June 2019: Paper 1

Mark scheme

Examiner's comment

In this question the focus is on having the ability to correctly calculate the percentage change in quantity supplied and to substitute the answer into the PES formula. A mark was not awarded for the formula itself but overall this was well answered by candidates and nearly all carefully made use of the formula and showed their working to achieve their final answer. The main issues that candidates faced here was failing to correctly calculate the percentage change or to apply the formula the correct way around. The candidate correctly calculated the % change in quantity supplied as 20.99 thus earning one mark. They then substituted their answer correctly into the PES formula but the final calculation was wrong. As an incorrect answer they receive 0 marks for the final calculated answer despite having the correct working. Overall they achieve 1+0 = 1 mark. Ensure you make use of a calculator and double check that your final answer makes sense – to overcome human error. This candidate provides a correct answer, achieving 2 marks.

Notes from the mark scheme and report

• %change in Qs = 28 268 / 134 612 x 100 = 21%
• PES = 21 / 5.4 = 3.9
• report: errors were a wrong % change or the formula the wrong way round

Quantitative skills: QS 2 (calculate, use and understand percentages, percentage changes and percentage point changes); QS 8 (make calculations of elasticity and interpret the result)

Answer

C

Mark scheme

Notes from the mark scheme and report

• PES = 10 / 2.5 = 4, greater than 1 so relatively price elastic (C)
• perfectly elastic is infinity, perfectly inelastic is zero, relatively inelastic is below 1

Quantitative skills: QS 8 (make calculations of elasticity and interpret the result)

Mark scheme

Examiner's comment

There are two marks for this question, one for knowledge and one for identifying a factor determining PES. The second analysis mark is for explaining the impact on price elasticity of supply. It was mostly well answered – where it was not candidates had confused the factors that influence PED or cause shifts in supply. Confident answers directly linked the factor in new house builds to the relative degree of price elasticity of supply. Some candidates identified a factor as being new technology, with ‘flat-pack' new houses being quick to assemble and thereby relatively price-elastic or releasing in phases new builds. This answer scores zero marks. The candidate confuses a determinant which could shift supply as being a determinant of price elasticity of supply. An abundant availability of building materials resulting in the PES being more elastic would have been a valid response. Do not confuse factors determining elasticity with factors that cause a shift. This answer achieves full marks – one knowledge mark for identification of a factor determining PES – availability of land. Then the analysis mark explains how the lack of 'unused land to build on in London' impacts on PES – being 'inelastic'. When you are asked to explain how a factor determines – make sure you not only identify the factor but that you then go on to explain how the factor has an impact in the context of the question.

Notes from the mark scheme and report

• factor (spare capacity, stocks of bricks, availability of land and builders, planning permission, time period) plus its effect on PES
• report: some confused factors affecting PED or shifts in supply

Mark scheme

Examiner's comment

This question specifically asks candidates to draw a diagram. There is no need for candidates to write any explanation to go along with their diagram. When drawing diagrams candidates should always double-check that the lines and axes are correctly labelled. Nearly all candidates provided the answer as illustrated in the mark scheme. The candidate received two marks for drawing a supply and demand diagram annotated to show a left shift in the supply curve. An arrow was not required in this case since the candidate had indicated S1 shifting correctly to S2. A large number of candidates did make use of arrows and this did help overcome the rare occasion whereby they had mistakenly drawn two supply curves with both annotated as S, or likewise with equilibrium points labelled P and/or Q on two occasions. This candidate did not obtain the two application marks as they did not indicate the new equilibrium price or quantity. They obtained 2+0 = 2 marks overall. Always ensure you fully annotate your diagrams and double check that you have done so. This diagram is correctly labelled. It also shows the shift in the correct direction and illustrates the new equilibrium points. In addition it annotates the answer given the context. Whilst this is not in the mark scheme, this is a good approach to take to ensure your answer is correct or in answering longer responses where a diagram may be useful or required. Therefore this answer achieves full marks. Draw diagrams clearly and large enough to be easy to interpret, like in this answer.

Notes from the mark scheme and report

• supply shifts left (2 marks)
• label the new higher equilibrium price and lower quantity for the application marks
• no written explanation needed
• label curves S1 and S2, not both S

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

Answer

A

Mark scheme

Notes from the mark scheme and report

• a natural disaster destroys capacity, so the PPF shifts inward and output falls from X to Y (A)
• B is growth in potential output, C a reallocation along the PPF, D a move from inefficiency to the frontier

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

Answer

D

Mark scheme

Notes from the mark scheme and report

• low barriers to entry and exit (D)
• firms do differentiate and advertise, so A is wrong
• domination by a few large firms is oligopoly
• homogeneous products describe perfect competition

Mark scheme

Examiner's comment

A significant number of candidates achieved zero marks for this question. This was due to them drawing monopoly diagrams showing abnormal/normal profit or perfectly competitive diagrams showing a horizontal AR curve. To secure marks for this question candidates had to first draw an AC curve tangential to a downward sloping AR curve. Candidates found it difficult to show the tangential point as just touching so we allowed this diagram as long as the touching point was not too extended along the AR slope. This answer scores two marks as it shows AC tangential to a downward sloping AR curve. Candidates found it difficult to show the tangential point as just touching so we allowed this diagram if the touching point was not too extended along the AR slope. This is not followed by an identification of the profit maximising equilibrium price and output where MC=MR. Also, AC is not equal to AR at the profit maximising equilibrium output price and output where MC=MR. This answer achieved 2+0 = 2 marks. Practice drawing accurate long run monopolistic competition diagram, as per the mark scheme. This diagram is correctly drawn. Therefore this answer achieves full marks.

Notes from the mark scheme and report

• AC tangential to a downward-sloping AR (2 marks), MC = MR output and price, AC = AR at that output (normal profit)
• report: "A significant number of candidates achieved zero marks" by drawing monopoly or perfect competition (horizontal AR) diagrams

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

Answer

C

Mark scheme

Notes from the mark scheme and report

• the demerged firm can focus on its core business (C)
• external economies of scale are irrelevant, internal economies come from growing not demerging, a demerger usually reduces market share

Mark scheme

Examiner's comment

Being a few years into the new specification candidates are well practiced in showing their working. A significant number of candidates were not able to calculate the total revenue and profit for 2016 so were unable to obtain the final answer. Some candidates wrongly subtracted the 2017 figures to obtain their final answer of 58.3 million. Nearly all responses seen ensured that they used the correct unit of measurement as £58.4 million rather than 58.4. This answer achieves one mark for correctly calculating profit in 2016 as being equal to 14.4 million. They miscalculate revenue for 2016 resulting in the wrong overall answer. An additional mark was awarded for the correct use of the formula. 2 marks overall. By showing your working it is possible that you may pick up at least a mark even if computational errors occur. This candidate has the correct answer of £58.4 million and hence achieves full marks.

Notes from the mark scheme and report

• 2016 profit = 17.5 / 1.215 = £14.4m
• 2016 revenue = 75.8 / 1.041 = £72.8m
• TC = TR - profit = £58.4 million
• report: some subtracted the 2017 figures instead of working back to 2016

Quantitative skills: QS 2 (calculate, use and understand percentages, percentage changes and percentage point changes); QS 6 (calculate cost, revenue and profit (marginal, average, totals))

Mark scheme

Examiner's comment

Many candidates displayed a secure knowledge of what is meant by a free market economy and were able to go onto secure full marks by explaining how resources are allocated – using rationing, signalling or a laissez-faire approach. This answer receives one mark for focussing on the market forces of supply and demand. It lacks development as an explanation so secures 1+0 = 1 mark. Ensure you read the question carefully. Here the question is specifically asking for an explanation of how resources are allocated in a free market economy. There is a clear explanation of how the market forces of supply and demand ration and allocate resources. Ensure you carefully and concisely explain your answer rather than adopting an almost bullet point approach to your answer.

Notes from the mark scheme and report

• via the price mechanism (market forces, invisible hand): prices ration, signal and give incentives
• private ownership and little government intervention

Answer

D

Mark scheme

Notes from the mark scheme and report

• Marx criticised private ownership of the factors of production (D)
• Hayek favoured free markets, not subsidies for inefficient firms or command economies
• Marx did not advocate the free market

Mark scheme

Examiner's comment

There are two marks for this question, one for knowledge and one for analysis. The second analysis mark is for linked development – explaining the benefit of division of labour. No mark was awarded for just saying more specialised as it is in the stem of the question. Greater output was awarded one mark but the candidate does not explain how division of labour enables this when organising the production process. 1+0 = 1 mark. Ensure you carefully read the question, including the stem of the question – in this case where it says 'Adam Smith described...'. The answer achieves full marks. One knowledge mark is secured for 'easier tasks' and there is a clear explanation as to why this is a benefit with linked development to lower costs of production. 1+1 = 2 marks.

Notes from the mark scheme and report

• one advantage (less training, faster production, more output, higher efficiency) with a linked development such as lower costs
• "more specialised" alone earns nothing as it is in the stem

Mark scheme

Examiner's comment

In this answer there is one mark for knowledge, and two marks for analysis for showing an understanding of a positive and a normative statement with some further analysis of the difference. Two marks were awarded for application by providing one example from Extract A for positive and one likewise for normative. Some candidates achieved 4/5 marks as they wrongly defined a normative statement as being an opinion. Positive statement defined with a valid example scores 2 marks. Normative statement repeats definition of positive statement and incorrectly identifies it as opinion based. There is an additional application mark for the example taken from Extract A, with some benefit of doubt given. Response achieves 1 knowledge mark and 2 application marks = 3 marks. Ensure you know accurate definitions of key terms from the specification. This answer achieves a total of 5/5 marks. In the first sentence the candidate gains one knowledge mark for understanding what a positive statement is and an additional two marks for further analysis and application using Extract A. An understanding of a normative statement as a 'value judgement' secures a mark. The scientific method point has already been awarded but the additional application mark is awarded towards the end. Ensure you carefully answer the demands of the question. This candidate carefully applied examples taken from Extract A as required.

Notes from the mark scheme and report

• positive = testable statement of fact, normative = contains a value judgement
• one example of each from Extract A (e.g. "the market is broken" vs 11 million households capped)
• report: defining normative as just "an opinion" lost a mark

Mark scheme, including the levels grid and indicative content

Examiner's comment

With the 'examine' question, the marks are allocated evenly across all four categories – so two marks for each of knowledge, application, analysis, and evaluation. The question specifically asks for 'benefits to consumers'. Therefore, candidates need to ensure they have examined two benefits in their answer. A diagram was not required and at times did not add anything to what was already written by the candidates. Some answers misread the question and only discussed benefits to the firm. The other thing that candidates need to remember is that there are two marks for evaluation here – many answers were well-written but without evaluation they are limited to 6/8 marks. There was no mark for identifying the type of merger, but this did on occasion allow candidates to go on to analyse possible benefits. This answer only identifies one benefit to consumers being lower prices (consumer surplus) from the economies of scale analysis given. There is also application awarded with reference to 'greater value bundles'. The closing paragraph is awarded two evaluative marks. The candidate scores 1K, 1An, 1APP and 2Ev = 5/8 marks. Remember the allocation of marks for these 8 mark 'examine' questions will be consistent – 2 marks for each of knowledge, application, analysis and evaluation. A careful reading of this question would have identified 'benefits' to consumers – thus requiring at least two benefits. This is an excellent well-structured answer to this question scoring full marks. Two distinct benefits are examined – lower prices and greater variety of products. Both policies are also evaluated effectively, worthy of two evaluative marks in both cases. Remember there are two marks available for evaluation on this question. If you are able to evaluate both benefits great, but 2 marks can be awarded for identification and development of one evaluative comment.

Notes from the mark scheme and report

• two benefits to consumers (lower prices from economies of scale, better-value bundles, quality, innovation) applied to BT/EE
• evaluate (35% market share, monopoly power, x-inefficiency)
• report: some discussed benefits to the firm, and no evaluation caps the mark at 6/8

Mark scheme, including the levels grid and indicative content

Examiner's comment

Answers to this question were generally strong, with stronger candidates using economic theory to explain patterns. Most provided two paragraphs of KAA and two separate evaluative paragraphs. Better answers explored low PED and brand loyalty, asymmetric information, computation issues, deliberately confusing tariffs and habits. Fewer candidates questioned their thinking or evaluated beyond saying that in the long run information will improve as the regulator intervenes. Stronger candidates questioned the idea that staying with BT was irrational behaviour at all given the hassle for small savings and the brand trust value of paying more. This answer scores 6/10 marks. The candidate has addressed brand loyalty (Level 2) and lacking market information, 'knowledge ' (L2). The final paragraph is awarded one Level 2 evaluation. Overall the candidate achieves L2 (4 KAA) and L1+ evaluation (2e) as the evaluation fails to recognise different viewpoints. Try to ensure evaluation is not on the brief side. A safe approach to this would be to evaluate each reason separately. In the first paragraph the candidate addresses the issue of habitual behaviour and links their knowledge and understanding in context to a Level 3 standard. It was felt that there was a little lack of clarity so was awarded L3-. The next paragraph went on to evaluate this reason to a Level 2 ev+ standard. The candidate provided another reason, that of missing information to a L3+ and L2ev+ standard. Overall the candidate achieved L3 (5KAA) and L2ev+ (4ev) = 9/10 marks.

Notes from the mark scheme and report

• information gaps (elderly customers cannot compare prices) and irrational behaviour (habit, computation, brand loyalty, status quo bias)
• Level 3 needs at least two reasons
• evaluate e.g. small savings may make staying rational

Mark scheme, including the levels grid and indicative content

Examiner's comment

Stronger answers identified how integration increased revenue with a Level 3 diagram showing an outward shift in AR and MR and a larger SNP area accurately identified. This was accompanied by economic ideas carefully explained in context and then evaluated twice with a logical chain of reasoning in both cases. Alternatively, stronger answers made appropriate use of the extract to identify falling costs as illustrated by the AC and MC falling. When only the AC was shown to fall, stronger candidates identified that this was due to a fall in fixed costs whilst weaker responses failed to identify why only AC was falling. The static cost and revenue diagram alone secured Level 1KAA as it did not provide one reason for the rise in BT's profit. The written answer on the same page lifted the overall response to Level 2 as it suggested in context that the ability to set a profit maximising price had now been secured. To achieve a Level 3 response the diagram would have been made dynamic by additional annotations showing the change in price for example from allocative efficiency pricing to profit maximising price. The evaluation on the next page secured Level 2ev- and required extending and/or an additional evaluative point to secure L2e+. As such this answer scores 4KAA and 3ev = 7/12 marks. Ensure you provide a clear diagram, when asked, with additional annotations that help you answer the question set. In contrast with the first exemplar this candidate provides a dynamic diagram in context and with analysis concerning the PED being relatively price inelastic. The answer secures 7 KAA and 4ev = 11/12 marks.

Notes from the mark scheme and report

• Level 3 needs an accurate cost and revenue diagram: AR and MR shift right (EE integration, 35% share, higher line rental) or AC and MC fall (wholesale cost down)
• a static diagram with no reason for the change only reaches Level 1

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

Price caps was by far the most common method used and most candidates provided a correct supply and demand diagram, with a few attempting to illustrate the change in consumer surplus and many evaluating well. Around a third of the candidates discussed price caps using a cost and revenue diagram, with many in this case identifying consumer surplus gain. Many candidates also had the price cap intersecting the allocative efficiency point, which set up the opportunity for some excellent evaluation. Candidates who were able to bring in a wider range of economic issues were therefore able to access the higher-level marks. Additional popular methods included providing information, profit regulation and nationalisation. This answer discusses briefly the introduction of a price cap achieving Level 2-. The evaluation is very thin, L1ev-. Another method implied is nationalisation but there is a lack of application. The evaluation this time achieves L2e-. Overall the response achieves Level 2- (4 KAA) and L2Ev- (3EV) = 7/15 marks. Try to ensure your chains of reasoning are developed with application and economic ideas, diagrams can help with this even when not requested. This is a well-written answer to this question, particularly in terms of logical and coherent chains of reasoning in both KAA and Evaluation. The first one focuses on information campaigns (L3+) and the second on a maximum price (L3). Maximum prices could have been developed a little further – for example identifying in the diagram the gain in consumer surplus. Therefore, overall this answer achieves Level 3 KAA and Level 3+ evaluation = 8 and 6ev = 14/15 marks. Focus on quality rather than quantity. This answer is two pages in total yet still achieves very highly. Avoid a scattergun approach of discussing many methods.

Notes from the mark scheme and report

• Level 3 needs more than one method, each explained as protecting consumers, in the utilities context
• price caps, profit regulation, information to aid switching, nationalisation
• evaluate with regulatory capture and asymmetric information

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question drew on candidate’s knowledge from 5.5 Labour Markets and/or 3.4.6 Monopsony. An accurate drawing of the monopsony labour market diagram was not required and candidates who answered this well did so using solid chains of reasoning; for example, in the health industry with bilateral monopsony power disputes. Candidates who did well mainly focussed on one industry – with the health industry and from the stem – the entertainment industry – being common responses. Weaker candidates tended not to move beyond basic supply and demand analysis or spoke about discrimination but struggled to develop a line of reasoning beyond saying that women have babies and take breaks from work or choose part-time work. Question 7 was less popular than Question 8 and on the whole responses were not as strong. This answer has many relevant reasons for wage differences. Initially the monopsony reason is theoretically well-structured, but it lacks an industry focus – achieving L3 and L2ev. Education and training are not sufficiently developed to achieve higher than L2 and L2e. Uber raises a relevant point from the specification on current labour market issues surrounding the gig economy and achieves L3 and L1e-. There is some attempt to provide a judgement at the end. Overall the response is awarded L3 (11KAA) and L2ev (5EV) = 16/25 marks . Less is more. Spend a little time planning to focus on one industry with reasons that are fully developed with as many chains of reasoning as possible. This will allow you to achieve much higher marks than simply writing down as many different points as you can think of. Evaluation can draw on examples from other industries. The football industry as a context is dealt with richly in terms of precise economic knowledge and understanding using appropriate examples. The first reason achieves L4KAA and L2 evaluation. The second reason regarding wage elasticity is awarded L3+ KAA mainly for the content on the third page, whereas the fourth page becomes a little unclear. The evaluation of this reason is solid and is awarded L3+. There is some judgement towards the end. Overall the candidate achieves L4- (13KAA) and L3- ev (7EV) = 20/25 marks.

Notes from the mark scheme and report

• wage differences from different demand (derived demand, productivity) and supply (skills, mobility) of labour, monopsony, trade unions, discrimination
• Level 4 needs a specific industry
• report: weaker answers stayed with basic supply and demand and responses were weaker than Question 8

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question was more popular than question 7 with better responses overall. After the truck industry, taken from the stem, supermarkets were the next most common industry, along with the airline and finance industry. The better responses made excellent use of game theory, with an accurate in context pay off matrix, commonly used to illustrate the temptation to collude and to break away. Price rigidity, limit pricing and controlling supply (cartels) were discussed too. Many good candidates linked this to low PED and raising revenue. Some candidates stayed in context, explaining that the high costs of conforming to emission regulation made it necessary. Evaluation was commonly about being caught and fined by the CMA. Stronger candidates illustrated the need for trust and fewer firms for this to work well. The candidate starts with identifying the supermarket industry as prone to collusion given its oligopolistic structure. The kinked demand curve, whilst outside the mark scheme as it is not on the specification, is explained well and moves on to discuss the music streaming industry to a Level 4 standard. The evaluation of this is sophisticated and in context, achieving L3ev. Game theory is then applied to the truck industry – the pay-off matrix is wrong and the reason for collusion is not fully explained – achieving L3- KAA. However, the evaluation is well written – achieving L3ev. The conclusion adds a little judgement. Overall the response achieves L3 KAA (11) and L3ev (8EV) = 19/25 marks. For a Level 4 response, candidates must refer to a specific industry in their answer. You must ensure that most of your response is focussed on one industry. Remember a judgement is expected to get the very top marks for evaluation on the 25 mark question. The first reason concerns interdependence and price rigidity but lacks context and the depth of the previous candidate's response thus achieving a borderline L2+/L3. The evaluation does link to the supermarket industry but is limited – E1+/L2-. Supermarkets collude to obtain spatial monopolies again could do with more theoretical explanation to achieve a secure Level 3 and the evaluation is judged as Level 2ev-. Finally, the sugar industry is used with a correctly drawn pay-off matrix but the candidate does not use the matrix well in their written explanation – again securing a borderline L3/L2. Overall the candidate achieves L3- (9 KAA) and L2ev- (4EV) = 13/25 marks. Less is more. Focus on providing answers that are fully developed in context with as many chains of reasoning as possible.

Notes from the mark scheme and report

• reasons for collusion: interdependence, joint profit maximisation, avoiding price wars, passing on regulation costs
• game theory pay-off matrix shows the incentive to cheat
• evaluate with fines and cheating
• Level 4 needs a specific industry
• kinked demand curve is not on the spec