other firms that they were more familiar with, which still allowed them to access the top mark bands. The old definition of 25% market share was valid but beyond the specification and most textbooks. Centres may be interested to look at the CMA's new definition on "monopoly power/market dominance". The most common approach linked profits made by the firm followed by a discussion of the possibility of dynamic efficiency, innovation and customer service compared to x-inefficiency, high prices, lack of consumer care or poor quality. Evaluation when not well developed was fairly generic (profits may not be reinvested, diseconomies of scale etc.) and rarely developed beyond L1e or L2e. This answer achieves a mark of 21/25. This answer focuses primarily on the theoretical arguments in context to an advanced level. Apple's innovation focus benefiting consumers is evaluated well with the Vodafone point being valid and displaying some reading around the subject thus achieving Level 3+ & L3e. The ability to achieve economies of scale is linked well through chains of reasoning and context of benefiting the consumer and is again well evaluated to achieve Level 4 & L3e. The Wanadoo point we were less convinced by and awarded Level 2 but the evaluation here was again strong achieving L3e. Finally, the candidate offered valid judgement in their conclusion. Overall, they achieved Level 3+ and L3e = 12 + 9e. Inevitably some judgement is made by examiners as to whether overall a response is to a Level 4 or 3, in this case rather than adding the additional Wanadoo point, time may have been better spent on explaining how a monopoly can control output and price to achieve maximum KAA. Try to plan your responses so that you can use your time effectively to secure the highest Level responses. This is an excellent response achieving full marks 25/25. There appears to be some evidence of planning which may have helped secure top marks. The logical and coherent chains of reasoning are clear throughout as well as offering substantial evaluation and informed judgement to a high standard.

Notes from the mark scheme and report

• Level 4 needs an accurate (monopoly) diagram
• link every point back to consumers (price, choice, quality, consumer surplus)
• dynamic efficiency and economies of scale against higher prices, x-inefficiency and deadweight loss
• evaluate with contestability, rivals and CMA regulation
• report: evaluation rarely beyond L1e or L2e

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)