Price, income and cross elasticities of demand Theme 1

Where it is examined: A-level Paper 1 (and Paper 3); AS Paper 1
Level: AS and A level
Specification: Section 1.2, 1 statement
Since 2016: 50 question parts: 2 essays, 8 levels-marked responses, 16 multiple-choice items

Specification statements

1.2.3 Price, income and cross elasticities of demand: a) Understanding of price, income and cross elasticities of demand b) Use formulae to calculate price, income and cross elasticities of demand c) Interpret numerical values of • price elasticity of demand: unitary elastic, perfectly and relatively elastic, and perfectly and relatively inelastic • income elasticity of demand: inferior, normal and luxury goods; relatively elastic and relatively inelastic • cross elasticity of demand: substitutes, complementary and unrelated goods d) The factors influencing elasticities of demand e) The significance of elasticities of demand to firms and government in terms of: • the imposition of indirect taxes and subsidies • changes in real income • changes in the prices of substitute and complementary goods f) The relationship between price elasticity of demand and total revenue (including calculation)AS

Every essay set on this topic

Series	Paper	Q	Marks	Title
October 2020	Paper 1	7	25	The International Energy Agency has predicted that oil use by cars will peak in 2025 because of the increasing number of drivers switching to electric vehicles. (Source adapted from: https://www.thetimes.co.uk) Evaluate the likely microeconomic consequences of consumers shifting from vehicles powered by fuel obtained from oil to electric‑powered vehicles.
June 2018	Paper 3	2(d)	25	With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects on Indonesia of the volatility of prices of commodities such as coal.

Past-paper questions

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Tap a question to zoom it. The data and extracts fold out above each question; the mark scheme and examiner's comment open underneath.

June 2025 · AS Paper 1 · Q2(a) 3 marks AO1=1, AO2=2 Calculation

(a) In 2021, a bakery sold 2.5 million sausage rolls per week at the price of £1.00 each. In 2022 the price increased to £1.20. The price elasticity of demand was estimated to be -0.2. Calculate the new quantity of sausage rolls sold per week in 2022 after the price increased, ceteris paribus. (3)

June 2025 · AS Paper 1 · Q2(b) 1 mark Multiple choice

(b) Which one of the following is the most appropriate description of the price elasticity of demand of -0.2? (1) A Perfectly inelastic B Relatively elastic C Relatively inelastic D Unitary elastic

June 2025 · Paper 1 · Q2(b) 1 mark Multiple choice

Data and extracts for question 2

2 In 2022 the UK government provided 130 new licences for North Sea oil and gas exploration, in order to reduce energy prices. However, companies can take 20 years to begin to extract oil. Furthermore, they often have to continue producing oil even when prices fall because the equipment has no other uses. (Source: adapted from https://www.theguardian.com/environment/2022/dec/12/ uk-ministers-face-legal-challenge-over-north-sea-oil-and-gas-licences)

(b) The cross elasticity of demand for petrol cars with respect to the price of diesel cars is estimated to be +0.64. Which one of the following is the most likely impact if the price of diesel cars falls by 10%? (1) A The price of petrol cars falls by 6.4% B The price of petrol cars rises by 64% C The quantity demanded of petrol cars falls by 6.4% D The quantity demanded of petrol cars rises by 64%

June 2025 · AS Paper 1 · Q6(a) 5 marks AO1=1, AO2=2, AO3=2 Short answer

Data and extracts for question 6

Sources for use with SECTION B Read the following figures (1 and 2) and extracts (A and B) before answering Question 6. The market for meat and the growth of vegetarianism Figure 1 The impact of subsidies on farmer income, in England, 2018–2019 (£000 per farm) Cereals Dairy Grazing livestock Pigs Poultry Mixed -20 0 20 40 60 80 100 £000 per farm Key Profit Subsidies (Source: adapted from www.FT.com) Figure 2 Potential impact of indirect tax rises on meat prices per kg, 2023–2030 Before indirect After indirect Type of Meat tax increases tax increases Beef/Veal £24.24 £29.50 Chicken £7.60 £8.63 (Source: adapted from Tax beef, pork and chicken to help climate and health, EU urged – CGTN) Extract A The case for cutting out meat Around a third of Britons are reducing the amount of meat they eat or are cutting it out altogether. Are these consumers right to be cutting out meat? For a start, there are the greenhouse gases released as a result of producing food. The evidence is clear that switching to a plant-based diet would lower emissions. A UK study found that eating a 5 diet high in meat costs 7.2 kg carbon dioxide emissions per day, compared with 3.8 kg for vegetarians. It would also free up land for other uses. Nearly 80% of the world’s farmland is dedicated to rearing animals; a plant-based diet would cut the use of land for agriculture by 76%. The land currently used by grazing livestock could be used for “rewilding”, allowing the environment and animal species destroyed by meat farming to 10 recover. Our health and wealth would be better too. A study published in 2016 modelled what would happen to our health and the global economy if we all switched to vegetarian diets. The economic benefits of switching to plant-based diets could be as much as £700 billion to £1 trillion per year in terms of savings on healthcare costs and lost 15 working days due to ill health. Some economists recommend an increased indirect tax on animal products so that their prices reflect the cost of externalities. This could impact on European farmers, if adopted by the European Union. The tax could bring £35 billion to the EU, with around £15 billion of that going directly to farmers. The 20 rest would be used to bring down VAT on fruit and vegetables, and fund other policies to encourage healthy-eating diets both in and outside the EU. (Source: adapted from https://moneyweek.com/499842/the-economic- consequences-of-veganism December-28-2018) Extract B Businesses benefitting from meat-substitute products There is one group for whom the trend towards meat-substitute products is definitely a good thing: processed food manufacturers and retailers. Finest British beef burgers are priced at £6.61 per kg. The ‘fake burger’ (which is made mostly of pea protein) is priced at £21.81 per kg even though the ingredients used to 5 make them, such as mushrooms, peas and palm oil, are cheaper ingredients than meat. Despite high prices, demand continues to rise for these products. This might benefit shareholders, but is it doing any real good for the rest of us? A large food producer bought meat-substitute product maker Vegetarian Butcher in December 2018 and is moving towards a range with more meat-substitute products. 10 In 2017, Nestlé bought Sweet Earth, a California-based maker of vegetarian foods, and it is launching its own meat-substitute ‘Incredible Burger’. It expects its meat-substitute revenues to reach $1 billion by 2029. As subsidies are being cut in every area of farming, consumers ought to be willing to pay higher prices for all food products. If farmers are to stay in business, they need to find 15 additional sources of revenue such as oyster mushrooms, goji berries and basil. (Source: adapted from http://www.financialtimes.com/the-veganism-boom-does- more-for-food-company-profits-than-the-planet February-22-2019)

(a) With reference to Extract B, explain why the change to meat-substitute products may result in an increase in the revenue of food companies. Refer to the concept of price elasticity of demand in your answer. (5)

June 2025 · Paper 1 · Q6(c) 12 marks AO1=2, AO2=2, AO3=4, AO4=4 12-mark response

Data and extracts for question 6

Sources for use with SECTION B Read the following figure (1) and extracts (A to C) before answering Question 6. Question 6 Digital markets Figure 1: UK sales of selected best-selling video games, 2022 Name of game Game publisher Sales (quantity) Game price FIFA 23 Electronic Arts (EA) 2 530 510 £59.99 COD: MW II Activision 1 675 323 £59.99 Mario Kart 8 Nintendo 426 748 £39.99 Gran Turismo 7 Sony 356 630 £69.99 Minecraft Microsoft 219 679 £14.99 (Source: adapted from https://www.statista.com/statistics/274072/most-popular-games-in- the-united-kingdom-uk-by-unit-sales) Extract A Digital markets Digital markets refer to firms producing and buying information technology services. Examples include digital banking, online retailing, computer games and mobile applications (apps). The emergence of digital markets has brought about increased competition across a wide range of products and services. They have also been beneficial 5 for consumers who now have greater choice and access to higher-quality products at lower prices, for example, fashion clothing and language tuition. But while the digital revolution has enabled greater competition, it also presents some challenges for competition law enforcement. (Source: adapted from https://pearsonblog.campaignserver.co.uk/digital- markets-reform-of-competition-laws/) Extract B Addictive video games When consumers want to play a new video game, there are three payment options to access the full gaming experience. There is the price for the game (see Figure 1), the subscription fee to play online with friends (e.g. £13.99 a month) and there are many in-game purchases. For example, a Spiderman ‘skin’ which costs £9.99 enhances 5 the appearance of the player. The high prices do not seem to deter many new buyers, especially in markets such as sports and multi-player action games. 40% of the world’s population are online gamers. Young players spend up to 10–16 hours a day on their games due to the addictive nature of the games. The video games can take up to five years to develop and cost over £150 million to 10 produce with 200 full time employees working on the software. Starting salaries for software developers can be £100 000. However, some simple video games and apps cost as little as £23 000 to develop and take about six months. All the major firms – EA, Microsoft, Nintendo and Sony – offer subscriptions that give access to new game releases. The US technology company, Microsoft, is one of the 15 dominant firms in the market for subscription services. In October 2023, it merged with the game designer, Activision, which already owns one of the world’s most popular video games (see Figure 1). The £65 billion merger is the largest in the history of the video games industry. However, Sony is concerned that the Microsoft-Activision merger may restrict access to popular video games owned by Microsoft and therefore reduce competition. 20 (Source: adapted from https://www.theguardian.com/technology/2023/apr/26/what- does-uks-ban-on-microsofts-activision-blizzard-takeover-mean-for-gaming?) Extract C The growth of automation Automation is the use of technology to perform tasks previously carried out by humans. Automation has the potential to bring great economic benefits to both consumers and firms, contributing up to £12 trillion to global GDP by 2030. This extra income will also create demand for many new jobs. However, there are also concerns that it could 5 displace many existing workers. Financial services jobs are most at risk from automation in the shorter term and transport jobs, such as train drivers, in the longer run. For example, the growth of online banking has already led to the closure of many high street bank branches. By the mid-2030s, up to 30% of all jobs could be automated, with slightly more impact on men. 10 Another form of revenue for Microsoft is the artificial intelligence (AI) program ChatGPT. The growth of AI will require highly skilled workers such as trainers and engineers. Microsoft’s annual gross profit for 2023 was £146 billion, a 7.69% increase on 2022. (Source: adapted from https://www.economist.com/business/2023/03/26/ big-tech-and-the-pursuit-of-ai-dominance)

(c) With reference to the information provided, discuss whether the price elasticity of demand for video games is elastic or inelastic. (12)

Examiner's comment

This question asked candidates to discuss whether the price elasticity of demand for video games is elastic or inelastic. This was the first of the level-based questions, and candidates were expected to develop an argument to say that PED was elastic and then counter it with an argument that PED was inelastic. Equally, candidates could switch and say that PED was inelastic and then counter it with an argument that PED was elastic. Again, the majority of candidates used the data effectively and wrote strong answers to support their points. One really well developed point on either side could achieve top marks here, but most candidates developed more than one. There are only four marks for evaluation, so one really well developed point can achieve all four marks. The first response we consider is clearly a strong example. The candidate has written two in depth arguments to say that the demand for video games is price inelastic. The first centres around the notion of the addictive nature of the game and explores the impact of the high prices. Gamers are prepared to pay £59.99 and sales still exceeded those of Minecraft, which was much cheaper. The sense that gamers are prepared to pay for the experience is clearly developed and the analysis is strengthened with a well explained cost and revenue diagram. This achieved the top Level 3 for KAA. The point is evaluated with the recognition that tastes may change and the impact of 'too much screen time' may cause demand to become more elastic over time. This was awarded Level 2 for evaluation. The second KAA point explores the habitual nature of subscription fees and makes the point that it is not possible to play the game without them. Though expensive, gamers pay them anyway. This is because they are a necessity, further strengthening the point. The candidate weaves together economic theory and the extract very effectively, again achieving the top of Level 3. Finally, the point is further evaluated by considering the threat of technological development reducing barriers to entry in the industry and how substitutes can increase the PED over time. Only four marks are available for evaluation, and this response secures all of them. Overall, this response achieved full marks. The 12-mark question is a step up from the 10-mark 'assess' question mainly in terms of the breadth of argument to support the KAA. The number of marks for evaluation is the same, so it is important for candidates to develop the KAA. In the case of this example, it is achieved by developing two distinct points. In this second example, the candidate still has the four paragraph structure, but the quality of the KAA is clearly less sophisticated when compared to the previous example. The evaluation is good, though again not in the same league as the previous example, though it is less pronounced than the quality of the KAA. The first KAA point covers the amount of time spent by gamers playing and refers to the high cost of the games and the subscriptions. However, the responses doesn’t use the data as much as it could and the points are not explained as fully as the previous example. This paragraph achieved Level 2 for KAA. The second KAA paragraph explores the impact of the Microsoft merger on the availability of alternative games. Though it is significant, it is unlikely to reduce the power of Sony and Nintendo in the short-term, so though valid the point has less gravity. This achieved Level 2 for KAA. The two evaluative points are sufficient for the bottom of Level 2. This response achieved 4 for KAA and 3 for evaluation.

Examiner's report extract for June 2025 Paper 1 question 6(c)

June 2024 · Paper 1 · Q1(a) 4 marks AO1=2, AO2=1, AO3=1 Short answer

Data and extracts for question 1

1 The table below shows price elasticity of demand for bus tickets in London 2021 Age Price elasticity of demand 18+ Student -0.7 Adult -0.4 (Source adapted from: https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/669090/youth-travel-concessions-price-elasticity.pdf and https://tfl.gov.uk/fares/find-fares/bus-and-tram-fares#on-this-page-4)

(a) Explain one likely reason for the difference in the price elasticity of demand for the 18+ student bus ticket and the adult bus ticket. (4)

Examiner's comment

In this question, candidates were asked to explain one likely reason for the difference in the price elasticity of demand for the 18+ student bus ticket and the adult bus ticket. Marks were awarded for an understanding of PED, the recognition that the demand for the adult bus ticket was more price inelastic, and the reason for this. Responses to this question tended to be strong, though there was some confusion regarding precisely what the numbers meant. A typical mistake was to say that the PED for the 18+ student bus ticket is more elastic, which it isn't, because it is less inelastic than the PED for the adult bus ticket. Some candidates also thought the value of –0.7 is more inelastic than –0.4, which it isn't. This is a strong response, which achieved all 4 marks. The candidate has clearly identified that differences in incomes are significant, because the cost of a bus ticket comprises a higher proportion of the students' incomes when compared to adults. The candidate clearly uses the values of –0.4 for adults and –0.7 for students. They tell us that both values are price inelastic. Although the candidate previously said that the PED for students is more 'elastic', which is untrue, we ignored this inaccuracy because of the final sentence. There is a clear recognition throughout the response that the student demand for bus tickets is more price sensitive than that for adults. Precision is essential to maximising the available marks. Student demand for bus tickets is not more elastic than that for adults. It is less inelastic. This second response achieved 3/4 marks. The candidate gains marks for the recognition of the significance of incomes and the explanation of the importance of them where the price elasticity of demand is concerned. The value of – 0.7 for the PED for student bus tickets is also creditable. However, the last sentence is incorrect because it implies that the PED for student bus tickets is more price inelastic than that for adult bus tickets, which according to the data, it isn't.

Examiner's report extract for June 2024 Paper 1 question 1(a)

June 2024 · Paper 1 · Q1(b) 1 mark Multiple choice

Data and extracts for question 1

(b) In 2021, the adult 7-day bus ticket was £21.90. Bus ticket prices in London in 2022 increased by 4.8%. Ceteris paribus, which one of the following is the percentage decrease in the 7-day bus ticket demand by adults? (1) A 0.08 B 1.92 C 3.36 D 12.00

June 2024 · AS Paper 1 · Q5(a) 2 marks AO1=1, AO2=1 Calculation

Data and extracts for question 5

5 Chief Executive Elon Musk said “affordability” was the biggest barrier to Tesla reaching a far larger market. Before recent price cuts for its electric vehicles, he said, “We weren’t sure about what the price elasticity of demand was for Tesla. We found that even small changes in price have a big impact on demand.” (Source adapted from: https://www.ft.com/)

(a) In June 2023, Tesla further reduced the price of its Model 3 vehicle by £4 200 from £42 990. It has been forecast that the price cut will lead to a 15% increase in demand. Ceteris paribus, calculate the price elasticity of demand for the Model 3. You are advised to show your working. (2)

June 2024 · AS Paper 1 · Q5(c) 1 mark AO1=1 Multiple choice

Data and extracts for question 5

(c) Which one of the following is most likely to be a determinant of price elasticity of demand for the Model 3 electric vehicle? (1) A Availability of substitute electric vehicles B Change in population size C Increase in the cost of steel D Number of unsold Model 3 electric vehicles

June 2024 · AS Paper 1 · Q6(c) 4 marks AO1=2, AO2=2 Short answer

Data and extracts for question 6

The market for plastic in the UK Figure 1: Trend in the purchase of single‑use plastic bags in millions, UK, 2014 to 2021 2014 2015 2016 2017 2018 2019 2020 2021 7 500 2 120 1 750 1 130 1 040 627 496 197 Extract A 10p charge continues to reduce use of plastic carrier bags The 5p charge on single‑use carrier bags was introduced in supermarkets in 2015. The charge was increased to 10p in 2021 and extended to all businesses. The UK Environment Minister said that the plastic bag charge has ended the irrational purchase of billions of single‑use carrier bags, thereby protecting our landscapes and 5 ensuring millions of pounds are redistributed to worthy causes. This was needed as without this legislation, the market is not able to effectively manage the situation. Consumers are now in the habit of bringing reusable carrier bags when shopping. In addition to single‑use carrier bag charges, major retailers have offered bottle deposit return schemes and refillable food and cleaning product options. These provide 10 incentives to consumers to reuse their plastic containers. However, retailers have suggested that most customers do not wish to pay more for cleaning products in reusable packaging. With the average household income falling by 4.3% in 2023, sales of refillable cleaning products are expected to fall from 200 000 to 130 000 this year. 15 (Source adapted from: https://www.circularonline.co.uk/news/) Extract B Plastic packaging tax Food manufacturers have criticised the implementation of a new UK environmental tax, warning it will force them to increase prices for consumers. The 2018 tax was designed to provide incentives to businesses to use recycled plastic in packaging. Businesses manufacturing or importing 10 tonnes or more a year of 5 plastic packaging that contains less than 30% recycled plastic are taxed at £200 a tonne. Plastic packaging containing more than this will be exempt from the tax. Helene Roberts, Chief Executive of Robinson Packaging, said increased prices for the consumer would be an unintended consequence of the tax. “It will just create inflationary pressures within the supply chain and firms may need to pass this on.” A wide range of 10 businesses are affected by the new tax, including retailers importing items such as bin liners, drink bottles and carrier bags. Food manufacturers are particularly impacted as the industry uses 40% of packaging in the UK. (Source adapted from: https://www.ft.com) Extract C Single‑use cups An estimated 2.5 billion single‑use cups are used in the UK every year by consumers buying coffee from chains and cafes, creating approximately 25 000 tonnes of waste. Research has found that while a 25p charge on single‑use cups increases the use of reusable coffee cups in coffee shops, a discount on reusable coffee cups has no impact at 5 all on their use. A 25p charge on single‑use cups increases the use of reusable coffee cups by 3.4%. Environmental messaging in cafes, for example posters about litter, increases the use of reusable coffee cups by 2.3%. The availability of reusable cups leads to an increase of 2.5% whereas the distribution of free reusable cups leads to a further increase of 4.3%. 10 “While the increases for individual measures were modest, the greatest behavioural change was when the measures were combined,” said Wouter Poortinga of Cardiff University. (Source adapted from: https://www.theguardian.com/environment/2017/mar/30/)

(c) With reference to Extract A, explain the likely numerical value for the income elasticity of demand for reusable cleaning products. (4)

June 2024 · AS Paper 1 · Q6(d) 6 marks AO1=2, AO2=2, AO3=2 Short answer

Data and extracts for question 6

(d) With reference to Extract C, explain how incentives to use reusable coffee cups may lead to a fall in demand for single‑use cups. (6)

June 2024 · Paper 3 · Q1(a) 5 marks AO1=2, AO2=2, AO3=1 Short answer

Data and extracts for question 1

The energy market Figure 1: UK wholesale gas prices per therm, 2021, in pence 500p Price per therm 400p 352p 300p 200p 100p 0p Feb Apr Jun Aug Oct Dec Figure 2: Number of firms supplying gas and electricity in the UK, 2004–2021 80 60 40 20 0 2004 06 08 10 12 14 16 18 21 Gas and electricity Electricity Gas Extract A Rising gas prices UK consumers are some of the biggest users of gas. 85% of homes use gas central heating, and gas generates a third of the country’s electricity. North Sea gas is running out – and as Britain has replaced coal-fired energy production with wind power in order to reduce carbon emissions, it has become dependent on gas imports. 5 Almost all UK businesses face significant rises in fuel costs over the next few months, and there is no substitute for energy, at least in the short run – an almost perfect example of price inelastic demand. (Source: adapted from https://www.theecoexperts.co.uk/ blog/reasons-for-uk-gas-price-increase) Extract B The UK gas market is broken During the past decade the government has allowed new entrants into the retail energy market with business models that left them ill-prepared to achieve long term business growth. Now the UK must choose between letting its energy market collapse and offering large subsidies for energy retailers. 5 The problem began in the 1980s and 1990s, when privatisation created an oligopolistic energy market dominated by the “Big Six”, which paid their shareholders high dividends and their bosses excessive salaries. The government responded to anger over high energy bills with further liberalisation. Some of the new entrants were innovative, such as Bulb, which offered consumption-tracking apps, and Octopus, which discouraged 10 consumption when demand was high with dynamic pricing. But most were under- capitalised and produced no energy, merely buying it on global wholesale markets and selling it on. Some paid little attention to ensuring continuity of supply or forward buying of gas. The constraints on energy retailers worsened in 2017 with the closure of a big 15 gas-storage facility, which left the UK able to store just 2% of its annual demand. Other big gas importing countries, by contrast, can store 20%–30%. The risks rose further in 2019, when the government capped consumer prices in response to continued complaints about high energy bills. The perfect storm came in the summer of 2021. As economies opened up, global 20 demand for energy rose. Gas supply in Russia, a big producer, was disrupted, and unusually calm weather reduced UK wind turbine energy production to 11% of capacity. In August Ofgem, the industry regulator, said that from October the firms would be able to raise prices for households by 54%. But since then the wholesale price of gas paid by UK energy firms has risen by more than 70%. The result is that UK energy firms are tied 25 into contracts to supply gas to households at far less than they must pay to get it. (Source: adapted from https://www.economist.com/britain/britains-gas-market-is-broken/) Extract C The gender pay gap in the oil and gas industry Despite best efforts to try to attract more women into the oil and gas industry, females are still hugely under-represented in science, technology, engineering and maths careers, whether school leavers, graduates or experienced workers. Women hold under 25% of careers in these areas, and typically hold more non-technical roles, which can attract 5 lower salaries than technical disciplines. There is an even smaller female representation in the offshore workforce (3.6%) e.g. working on rigs in the North Sea, an area that pays higher salaries than onshore work. Despite continued efforts there is still a lack of female applications. Only 5% of the applications to the technical apprentice programme were female, of which half withdrew 10 their applications at the first stage of the recruitment process. There is also a low representation of females in senior leadership roles within the oil and gas industry, especially in technical positions. Women also generally take up part-time positions which are typically lower paid. This has resulted in the oil and gas industry having an average gap in hourly pay of 25%. 15 In the majority of developed countries, women have made substantial progress in the labour market since the 1970s, with both wages and labour force participation increasing relative to that for men. Notwithstanding these large improvements, women still earn less than ‘comparable’ men in all developed countries and, since the 2000s, progress for women in the labour market seems to have slowed. 20 (Source: adapted from https://www.harbourenergy.com/media/2a2nmavb/chr-18311- 01-gender-pay-gap-2020-v6-final.pdf and https://ftp.iza.org/dp10975.pdf)

(a) With reference to Figure 1 and Extract A, explain what is meant by ‘price inelastic demand’ (line 8). (5)

Examiner's comment

Price inelastic demand is a key economic concept that most candidates are very familiar with. As can be seen on the markscheme, examiners are looking for candidates to answer the question - i.e. to ‘explain what is meant by price inelastic demand’. Candidates are not asked to explain price elasticity of demand, and so therefore did not receive marks for defining this or for writing out the PED formula. The Knowledge/Analysis marks are found from explaining what price inelastic demand means. One easy way to illustrate this, which surprisingly few candidates did, was to draw a diagram showing an inelastic demand curve. Remember just because you haven't been asked to draw a diagram, doesn't mean you can't still do so and you will receive credit where this aids your explanation. In any 'explain' 5-mark question such as this, candidates should remember that there are two marks for application. This means candidates need to ensure they have two distinct pieces of application in their answer. Many answers were receiving a mark of 4/5 because they only had one piece of application. <6ResultsPlus This answer achieves a mark of 3/5. They earn an application mark for ‘there is no short run substitute for energy’. There are two knowledge/analysis marks for explaining what price inelastic demand means and for the diagram. \ ip ResuitsPlus Drawing a diagram such as in this answer is a good way to gain marks. The question isn't about price elasticity of demand in general so no marks are awarded for the first sentence. <iResultsPlus This answer achieves full marks. The candidate has three knowledge/analysis marks for explaining what inelastic PED means, for fuel costs are a necessity, and for the numerical value is likely to be close to zero. They have achieved the two application marks for the quote from the extract - 'a perfect example of price inelastic demand' and for quoting data from figure 1. aN ots,ResultsPlus Make sure you are spending your valuable time in the exam writing things that will earn you marks - the first three lines of this answer do not earn any marks, as they are not answering the question.

Examiner's report extract for June 2024 Paper 3 question 1(a)

June 2023 · AS Paper 1 · Q2(b) 1 mark Multiple choice

Data and extracts for question 2

2 The world’s largest producer of natural gas is the USA. In 2021 production fell even though the price increased.

(b) The table below shows estimates of the price elasticity of supply and price elasticity of demand for gas. Natural Gas Price elasticity of supply + 0.14 Price elasticity of demand - 0.10 (Source: adapted from http://www.usaee.org/usaee2013/submissions/Abs/Ponce_ Neumann_Elasticities_gas_supply.pdf, http://www.mackinac.org/1247) Which one of the following can be inferred from the table? (1) A A 10% increase in the price of gas would cause a more than 10% increase in the supply B Gas is a normal good with income inelastic demand C The demand and supply of gas are both price inelastic D The demand for gas is more responsive to changes in price than supply

June 2023 · Paper 1 · Q3(a) 1 mark AO2=1 Multiple choice

Data and extracts for question 3

3 A luxury brownie baker is faced with falling demand as incomes fall.

(a) The likely income elasticity of demand for a luxury good is: (1) A –3.40 B –0.74 C +0.74 D +3.40

June 2023 · AS Paper 1 · Q4(b) 1 mark Multiple choice

Data and extracts for question 4

4 During 2021 the UK experienced severe shortages of crisps, petrol and many other items. (Source: adapted from https://www.independent.co.uk/news/business/news/ uk-shortages-covid-brexit-supply-chain-b1968458.html)

Esso, Tesco and Sainsbury’s all charge £ 1.48 for a litre of petrol. (b) Which one of the following is the most likely cross price elasticity of demand for close substitutes? (1) A - 2.1 B - 0.1 C + 0.1 D + 2.1

June 2023 · AS Paper 1 · Q6(a) 5 marks AO1=1, AO2=2, AO3=2 Short answer

Data and extracts for question 6

The market for television content Figure 1: Elasticities of demand for streamed television services, UK, 2021 Price elasticity of demand -0.6 Income elasticity of demand 1.6 (Source: adapted from https://www.consultancy.uk/news/24986/covid-19- presents-netflix-with-chance-to-hike-prices) Figure 2: Market shares of streamed content providers, Europe, 2021 39% Netﬂix 29% Amazon 9% Apple TV+ 7% Disney+ 3% DZN 2% Viaplay 1% TIM Vision 1% Sky Now Tv 1% HBO 1% IPLA 7% Others 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Market share (Source: adapted from Statista 2021) Extract A The growth of streamed television content Netflix currently has 13 million UK subscribers, who typically pay £9.99 a month to the US based private sector firm. At this price, up to two users can view the television content at the same time. The demand for individual firms’ streamed television content boomed when people were forced to stay at home and has only begun to slow recently as more 5 firms enter the market e.g. Amazon Prime Video. The launch of Disney+ at the end of 2019, including original content such as the £74 million Star Wars TV spin-off The Mandalorian, resulted in the service adding more UK subscribers in a year in 2020 than any other streaming platform has ever managed. However, the costs of providing streaming television content have risen. Consumers now 10 expect original content, for example Stranger Things which costs around £10 million an episode to make. Furthermore, advertising in a saturated market is expensive. In 2021, Netflix put up the price of its most-popular package by £1 a month to £9.99. Fortunately for Netflix, its subscriber demand has proven price inelastic. Just 3% of customers in a survey said they would definitely cancel their subscription after Netflix’s 15 latest price rise. (Source: adapted from ‘As UK hits peak, Netflix the streaming giant will have to work harder’, The Guardian, Monday 3 January 2022) Extract B Is television content a public good? Public service broadcasting in the UK is made up of a number of parts. First, there are the main UK-wide public service broadcasters (PSBs). There is the publicly funded BBC, and the publicly owned Channel 4 which is funded through advertisements. The BBC was established in 1922 by a Royal Charter. It is mainly funded through the TV 5 licence fee, which costs £159 a year and is a compulsory charge for those who watch live TV on any device. Live TV and catch-up services are free to view and do not restrict household usage. Without the licence fee very few people would pay due to the free rider problem. The BBC’s Charter sets out its five public purposes: 10 • To provide impartial news and information • To support learning for people of all ages • To show the most creative, highest quality and distinctive televised content • To provide content for minority groups which would not be profitable for a private firm 15 • To reflect the UK, its culture and values to the world. (Source: adapted from https://publications.parliament.uk/pa/cm5801/cmselect/ cmcumeds/156/15604, and ‘BBC licence fee to be abolished in 2027 and funding frozen’, The Guardian, Sunday 16 January 2022) Extract C The environmental impact of streaming television content The carbon footprint produced by watching a month of Netflix programmes is equivalent to driving a car to Saturn. Every activity in the chain required to stream video, from the use of huge datacentres and transmission over Wi-Fi and broadband to watching the content on a device, requires electricity. The majority of this is generated by emitting CO2. 5 Modern flatscreen televisions use significant amounts of energy. There’s very little a government can do about this in a free market dominated by US firms. The focus of any government intervention could be to encourage alternative forms of entertainment and recreation, support the development of more energy efficient devices, to improve information on the environmental effects or to use regulation to limit 10 viewing hours. (Source: adapted from ‘Streaming’s dirty secret: how viewing Netflix top 10 creates vast quantity of CO2’, The Guardian, Friday 29 October 2021)

(a) With reference to Figure 1 and Extract A, explain the relationship between price elasticity of demand and total revenue. (5)

June 2023 · Paper 1 · Q6(c) 8 marks AO1=2, AO2=2, AO3=2, AO4=2 8-mark response

Data and extracts for question 6

The UK online streaming services market Figure 1: Market share of UK online streaming services Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Amazon Prime Video 37.9% 41.1% 45.0% 27.1% 25.9% Disney+ 16.0% 17.7% 19.3% 14.1% 21.5% Netflix 15.0% 10.5% 5.0% 9.4% 4.5% NOW 11.3% 11.2% 5.6% 11.0% 11.1% AppleTV+ 4.0% 5.5% 7.3% 9.2% 9.9% BritBox 4.0% 3.0% 5.7% 6.0% 5.9% Others 11.8 11.0% 12.1% 23.2% 21.2% (Source adapted from: Kantar, Worldpanel Division Geotech 2022) Figure 2: UK online streaming services – monthly fees Streaming service provider September 2022 Netflix premium (4 users/ultra HD*) £15.99 Netflix standard (2 users/HD) £10.99 *This is the highest quality Netflix basic (single user/non HD**) £6.99 picture currently available Amazon Prime Video £8.99 ** This is the basic quality picture Amazon Prime Video – Student price £4.49 Disney+ £7.99 AppleTV+ £4.99 (Source adapted from: https://www.radiotimes.com/tv/what- to-watch-tv/best-streaming-service-uk/) Extract A How Netflix makes use of behavioural science In the last few years, companies have been trying to find ways to attract the attention of customers. Various streaming platforms such as Netflix, Amazon, and YouTube use ‘nudges’ to influence consumer behaviour. The ‘next‑up’ feature on Netflix or ‘auto‑play’ on YouTube has been subject to research that relates it to binge‑watching. 5 Binge‑watching is the practice of viewing for a prolonged period, multiple episodes of a TV show or several films in rapid succession. Similarly, the policy of offering a one‑month free subscription under the label of ‘free trial’ requires credit card information to turn the forgetful subscriber into a potential paying one. Following this strategy, Netflix has expanded to 190 countries in just seven years 10 and according to the Wall Street Journal, the company generated total revenue of over $5.2 billion in 2019, which was an increase from 2018 of around $4 billion. However, 2022 data shows that consumers, increasingly worried about the rising cost of living, are turning their back on Netflix. With a reported cancellation of over 200 000 subscriptions in the first quarter and another two million forecast to leave by the 15 end of the year. Subscribers are rethinking their commitment to the streaming services that grew their numbers sharply during the home‑based months of the global health crisis. Netflix subscribers have also quoted a decline in value for money and satisfaction with the quality of the shows as key motives for cancellation. Disney now see higher satisfaction rankings than Netflix across the quality of shows, 20 amount of original content, number of new‑release films, variety of classic films and amount of kids’ content. Forecast cancellation rates for Disney+ fell to an all‑time low of 3.2%. (Source adapted from: https://www.novanudge.com/post/sludge-on-demand-how-netflix- makes-use-of-behavioural-science https://www.theguardian.com/media/2022/apr/20/netflix-shares-fall-losing-subscribers) Extract B The economics of price discrimination Throughout 2022, Netflix, a 100‑billion‑dollar company, increased prices in the US, Canada, the UK and Ireland (most of which saw similar price increases in 2021, too). In sharp contrast, Netflix recently announced it was reducing its prices in India (standard/2‑user 499 rupees a month, equivalent to £5.42) in a bid to compete with 5 Disney+ and Prime. UK students currently enrolled in a college or university who have a valid student email address can join Prime Student through the Amazon website. This gives them nearly 50% off a standard Prime membership and many other exclusive benefits. (Source adapted from: https://help.netflix.com/en/node/24926/in) Extract C Educational Website and TV Programmes BBC Bitesize is a learning platform created by the BBC in 1998. The online study resource allows parents to teach their children from home, using ready-made lesson plans and study guides with questions for all ages. The revision sessions are free to watch and they are available for children aged five up to their late teens. The guides are written by 5 teachers and subject experts, so they are reliable and follow the National Curriculum. Last year Bitesize attracted around two million weekly unique browsers with a peak week of 3.3 million in the GCSE exam period. Oak National Academy is a freely available learning resource website created for pupils aged four to sixteen. Launched in 2020, as a response to the global health crisis, the 10 website includes lesson slides, video lessons, worksheets, and quizzes conforming to the national curriculum in England. Ministers have set aside £43 million to fund the Oak National Academy over the next three years. (Source adapted from: https://www.bbc.co.uk/bitesize/articles/zmjdhbk https://www.structural-learning.com/post/oak-academy-a-teachers-guide#:~:text=Oak%20 National%20Academy%20is%20a,the%20national%20curriculum%20of%20England)

(c) With reference to the information provided, examine the likely numerical value of the cross elasticity of demand between UK online streaming services. (8)

Examiner's comment

In the 'examine' question, the marks are allocated evenly across all four skills, so two marks each for knowledge, application, analysis and evaluation. The question specifically asks for the likely numerical value of the cross elasticity of demand between UK online streaming services. The knowledge marks are given for an understanding of XED, and for recognising that the value is positive. Application marks are available for reference to the changing market share of the different streaming services, and analysis marks for the explanation of substitute goods. As ever, the two evaluation marks are available for the recognition that the strength of the relationship between streaming services changes over time or that some may be complementary goods. Overall, this was a slightly more demanding question which caused some issues for candidates, the main one being the confusion between the numerical value of substitutes and complements. This is a strong response. The first paragraph gets a knowledge mark for an understanding of XED, and a second one for the value being positive. The application mark is achieved for the reference to the prices of Netflix and Disney+ and the first analysis mark for the explanation of them being substitutes. The first evaluation mark is given for the reference to the Netflix promotional offer which may lower XED. The second paragraph gets the second application mark for the reference to the falling market share of Netflix. The final analysis mark is then achieved by the explanation of cutting back by switching to cheaper alternatives. The last evaluation mark is then given for the last sentence of the response. Overall, 8/8. You should remember to evaluate in 'examine' questions. Many candidates didn't do this and dropped marks as a result. This response was weaker than the first, and scored 5/8. There is a knowledge mark for the recognition of the value of XED being greater than 1, and then an application mark for the changing Netflix market share figure. The analysis of substitute goods gets both analysis marks. The final sentence referring to loyal customers gets one mark for evaluation. A second mark could have been achieved through a more extensive development of the point.

Examiner's report extract for June 2023 Paper 1 question 6(c)

June 2023 · AS Paper 1 · Q6(d) 4 marks AO1=2, AO2=2 Short answer

Data and extracts for question 6

(d) Using examples from the information provided, explain what is meant by both ‘substitutes’ and ‘complementary goods’. (4)

June 2022 · Paper 1 · Q2(a) 2 marks AO2=2 Calculation

Data and extracts for question 2

2 The table below shows data on the drinks market in Chile in 2017. Price elasticity of demand for sweetened drinks –1.37 Cross price elasticity of demand for bottled water +0.63 in response to a price change in sweetened drinks (Source: adapted from https://bmcpublichealth.biomedcentral.com/ articles/10.1186/s12889-017-4098-x)

(a) The price of sweetened drinks increases by 5%. Ceteris paribus, calculate the percentage change in the quantity demanded for sweetened drinks. You are advised to show your working. (2)

June 2022 · Paper 1 · Q2(b) 2 marks AO2=2 Calculation

Data and extracts for question 2

(b) The price of sweetened drinks increases by 5%. Ceteris paribus, calculate the percentage change in the quantity demanded for bottled water. You are advised to show your working. (2)

June 2022 · Paper 1 · Q2(c) 1 mark AO1=1 Multiple choice

Data and extracts for question 2

(c) Using the data on page 4, which one of the following is most likely? (1) A decrease in the price of Sweetened drinks and sweetened drinks will have the bottled water are: following effect on revenue: A Decrease Complements B Decrease Substitutes C Increase Complements D Increase Substitutes

June 2022 · Paper 1 · Q6(b) 8 marks AO1=2, AO2=2, AO3=2, AO4=2 8-mark response Hard

Data and extracts for question 6

UK branded coffee shop chains market Figure 1: Branded coffee shops by number of shops in the UK in 2021 Costa 2681 Starbucks 1025 Caffè Nero 648 Coffee 50 AMT shop chains 40 Soho Coffee 30 Coffee Republic 3748 Other chains 0 500 1000 1500 2000 2500 3000 3500 4000 Number of shops (Source: adapted from https://www.statista.com/statistics/297863/ leading-coffee-shop-chains-in-the-united-kingdom-uk-store-number/) Figure 2: International coffee price (Arabica bean), US dollars per kilogram Month Price Change Jan 2020 3.13 – Feb 2020 2.99 –4.47% Mar 2020 3.27 9.36% Apr 2020 3.41 4.28% May 2020 3.30 –3.23% Jun 2020 3.12 –5.45% Jul 2020 3.24 3.85% Aug 2020 3.60 11.11% Sep 2020 3.67 1.94% Oct 2020 3.35 –8.72% Nov 2020 3.31 –1.19% Dec 2020 3.48 5.14% (Source: adapted from https://www.indexmundi.com/commodities/ ?commodity=other-mild-arabicas-coffee&months=12) Extract A Tough market conditions for coffee shops – but coffee quality is king UK coffee shop chains have experienced slow growth opportunities and rising costs. In 2019 the UK market leader, Costa Coffee, opened over 60% fewer stores than in 2018, while Starbucks opened just three new stores overall in 2019. By 2020, many costs were rising: staff shortages meant rising wages for baristas (trained 5 coffeemakers), a 6.2% National Minimum Wage increase for over 25-year-olds and rising rents. In a challenging UK economy, consumers placed coffee quality ahead of convenient location when choosing a coffee shop. This demonstrates the need for coffee shops to match rising expectations in the UK’s increasingly crowded coffee shop market in 10 order to stay competitive. Independent coffee shops (total 25 892 shops in 2020) remain a threat to the branded coffee shops as they pursue a unique luxury experience for customers. This will often focus on the atmosphere and customer service, luxury food and drink ranges and being a part of the local community. Independent coffee shops run on average profit as low as 2% of revenue, and many go out of business as new chains 15 arrive in a locality. In January 2020, Coca-Cola finalised its £3.9 billion takeover of market leader, Costa Coffee. The Coca-Cola company’s stated aims are to maximise long-term returns to shareholders while being mindful of overall responsibilities such as supporting sustainable communities. Major brands, such as Costa, continue to lead coffee shop 20 expansion in 2020 as competition intensifies. (Source: adapted from https://www.worldcoffeeportal.com/Latest/InsightAnalysis/2020/ February/5-UK-coffee-shop-market-dynamics-to-watch-in-2020) Extract B Greggs aiming for ‘coffee shop experience’ Greggs is looking to increase its branded coffee shop market share after the British bakery chain achieved record profits and overtook Starbucks in the amount of coffee it served in the UK. Although Greggs will continue to focus on the food-to-go market, it will be investing in better coffee machines and providing WiFi. It wants one in three 5 new outlets to have more seating. The company believes that it has the ability to take market share in two ways, by expanding its coffee range and at the same time enhancing the coffee shop experience. Greggs is modelling its plan on rival chain Pret A Manger, which has changed from focusing on food-to-go sales to mainly eating in. Greggs has transformed itself from an unremarkable seller of bread and pastries into one of the UK’s 10 most popular food-on-the-go chains, in part thanks to its embrace of vegan, gluten-free and healthy options as well as clever marketing that have changed its image. (Source: adapted from Financial Times, 3 March 2020 https://www.ft.com/ content/6fb6d73a-5d24-11ea-8033-fa40a0d65a98)

(b) With reference to Figure 2 and your understanding of price elasticity, examine two factors that may cause significant changes in the international price of coffee beans. (8)

Examiner's comment

This question proved to be most challenging for candidates. The response was to identify that a rise in incomes would increase demand which would cause a significant rise in price if supply was price inelastic. However, as there are more plantations grown supply may become less price-inelastic and there would be less volatility. Some candidates chose to look at the factors and then to consider price-elasticity and this was marked positively. Some candidates made use of a diagram that enhanced their written explanation or evaluation. At least one reference to Figure 2 was required for application. As a points-based question, these are marked following the marking criteria Knowledge (K), Analysis (AN), Application (APP) and Evaluation (EV). In this response, the first point identified is price inelastic demand (1K). This is followed by two numerical references (2APP max). The next part was not seen as an effective evaluation. Another factor was price inelastic supply (1K) with reference then to income rising (1AN). Overall, this response is awarded 1K + 2APP + 1K +1AN and achieves 5 of the marks 8 available. Make effective use of the data. 2 marks are always reserved for application on 8 mark responses. This response is awarded 2 marks for application from the start. 1 mark is awarded for identifying supply is price inelastic for knowledge. A further mark is awarded for analysis for explaining how a significant increase in price will have a small increase in demand. The response is further supported by use of the diagram. Two evaluative marks are then awarded for identifying how and why supply may become less price inelastic in the long run. A second factor regarding a good harvest is also provided as a non-price determinant of supply (1K) with a written explanation that is again supported by the use of an accurate diagram (1AN). Overall, this response is awarded the full 8 marks. Making effective use of supply and demand diagrams can help lock in knowledge and analysis marks or may provide a way into evaluation.

Examiner's report extract for June 2022 Paper 1 question 6(b)

June 2022 · AS Paper 1 · Q6(d) 4 marks AO1=2, AO2=2 Calculation

Data and extracts for question 6

The market for fish Extract A Total allowable catches of North Sea cod halved in response to falling stocks In 2020, new lower limits on the quantity of cod that can be caught by the UK fishing fleet came into force. These limits on the fish catch, called total allowable catches (TACs), were agreed at the annual EU fisheries negotiations. It was the last December EU meeting attended by the UK before it left the EU. It was 5 agreed that cod catch limits will be cut by 50% in the North Sea, while reduced limits were agreed for cod in the Celtic Sea, Irish Sea and west of Scotland. However, there were increases for other types of fish, with TACs for haddock in the North Sea rising by 23% and for sole rising by 19%. UK Fisheries Minister George Eustice said: “This year there has been mounting scientific 10 evidence suggesting that cod is being overfished in many parts of the northeast Atlantic and we have responded to conserve stocks”. These new regulations applied to the UK while it remained part of the Common Fisheries Policy. In the future it will become an independent coastal state and negotiate on fisheries with the EU and other coastal states such as Norway. 15 (Source adapted from: https://www.independent.co.uk/news/business/news/north-sea-cod- stocks-quota-climate-change-brexit-a9252196.html) Figure 1 Atlantic over-fishing: share of total allowable catch (TAC) in excess of scientific advice (2019) Country Excess TAC (%) Excess TAC (tonnes) Sweden 52.4 17 369 106 925 United Kingdom 24.3 34 052 Ireland 21.7 49 914 Denmark 19.7 20 620 Germany 18.0 The Netherlands 13.5 31 910 3 009 Belgium 10.4 France 9.4 27 230 Spain 6.6 16 689 Portugal 3.8 3 662 (Source adapted from: Statista 2018) Extract B The tragedy of the commons The ‘tragedy of the commons’ may occur when there are common access resources (CARs). These are natural resources over which no private ownership has been established. Therefore, there are difficulties in excluding people from using or exploiting them. CARs include fisheries and common grazing lands. Oceans are so vast that it is 5 impractical for one fishing company to establish ownership and control. This means that others cannot be prevented from exploiting the ocean. Economists have suggested that with the lack of ownership of these resources, private producers will act in their own self-interest and exploit CARs to maximise profit. This exploitation is unsustainable. In other words, CARs provide an opportunity for individuals to create profit, while 10 creating negative externalities which impact on everybody else. This process is referred to as the ‘tragedy of the commons’. The ‘tragedy of the commons’ is at the core of a range of problems that are relevant and threatening to natural resources, environments and human health. In the case of overfishing, fishing companies are not made accountable for the state of the ocean. 15 They continue to fish as much as possible to maximise profit. Today, 90% of fish stocks are depleted. The reason for such a wide range of problems is because there is an environmental cost for everything. The ‘tragedy of the commons’ is the outcome of the fact that every resource is limited on this planet, coupled with the rising level of demand for these 20 resources. These issues are large-scale and require laws, regulation and international cooperation. (Source adapted from: http://felixonline.co.uk/articles/2019-12-09-tragedy-commons- drama-planet-not-enjoying/)

Fish and chips are complementary goods with an estimated cross elasticity of demand of –8. Currently 950 000 bags of chips are sold in UK fish and chip shops each day. (d) With reference to the information provided, calculate the new quantity demanded of bags of chips from fish and chip shops, following a 2% increase in the price of fish. You are advised to show your working. (4)

June 2022 · Paper 3 · Q1(b) 8 marks AO1=2, AO2=2, AO3=2, AO4=2 8-mark response Hard

Data and extracts for question 1

The food delivery industry Figure 1: Market share for third‑party food delivery services in the UK, 2019 1.2% 10.2% 21.3% 67.3% Just Eat Deliveroo Uber Eats Others (Source: adapted from https://onefourzerogroup.com/the‑takeaway‑takeover/) Extract A National Minimum Wage rises are more significant for 23 to 25-year-olds In 2021, the National Minimum Wage main rate, also known as the National Living Wage, rose by 2.2% to £8.91, following a 6.2% rise in 2020. By reducing the age at which people are eligible for the National Living Wage to 23 in 2021, it is estimated that an additional 7.5% of 23 to 25-year-olds could get a 71p an hour pay rise. This amounts to an 8.7% 5 increase, which may cause further financial worries for employers. (Source: adapted from https://www.ndna.org.uk/NDNA/News/Latest_news/2020/ Minimum_wages_to_rise_by_inflation_in_April.aspx) Extract B What is the true cost of the food delivery service? The food delivery industry has boomed in recent years. Just Eat, Uber Eats and Deliveroo all offer very similar services – third‑party food delivery firms that take up to 30% of the price of restaurant meals and deliver them to customers within a certain radius. The average spend per customer is around £15 with a £5 delivery fee, about five times 5 more expensive than cooking at home and the same price as eating in the restaurant. Cash rich, time poor professionals increasingly turn to food delivery. Food delivery comes with many layers of packaging. In the UK, there are 200 million meals annually with around 1.4 billion individual pieces of plastic for heat retention and protection when travelling, but does it really have to be plastic? People tend to 10 order more food, often high in fat, sugar and salt, and don’t even have to get up from their sofa. But there are concerns that the delivery firms are exploiting employees who have no alternative. There is an issue of low pay and informal contracts. Delivery drivers are classed as ‘independent contractors’, and therefore not subject to some employment 15 rights including a guaranteed minimum wage, sick pay, pensions or holiday pay. Drivers are paid either a flat hourly rate, or a fee per delivery. Factors such as delivery distance, speed, how busy it is and whether there are multiple drop‑offs are all factored into how much a driver is paid. Deliveroo says its wages amount to around £10 per hour, but drivers say that during 2020 their pay has been as low as £1 per hour. Drivers are not 20 paid extra for petrol or to maintain their vehicles. Many drivers are recent immigrants or students, who do not have property or savings to fall back on. The government could address this with widening minimum pay legislation to contracted workers, by setting codes of practice, or by setting recommended wage targets. Furthermore, there are health and safety issues for workers. Vehicle safety checks, 25 length of shifts and safety equipment are of concern. However, there are still people who take benefit from working flexibility. (Source: adapted from https://www.theguardian.com/australia‑news/2020/oct/25/home- food-delivery‑what‑is‑the‑most‑ethical‑way‑to‑order‑in and https://digitalcommons.molloy. edu/cgi/viewcontent.cgi?article=1043&context=bus_fac) Extract C Integration in the third‑party food delivery industry The Competition and Markets Authority (CMA) is watching carefully to prevent any one firm having complete control of the food delivery industry. Just Eat, the market leader, agreed to merge with successful Dutch firm Takeaway.com in 2020, creating a new European leader by revenues. It also bought Grubhub in the US, with 20 million active 5 users. Just Eat uses an aggressive pricing strategy, undercutting delivery fees below the average cost of other firms in the market, that will force them to merge in order to gain some economies of scale. Amazon, having failed with its own delivery company Amazon Restaurants in 2018, has bought 16% of Deliveroo. The CMA took over a year to agree to the partial integration, 10 on the argument that Deliveroo would close down without external investment. Amazon has unique expertise in marketing, increasing customer share and, most importantly, efficiency in delivering things. Food delivery is often uneconomical because a single household puts in a single order from a single restaurant at any one time. Tech companies such as Amazon can improve the business: once a meal has been ordered, an 15 app often moves that restaurant to the top of the rankings for that neighbourhood, in the hope of getting a second and third delivery. So why do restaurants turn to these delivery firms? The sheer volume of customers these delivery firms can hold makes it a difficult deal to turn down. But resentment from small business restaurant owners, angry at being wholly dependent on tech companies, is 20 growing. Most restaurants would prefer that customers come in and pick up their orders themselves because they do not have to pay the 30% commission. Restaurant profit margins are small, and the effects of a 20% fall in the external value of the pound since 2016 on food costs are significant, given that over half of their food and drink is sourced outside the UK. 25 (Source: adapted from https://www.ft.com/content/c20f6848‑3c4b‑11ea‑a01a-bae547046735 https://www.ft.com/content/edf8a144‑a101‑4ef8‑80e3‑7d2f1565d35c and https://www.thisismoney.co.uk/money/markets/article‑8138703/Uber‑set‑sell- takeaway-division‑rival‑Deliveroo‑two‑years.html and https://www.ft.com/content/c20f6848-3c4b‑11ea‑a01a‑bae547046735 and https://www.ft.com/content/bed7c4d8-28c1-11ea-9a4f-963f0ec7e134 and https://www.economist.com/1843/2021/01/26/gulp‑the‑secret‑economics-of-food‑delivery)

(b) With reference to Extract B, examine whether the demand for delivered food is price inelastic and income elastic. (8)

November 2021 · Paper 3 · Q1(b) 8 marks AO1=2, AO2=2, AO3=2, AO4=2 8-mark response

Data and extracts for question 1

Hand car wash (HCW) firms in the UK Extract A What is the true human cost of your £5 hand car wash (HCW)? The UK’s hand car washes (HCWs) are extremely price competitive, but they have also been linked to modern slavery. Are they ever fair for workers? There is little agreement about how many HCWs there are in the UK. Estimates range from 10 000 to 20 000. This lack of accurate information about the industry makes 5 government regulation very difficult. Automated car washes, with their fierce rotating bristles, used to be the first option for drivers in a hurry. Now there is more choice. While the economy slows and incomes fail to keep up with inflation, demand for HCWs has grown. Many people see paying £5 for a car washed by someone else, rather than cleaning it at home, as a small expense which yields a high utility. But what is the true 10 cost of a £5 car wash – and what should we be paying? The growth of HCWs is partly the result of changes in the structure of industry in the UK. Many petrol stations have closed as drivers fill up at supermarkets. Garages and their forecourts have closed as cars become more reliable and locked into service agreements. The available sites for HCWs have therefore increased significantly and rents have fallen. 15 HCW entrepreneurs have identified available land and have benefitted from changes in the labour market, partly as a result of EU migration. UK drivers are now able to obtain cheap and effective hand car washing. For many migrants, car washes are a first job. “They accept car washing for a short period while they improve their language skills and move into other industries,” says Ian Clark, a professor of work and employment at 20 Nottingham Business School. “But there are also car-wash workers without networks who are in a dead end, working there for long periods.” Many drivers are only interested in getting the cheapest wash. If the price is very low, it probably means that workers are receiving less than the minimum wage and working in poor conditions. Crude calculations illustrate the problem. A £5 HCW employing five 25 workers for 10 hours a day would need to wash 79 cars a day to just cover the wage costs. This assumes the workers are paid the minimum wage. This is one car every seven and a half minutes. Even if the profit can be higher on valet services, the price of which can be as little as £12 for a full inside-and-out clean, it’s hard to see how a car wash price as low as £5 pays a living wage. This ignores all other costs which HCWs incur such as 30 business rates and rent. Evidence from car-wash workers is limited but Clark and others have been able to build a picture of some of the tougher conditions on drenched forecourts. “Like nail bars and small garment manufacturers, car washes are what we call ‘hard-to-reach places,’” Clark explains. As part of the research, Clark and his team spoke to workers from 45 HCWs in 35 the Midlands. Clark and his team met and observed workers who lacked waterproof boots or trousers, or hi-vis jackets and gloves. “They’re spraying around hydrochloric acid solution for alloy wheels, breathing in the vapour and fumes,” Clark says. Some workers were paid a little over half the minimum wage. 40 (Source adapted from: https://www.theguardian.com/world/2018/jul/16/true-human-cost- 5-pound-hand-car-wash-modern-slavery) Extract B Government intervention in the HCW industry There are three main areas of government intervention that might impact on labour intensive firms such as HCWs: First, there is the planning issue which focuses on the impact on the environment, for example, the disposal and recycling of waste water and chemicals. There could be 5 planning regulations to prevent the use of tarmac rather than concrete on forecourts. Tarmac allows waste water and chemicals to seep into the sub soil. It could also be a requirement to have a sludge trap to stop the waste entering waterways. Second, there is the health and safety issue for workers. Prolonged exposure to chemicals and lack of protective clothing puts the health of workers at risk. Performance targets 10 could involve minimum levels of protective clothing and rest breaks for the workers. Third, there is the issue of tax. The informal nature of the business type makes tax evasion easier. Not all UK HCWs violate regulations. There are legitimate, regulated HCW firms as well as examples of good practice by independent outlets. One national supermarket, Tesco, 15 has banned all independent hand car washes from its car parks. It is now in a partnership agreement with national car wash operator Waves. It uses a WashMark certificate of quality and compliance which was introduced by the industry to improve working conditions. Other major supermarkets are considering similar changes. One adviser believes £9 is a reasonable minimum price for a basic wash. Some pressure groups have 20 developed a mobile phone app where evidence of unreasonable conditions can be reported by drivers. Involving drivers in the issue, and making them demand fairer car washes, creates an incentive for good businesses to improve practices and come forward to get a WashMark certificate. 25 (Source adapted from: https://www.parliament.uk/documents/commons-committees/ environmental-audit/Hand-Car-Wash-evidence.pdf research into HCWs by Professor Ian Clark, Nottingham Business School May 2018)

(b) Examine two reasons why the demand for HCWs increases during a period when consumer ‘incomes fail to keep up with inflation’ (Extract A line 8). (8)

Examiner's comment

1a The market structure that was expected for this question was monopolistic competition, although the characteristics are so close to perfect competition that this model was fully acceptable. Many however wrote ‘monopolistic’ without the noun ‘competition’ and although it may seem generous, this was accepted if it was clear that the model being described was not in fact monopoly. - Allow perfect competition/highly competitive as the ID mark (Knowledge)- with follow on explanation to match - ‘Monopolistic’ is allowed this year for first time as shorthand for monopolistic competition but monopoly/oligopoly is not allowed - Allow low or no barriers to entry - 1 mark for the ID of model, 2 characteristics of model, 2 applications - Diagrams can be used as the analysis marks (up to 2 marks e.g. - price setting power and SNP/normal profit) Below is an exceptional answer worth full marks; This is not: 1b The reason for increased use of hand car washes during a period of lower income was best answered by using the data and the concept of elasticity. Falling income and rising demand is associated with inferior goods, but as with items such as chocolate, the luxury of a car wash might be just the thing to increase standards of living at a low expense. The other common argument used was that the HCW is cheaper than an automated service so this is an inferior good. Many commented on the low price (£5) to explain high demand, but it was important to explain why demand was rising rather than just not responding. - 2 K, 2 Ap, 2 An, 2 Ev - Allow diagrams as An: 2 An or 1Ap + 1 An - Many are confused with PED and YED - be careful when awarding - High utility is an acceptable reason - Reference to aspects of car washing is enough for data marks, e.g. the hoses/chemicals - Be careful for candidates losing track of the question - needs to link to incomes changing This only scored half marks; This was better; good reasons but no evaluation 1c - Answer needs to be about increased migration to UK (opposite in context of leaving the EU/shortage of staff as a result of the global health crisis was seen as EV, a good way to evaluate using the current economic context) - Any industry with large use of migrant workers is accepted as application e.g. - hospitality, nursing, construction - Higher demand for labour and MRP arguments are allowed if correctly explained, although MRP not required - Must have a valid diagram and reference to an industry for L3 - Some segments may not suit low skilled migrant workers e.g. - valeting and paint touch up - Accept variations on the axis if the explanation is correct e.g. - £ not wages - Do not need more than one point as long as ‘effects’ are considered within it. - A Level 3 diagram should be linked to the effect on wages (not confused with price of the product) - The question is the impact on the firm (not wider effects e.g. government budgets) - Application can be shown on the diagram or reference to ‘low skilled jobs’ This clearly starts well with a labour market diagram and a fairly good approach using a cost and revenue diagram: 1d - 1d was much less popular. Causes questions are more difficult to access than effects questions on this paper. - L4 response must have reference to an industry - Must link to the number of firms in the market This was a good attempt at a difficult question This was more typical: This scored quite poorly. It is imperative that the candidate focuses on the requisites of the question. 1e - Must be reference to a specific industry - Any forms of government intervention are allowed This scored 11/25 but this was more typical: This short answer was running out of time. There was an opportunity cost in the introduction here, and although it starts well with a valid idea and some application, this was all that was written, so it scored Level 1 3/25.

Examiner's report extract for November 2021 Paper 3 question 1(b)

October 2020 · AS Paper 1 · Q2(a) 1 mark Multiple choice

(a) The income elasticity of demand for bus travel is estimated to be –1.5. This implies that: (1) A a 10% increase in fares will lead to a 15% decrease in passengers B as unemployment falls, more people will use buses C bus travel has a negative cross elasticity of demand compared to rail travel D bus travel is an inferior good

October 2020 · AS Paper 1 · Q2(b) 3 marks AO1=1, AO2=1, AO3=1 Short answer

(b) Explain why a firm might try to reduce the price elasticity of demand for its products. (3)

October 2020 · AS Paper 1 · Q6(a) 5 marks AO1=1, AO2=2, AO3=2 Short answer

Data and extracts for question 6

The market for higher education in the UK Figure 1: Average graduate earnings, according to subject studied, compared to average non-graduate earnings (per cent) 2018 selected subjects. Economics Medicine Architecture Business Top 5 Law Bottom 5 Psychology Philosophy English Agriculture Creative arts –20% 0% 20% 40% (Source: adapted from https://www.ifs.org.uk/publications/13731 The impact of undergraduate degrees on early-career earnings, Research report, November 2018) Figure 2: Student loans outstanding at the end of financial years 2013 to 2018 in England 120 000 100 000 80 000 60 000 102 357 87 629 74 960 40 000 63 776 53 668 45 418 20 000 0 2013 2014 2015 2016 2017 2018 Financial year (Source: adapted from https://www.slc.co.uk/official-statistics/ student-loans-debt-and-repayment/england.aspx) Figure 3: Number of applications to UCAS according to median income of area lowest household highest household income below £23 000 income above £35 400 90 000 80 000 70 000 60 000 50 000 40 000 30 000 20 000 10 000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Source: adapted from https://www.ucas.com/corporate/data-and-analysis/ucas-undergraduate- releases/2018-cycle-applicant-figures-january-deadline) Extract A Rethinking tuition fees The value of a degree is significant. The latest data shows that the median university graduate income was £10 000 more than the average non-graduate income in 2018. This ‘graduate premium’ means graduates will contribute significantly to the economy. In addition, the government will benefit greatly from additional tax revenues. 5 However, funding higher education continues to be a major issue. English universities charge some of the world’s highest fees. Interest rates on student loans are now 6.3%. There are a large number of courses where graduates are likely to earn less than non-graduates, despite an average of £50 000 of debt. The Department for Education estimates that 45% of the value of loans will not be 10 repaid. Outstanding student loans in England totalled more than £100 billion in 2018. By 2023 total outstanding student loans are forecast to rise to £120 billion. One option for revising student fees could be to charge higher fees for courses that are more expensive to teach or that have a better chance of higher earnings. That would make Science or Mathematics degrees more expensive to study than English or 15 Philosophy. At most universities the level of fees is likely to be the same flat rate of £9 250 per year. However, science-based courses need more expensive equipment and courses such as medicine require more teaching time and personal instruction. Tuition fees were introduced in 1998 at £1 000 per year. They are currently £9 250. 20 Economists estimate that the price elasticity of demand for higher education is about –0.5. Charging £9 250 a year for an undergraduate degree makes England very expensive by international standards. Scotland has no fees for Scottish students, and fees in Wales and Northern Ireland are significantly lower. Much of Europe has low or no fees and Germany, which used to charge fees, has abolished them, replacing them with a graduate tax. 25 The only country with comparable fees is the United States. Top private colleges can charge more than the equivalent of £30 000 per year while state colleges can charge local students less than fees in England. Despite this, student numbers at English universities have continued to increase from 450 000 in 1998 to over 700 000 in 2018. Students from all backgrounds are more likely to 30 go to university than ever before. However, applicants from low-income areas are much less likely to go to university than applicants from high-income areas. The Universities and Colleges Admissions Service (UCAS) found that in the most deprived 10% of postal areas about 20% of young people went to university in 2018, compared with 50% in the highest income areas. Research 35 by University College London revealed that even when candidates from low-income areas had the same exam results, they were much less likely to apply to university than candidates from high-income areas. (Source: adapted from https://www.theguardian.com/education/2018/dec/16/change-in-student-loan- accounting-could-add-10bn-to-national-debt) Extract B Low-income university students twice as likely to drop out than high-income ones The number of students from low-income areas who drop out of university before finishing their degree is at its highest in five years, indicating a considerable waste of scarce educational resources. This news comes at the same time as a drive to recruit students from poorer backgrounds, with universities spending a total of £725 million on 5 access initiatives in the past academic year alone. A number of top universities have started to lower their A level grade offers to students from low-income areas, in an attempt to encourage them to apply. However, there is a danger with ‘enticing’ disadvantaged students through lower grade offers, if universities are not going to provide ongoing support for them once they begin their courses. 10 The latest figures show that 9% of disadvantaged undergraduates do not continue in higher education beyond their first year. In comparison, the average drop-out rate among students from the high-income backgrounds was less than 5%. The gap continues to widen. A report, published by the Office for Fair Access, concluded that: ‘The significance of 15 this for students is huge. Higher education can be a transformational experience that opens doors to rewarding careers and social mobility, but this is only the case if students achieve successful outcomes.’ (Source: adapted from https://www.telegraph.co.uk/news/2017/06/28/number-poor-students-dropping- university-highest-level-five/)

(a) Explain why ‘the price elasticity of demand for higher education is about –0.5’ may be of relevance to English universities. Refer to Extract A in your answer. (5)

October 2020 · Paper 1 · Q7 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or

7 The International Energy Agency has predicted that oil use by cars will peak in 2025 because of the increasing number of drivers switching to electric vehicles. (Source adapted from: https://www.thetimes.co.uk) Evaluate the likely microeconomic consequences of consumers shifting from vehicles powered by fuel obtained from oil to electric‑powered vehicles.

June 2019 · AS Paper 1 · Q3(a) 1 mark AO2=1 Multiple choice

Data and extracts for question 3

3 Amazon Prime, Netflix and NowTV all charge £7.99 per month for streaming very similar film and television services.

(a) The most likely cross price elasticity of demand for close substitutes is: (1) A – 2.1 B – 0.1 C + 0.1 D + 2.1

June 2019 · AS Paper 1 · Q3(b) 3 marks AO1=1, AO2=2 Calculation

Data and extracts for question 3

In 2016 the average cinema ticket price in the UK was £7.41, and there were 19.1 million tickets sales. The price elasticity of demand was estimated to be –0.5. (b) Calculate the new total revenue if prices were raised by 3% in 2017 to £7.63, if everything else remained unchanged. You are advised to show your working. (3)

June 2019 · AS Paper 1 · Q5(a) 1 mark AO2=1 Multiple choice

Data and extracts for question 5

5 2015 2017 Average weekly pocket money for children £7 £8.75 aged under 10 years In the UK, Freddo is a popular chocolate snack bought by children who are under 10 years old. Freddo’s income elasticity of demand is estimated to be –0.1.

(a) Calculate the percentage change in quantity demanded for Freddos between 2015 and 2017, ceteris paribus: (1) A –0.8% B –2% C –2.5% D –25%

June 2019 · AS Paper 1 · Q5(b) 3 marks AO1=1, AO2=1, AO3=1 Short answer

Data and extracts for question 5

(b) Explain one reason why the income elasticity of demand is significant to the producer of Freddos. (3)

June 2018 · AS Paper 1 · Q2(a) 2 marks AO2=2 Calculation

Data and extracts for question 2

2 In February 2016 the Daily Mail newspaper increased its price from 60p to 65p. By August 2016 its sales had fallen by 5.41%.

(a) Ceteris paribus, calculate the price elasticity of demand for the Daily Mail newspaper over this period. You are advised to show your working. (2)

June 2018 · AS Paper 1 · Q2(b) 1 mark Multiple choice

Data and extracts for question 2

(b) Which one of the following is most likely to be a determinant of price elasticity of demand for the Daily Mail newspaper? (1) A Availability of rival newspapers B Change in population size C Decrease in the cost of producing the Daily Mail newspaper D Expected rise in the price of the Daily Mail newspaper

June 2018 · Paper 1 · Q2(b) 2 marks AO1=1, AO3=1 Short answer

Data and extracts for question 2

2 The number of individual weekly ticket sales from UK National Lottery games operated by Camelot was 73 million in the financial year 2015–2016. The sale price of each lottery ticket was £2. This figure included 24 pence of tax revenue on each ticket sold.

Research conducted for HMRC estimated the cross elasticity of demand for using gaming machines to be 1.28 in response to changes in the price of national lottery tickets. (Source: https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/322845/report313.pdf) In October 2013 Camelot increased the price of a national lottery ticket from £1 to £2. (b) Explain the likely impact of the price increase of national lottery tickets on the demand for using gaming machines. (2)

June 2018 · AS Paper 1 · Q4(a) 1 mark Multiple choice

Data and extracts for question 4

4 Between 2013 and 2015, median household income in the UK increased from £24 200 to £25 700. Over the same period the demand for bus travel fell by 3%.

(a) Which one of the following is the most accurate explanation of the term ‘median household income’? (1) A The difference between the highest level of household income and the lowest level of household income B The middle household income after placing all household incomes in numerical order C The most frequently occurring level of household income D Total household income divided by the number of households

June 2018 · AS Paper 1 · Q4(b) 3 marks AO1=1, AO2=1, AO3=1 Calculation

Data and extracts for question 4

(b) Using the data provided, explain whether bus travel is a normal good or an inferior good. (3)

June 2018 · Paper 1 · Q6(d) 8 marks AO1=2, AO2=2, AO3=2, AO4=2 8-mark response

Data and extracts for question 6

The UK energy market Figure 1: UK retail electricity and gas real price indices, 2004–2015 Gas Electricity Indices: 2010 (base) = 100 140 index 120 100 80 60 40 20 0 2004 2006 2008 2010 2012 2014 2016 (Source: https://assets.publishing.service.gov.uk/media/5773de34e5274a0da3000113/ final-report-energy-market-investigation.pdf) Figure 2: UK retail electricity and gas supply: market share by company, 2016 Company Electricity Gas % % British Gas 23 36 EON 16 13 SSE 16 13 EDF 12 8 Scottish Power 11 9 RWE (nPower) 10 9 Other companies 12 12 Total 100 100 (Sources: https://www.ofgem.gov.uk/chart/ electricity-supply-market-shares-company-domestic-gb and https://www.ofgem.gov.uk/data-portal/retail-market-indicators) Extract A Competition and Markets Authority (CMA) report into the UK energy market An investigation into the UK energy market by the CMA concluded that customers have been paying £1.4 billion a year more than they would in a fully competitive market. It found that 70% of domestic customers of the six largest energy firms were on an expensive standard rate. These customers could each save over £300 a year by switching 5 to a cheaper deal but appear reluctant to do so. However, the CMA investigation found no evidence of anti-competitive practices by firms. There has even been an increase in new entrant energy suppliers over recent years and their combined market share has reached 12% in both gas and electricity supply. To protect consumers, the CMA has introduced various measures to open up and 10 increase competition in the UK energy market. These include: • the creation of a database designed to help consumers switch energy suppliers – rival suppliers can directly contact these customers • the conversion of all homes to smart energy meters making it easier for customers to measure energy consumption and switch supplier 15 • new rules to protect the four million vulnerable customers using prepaid meters – this includes a temporary price cap until smart meters have been installed. (Source: adapted from ‘Competition and Markets Authority Final report into Energy Market Investigation’ https://www.gov.uk/government/ news/cma-publishes-final-energy-report-in-full) Extract B Proposals to regulate profits in the UK energy market Currently energy retail companies make an average profit of 7% of total revenue. The Chairman of the Competition and Markets Authority (CMA) suggested that these profits are as much as five times higher than they should be, given the companies’ limited role in marketing, metering and billing customers. He recommended a profit cap of 1.25% of 5 total revenue. However, Scottish Power criticised proposals for regulating profits saying that it would reduce investment in the energy industry and undermine long-term energy provision. The firm claimed that such a low rate of return is below the profit margin made by supermarkets. 10 All six large energy firms are vertically integrated – producing as well as distributing gas and electricity. This can provide efficiency benefits but also harm competition. (Source: adapted from ‘Profit cap doesn’t fit with new investment, energy boss warns’, by Robin Pagnamenta, The Times, 19th September 2016) Extract C Skills shortages in the UK energy sector The energy sector is facing a skills shortage of engineers and technicians. Some 29% of employers in the gas and electricity industries report unfilled job vacancies compared with an average of 18% across all industries. A lack of information and advice on career prospects for young people is partly to blame 5 - many graduates have a negative image of the work involved. There is also a lack of students taking science, technology, engineering and maths-based subjects at school and university. Less than one-fifth of the energy sector’s workforce are women. The energy sector is characterised by an ageing workforce - data from the UK Labour Force Survey reveal that around two-thirds of workers are aged over 50. These cannot 10 easily be replaced as a long time period is required for training and developing workers’ skills in a highly regulated industry. Urgent action is required by businesses and the government to reduce labour immobility to benefit the energy sector. This action could include policies to increase investment in training programmes, recruit skilled workers from overseas, change the industry image 15 and deal with its ageing workforce. (Source: adapted from ‘Sector insights: skills and performance challenges in the energy sector’, by the UK Commission for Employment and Skills, March 2015; https://www.gov.uk/government/uploads/system/uploads/attachment_ data/file/416998/15.03.25._Energy_SLMI_-_evidence_report.pdf)

The price elasticity of demand for electricity in the UK is estimated to be –0.35 in the short run and –0.85 in the long run. (d) With reference to Extract A and your own knowledge, examine two possible reasons for the change in price elasticity of demand for electricity over time. (8)

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.

Examiner's report extract for June 2018 Paper 1 question 6(d)

June 2018 · Paper 3 · Q2(d) 25 marks AO1=4, AO2=4, AO3=8, AO4=9 25-mark essay Either/or

Data and extracts for question 2

Indonesia Figure 4: World coal prices, 2006–2016, US dollars per tonne 250 200 150 $ per tonne 100 50 0 2006 08 10 12 14 16 (Source: http://www.economist.com/news/world-week/21697025-business-week) Figure 5: Indonesia’s real GDP, annual percentage change 10 5 + % 0 change – in GDP 5 10 15 2006 08 10 12 14 16 (Source: http://www.economist.com/news/world-week/21697025-business-week) Extract D Indonesia’s economic outlook The Indonesian economy is expected to grow by an average of 4.8% a year between 2017 and 2021. Joko Widodo, president of Indonesia since 2014, is increasingly confident in his role and now has enough political support to pass some of his desired supply-side reforms. His government has been aggressively trying to improve the business and investment 5 environment by easing regulations and offering tax incentives, for example to firms investing in special economic zones. Indonesia receives US$2.3 billion a year in overseas development aid, which is mainly spent on education and healthcare. There is also ongoing aid from international institutions and non-government organisations paying for restructuring after the 2004 10 Indian Ocean earthquake and tsunami, which led to the loss of over 170 000 lives and much damage to economic livelihood. Aid agencies have supported the Indonesian government in providing healthcare free at the point of access for 88 million of the poorest people, free schooling for 12 years for each child, and tertiary education for students accepted into university. There is a scheme to provide each of Indonesia’s 15 15.5 million poorest households with a cash transfer of 200 000 rupiah (US$14.37) a month. The World Bank has approved US$800 million in infrastructure loans to Indonesia, with another US$950 million as conditional loans. The Asian Development Bank has committed itself to lending US$2 billion. In December Japan’s development agency lent Indonesia US$535 million to construct two power stations. 20 (Sources: adapted from http://country.eiu.com/Indonesia and http://www.economist.com/ news/special-report/21693404-after-decades-underinvestment- infrastructure-spending-picking-up-last) Extract E Indonesia’s economic policies as commodity prices collapse Indonesia is the world’s fourth largest exporter of coal and the raw material accounts for 11% of its exports. Its other main exports are crude oil, palm oil, rubber and tin. Its main commodity exports tripled in value between 2000 and 2010, and as exports boomed, so did the economy. But the value of commodity exports has fallen by more than half from 5 its peak. Coal now sells for just US$50 per tonne, against US$125 in 2011. In the decade to 2014, Indonesia’s real GDP grew by an annual average of 6%, but the collapse in commodity prices has slowed the economy. In 2015 growth was 4.8%, the slowest rate since 2009. But compared with many other commodity exporters, Indonesia is getting off lightly. 10 The value of the rupiah, Indonesia’s currency, against the US dollar has fallen by 30% since 2013, but has since stabilised. Other emerging market currencies have depreciated even more steeply over that period. Despite the weak exchange rate, Indonesia’s inflation rate has mostly remained within the central bank’s target range of 3-5%. The main impact of the rupiah’s fall has been to curb imports, helping limit Indonesia’s current account 15 deficit to around 2% of GDP despite weaker export earnings. A cautious fiscal policy during the boom years has allowed for a modest fiscal expansion to offset the effects of weak exports and investment. The national debt is just 26% of GDP. Mr Widodo knows that Indonesia cannot raise its long-term growth rate if the economy remains reliant on coal. It needs a broader range of manufacturing and service industries. 20 If new enterprise is to flourish, Indonesia must support local entrepreneurship. The labour market is inflexible. To start a business takes an average of 47 days, compared with four in Malaysia and two in Singapore. The President’s supply-side policies are improving the business climate. The average number of days needed to approve a new power plant has declined from 900 to 200. The government recently revised its “negative investment 25 list” of sectors in which foreign ownership is banned or restricted, fully opening up the rubber, film and restaurant sectors, among others. In 2015 he launched a series of measures to try to reduce government failure, including easing some regulations, streamlining licensing procedures for firms on industrial estates and providing tax incentives to invest in special economic zones. 30 The government has used savings from cutting fuel subsidies, worth over 4% of GDP, to fund extra capital spending. But the budget deficit still widened to 2.8% of GDP, very close to the legal limit of 3%. If public expenditure is to increase further, the government will need to raise more revenue. That will not be easy. Most workers and employers pay little or no tax. Only 27 million of Indonesia’s 255 million people are registered taxpayers, 35 and in 2014 just 900 000 of them paid what they owed, leaving it with a tax revenue to GDP ratio of around 10%. Big companies say that they are being squeezed harder by the tax authorities because they are an easier target. Infrastructure spending will help bring foreign investment and good jobs to Indonesia as well as encouraging exports. Indonesia’s infrastructure problem can be summed up 40 as too few roads and congested ports. In the short term, infrastructure spending puts people to work and boosts demand for raw materials. In the longer term this spending offers the chance to make up for decades of neglect and underinvestment. Indonesia has plans for 65 dams, 16 of which are already under construction. In 2015 work started on the Keureuto Dam, designed to boost agricultural productivity in Aceh. Recently fields 45 were flooded for the massive Jatigede Dam in West Java, after 20 years of delays. Once complete, the dam will irrigate 90 000 hectares of rice paddy, increasing efficiency by giving farmers two harvests a year instead of one. (Sources: adapted from http://www.economist.com/news/special-report/21693405- secure-growth-it-needs-indonesia-must-resist-its-protectionist-urges-roll- out and http://www.economist.com/news/special-report/21693404-after- decades-underinvestment-infrastructure-spending-picking-up-last)

(d) With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects on Indonesia of the volatility of prices of commodities such as coal. (25)

June 2017 · Paper 1 · Q1(b) 1 mark Multiple choice

Data and extracts for question 1

1 The table shows market data for e-cigarette kits. The original equilibrium price is £23. Quantity Quantity New quantity New quantity Price demanded per supplied per demanded per supplied per £ month (000) month (000) month (000) month (000) 25 5 9 24 6 8 23 7 7 22 8 6 21 9 5 As a result of a successful advertising campaign, demand increased by 3 000 e-cigarette kits at all prices. At the same time production costs fell leading to an increase in supply of 1 000 e-cigarette kits at all prices.

(b) Research conducted in New Zealand in 2014 estimated the cross elasticity of demand for e-cigarettes to be 0.16 in response to changes in the price of tobacco. This implies that a 5% increase in the price of tobacco will cause the percentage change in demand for e-cigarettes to be: (1) A -31.25 B -0.16 C 0.8 D 31.25

June 2017 · Paper 1 · Q2(a) 2 marks AO2=2 Calculation

Data and extracts for question 2

2 Between 2010 and 2015 the average price of tea in the UK increased from £7.20 per kilo to £8.48 per kilo. Over the same period the quantity of tea purchased fell from 97 million kilos to 76 million kilos. (Source: http://www.theguardian.com/lifeandstyle/shortcuts/2015/aug/05/brew-do- you-think-you-are-why-tea-needs-to-copy-coffee-in-order-to-survive)

(a) Assume that the change in the quantity of tea purchased was only caused by the change in the price of tea. Calculate the price elasticity of demand for tea in response to the rise in its price. You are advised to show your working. (2)

June 2017 · Paper 1 · Q2(b) 2 marks AO1=1, AO3=1 Calculation

Data and extracts for question 2

(b) Calculate the change in total sales revenue for UK tea retailers between 2010 and 2015. You are advised to show your working. (2)

June 2017 · Paper 1 · Q2(c) 1 mark Multiple choice

Data and extracts for question 2

(c) Estimates for the demand for black tea in the UK suggest that it is an inferior good. This implies it has a negative: (1) A cross elasticity of demand B income elasticity of demand C price elasticity of demand D price elasticity of supply

June 2017 · AS Paper 1 · Q6(c) 6 marks AO1=2, AO2=2, AO3=2 Short answer

Data and extracts for question 6

The market for cigarettes Figure 1: Price elasticity of demand - a comparison between tobacco and e-cigarettes Price of packet of 20 Price of tobacco cigarettes e-cigarette kit £7.70–£9.50 £9.99–£19.99 Average price per Single cigarette equivalent tobacco cigarette price of an e-cigarette 48p 7p Price elasticity of demand Price elasticity of demand for tobacco cigarettes for e-cigarettes –0.35 –1.9 (Source: adapted from https://www.blucigs.co.uk/united-kingdom/kits/all-kits) Extract A Government intervention on tobacco There was a time when smoking was fashionable. Television and magazine advertisements glorified smoking. Everyone from your dad to your doctor smoked in all places – cars, restaurants and even hospitals. Tobacco is still the single biggest cause of cancer in the world and the leading cause of preventable deaths. Nearly 80% of the 1 billion smokers worldwide live in low- and 5 middle-income countries. Bans on tobacco advertising, promotion and sponsorship can reduce tobacco consumption. Comprehensive smoking bans covering indoor workplaces, public places and public transport have been introduced in 48 countries. Tobacco taxes are the most cost-effective way to reduce tobacco use, especially among 10 the young and people in low-income groups. A tax increase that raises tobacco prices by 10% decreases tobacco consumption by 4% in high-income countries and 5% in low- and middle-income countries. However, some 8 million people are expected to die each year by 2030 – because they have smoked tobacco or have been exposed to passive smoking. The use of alternative 15 products such as electronic cigarettes (e-cigarettes) are gaining in popularity but information about their effects is uncertain. Little research has yet been done about the long-term health effects of e-cigarettes and the nicotine dispensed by e-cigarettes is highly addictive. The illegal tobacco market still counts for 1 in every 10 cigarettes consumed globally. In addition, tobacco companies still spend tens of billions of dollars 20 each year on advertising and promoting tobacco products and sponsoring events. They continuously challenge the regulatory measures governments are taking. (Source: adapted from http://www.who.int/topics/tobacco/en/ and http://www.who.int/ mediacentre/commentaries/reducing-tobacco-use/en/) Extract B Free market approach Are free markets incompatible with good health? If the solution to every problem involves banning advertising, raising prices and restricting availability, you might easily conclude that the free market is the disease and government regulation is the cure. From this perspective, the providers of food, alcohol and tobacco are determined to push the most unhealthy products on the public at the lowest prices. 5 Contrary to this viewpoint, the profit motive is not unhealthy. Businesses have an obvious incentive to keep their customers alive and customers have a strong incentive to seek out healthier options. Any company that can make a scientifically sound health claim gains a competitive advantage over its rivals. Health sells. In contrast, government regulation can lead to negative health outcomes. Markets can correct themselves long before 10 government failures are even acknowledged. Over a million Britons, almost all of whom are smokers or ex-smokers, use e-cigarettes, as a less hazardous product than cigarettes and yet e-cigarettes face increased regulations and in many countries they are banned. It is neither consistent nor ethical to prevent smokers from switching to much safer alternatives. Efforts to regulate e-cigarettes are a far greater threat to public health than 15 the products themselves. We argue that the interests of consumers are nearly always better advanced by the provision of accurate information and free choice than by prohibitions and regulations. The government policy of small but steady tax rises on tobacco and ever-larger warning labels is becoming less effective and leads to unintended consequences. 20 (Source: adapted from http://www.iea.org.uk/blog/free-market-solutions-in-health- should-be-allowed-to-flourish, Christopher Snowdon, 11th July 2013)

Tobacco cigarettes and e-cigarettes are considered to be substitutes. (c) Explain how changes in the price of tobacco cigarettes may affect the demand for e-cigarettes over time. (6)

Examiner's comment

The question asked candidates to explain how changes in the price of tobacco cigarettes may affect the demand for e-cigarettes over time, given tobacco cigarettes and e-cigarettes are considered to be substitutes. High scoring candidates confidently identified a close substitute relationship with a positive cross price elasticity of demand greater than one and explained in context. Knowledge marks proved relatively easy for candidates to score with many identifying the positive relationship and/or giving the formula/definition of XED. Application marks proved harder to score, substitutes both containing nicotine being one of the more common marks. Some diagram were drawn either showing XED relationship, but fewer showing the relationship between the two markets. There was the odd attempt to evaluate which was not required for this type of question. 6 out of 6 marks awarded. The candidate started by defining substitutes through the cross elasticity of demand formula (1 Knowledge) before a linked development of analysing in context (1 Analysis). This was further aided with application to a diagram showing the impact of a price rise in tobacco cigarettes on e-cigarettes (1+1 Application). Finally the candidate gained a further knowledge mark by understanding the substitute relationship ‘switching (1 Knowledge) and analysed this with reference to the magnitude of the price increase (1 Analysis). A good way of achieving maximum marks for an explain question is to carefully go through the concept, in this case the cross elasticity of demand, illustrating your knowledge of the concept as you apply it to the context. 2 out of 6 marks awarded. The opening sentence was not relevant to the question set. There was some understanding of the relationship (1 Knowledge) in the next elongated sentence with a limited example of analysis (1 Analysis). Always look carefully at the question. The initial stem of the question, referred to ‘substitutes’, as this can act as a prompt to guide you to the correct concept to be considered.

Examiner's report extract for June 2017 Paper 1 question 6(c)

June 2017 · AS Paper 1 · Q6(d) 4 marks AO1=2, AO2=2 Calculation

Data and extracts for question 6

(d) With reference to Extract A, lines 11–13, calculate the price elasticity of demand for tobacco cigarettes in high-income countries and in low-middle-income countries. You are advised to show your working. (4)

June 2017 · AS Paper 1 · Q6(e) 15 marks AO1=3, AO2=3, AO3=3, AO4=6 15-mark response

Data and extracts for question 6

(e) With reference to Figure 1, assess the likely reasons for the difference in price elasticity of demand for tobacco cigarettes and e-cigarettes. (15)

Examiner's comment

The question invited candidates to assess the likely reasons for the difference in price elasticity of demand for tobacco cigarettes and e-cigarettes, with reference to Figure 1. More able candidates clearly understood the determinants of price elasticity of demand in context and provided a coherent chain of reasoning to access top level KAA. They did not have to cover all the reasons but often covered two in depth, typically the closeness of the substitute given and the proportion of income spent. There were many strong answers on this question, with candidates being able to distinguish and give reasons for the difference in PED. In some cases there was repetition of one reason applied to tobacco and then e-cigarettes. Less able candidates did not know the determinants of PED and often started with defining price elasticity of demand but then became confused by covering determinants which cause shifts in demand rather than determinants of the relative price elasticity of demand determinants. In the evaluation for high scoring candidates some behavioural approaches were often used in conjunction but evaluation typically focused on why the determinant may change over time, e.g. closer substitutes or changes in price often using Figure 1. Top level evaluation made use of the context and provided a clear chain of reasoning, typically completed within two separate evaluative points. Full marks were not always accessed when the answer did not consider the broad elements of the question. 15 out of 15 marks awarded. A confident start was made by concisely defining price elasticity of demand and using the data to identify relative elasticity. This was then followed by a well-structured paragraph on addictiveness of nicotine in tobacco cigarettes linked to it becoming habitual compared to e-cigarettes (Level 3+ KAA). The chain of reasoning was then well balanced with Level 3 evaluation explaining the lack of information linked to how as a new product e-cigarettes may become more addictive over-time (Level 2 EV). The use of data to compare the proportion of income taken up by the two products was then well analysed in context (L3+KAA). The final paragraph then critiqued this by questioning the PED measures and computational problems for consumers in comparing the two products (Level 2 EV). Overall it achieved top Level 3 KAA marks and Level 2 evaluation as an assess question and also achieved top Level 3 evaluation as a discuss question. A well-structured 15 mark response will enable you to more fluidly link knowledge and understanding in context using relevant and focused examples which are fully integrated into one paragraph. This will then enable you to provide linked evaluation to a similar standard. Ensuring the evaluation is balanced and covers the broad elements of the question in depth. 9 out of 15 marks awarded. The initial paragraph defined PED and explained relative price elasticity. The next paragraph obtained a low Level 3 response in looking at the addictive nature of tobacco cigarettes as price inelastic. Whilst the next paragraph started with ‘however’ it covered a separate analytical point regarding health concerns for e-cigarettes to a Level 3 standard. The next page attempted to look at a second factor regarding price-elasticity but linked addiction to habitual behaviour locking in the earlier Level 3. There was a possible separate low Level 2 coverage of brand loyalty. Again the next paragraph whilst beginning with ‘however’ was not convincing as evaluation. The use of the data comparing the price did not go far enough in explaining a clear reason for the different price elasticities, scoring a low Level 1 KAA. The coverage of inferior goods was wrong but the end of the paragraph was worthy of Level 1 evaluation. The diagram and its explanation achieved Level 1. Overall the response achieved Level 3 KAA and Level 1e – evaluation, resulting in 8 + 1e. It is worth planning out your response so that your evaluation offers critical thinking supported by chains of reasoning and appropriate reference to context to achieve top level evaluation. Writing however does not guarantee you evaluative marks.

Examiner's report extract for June 2017 Paper 1 question 6(e)

June 2016 · AS Paper 1 · Q5(a) 1 mark Multiple choice

Data and extracts for question 5

5 “Since peaking at 132p a litre in July 2014, petrol prices have fallen by 20%”. (Source: adapted from UK petrol prices cut again, L Elliott, The Guardian 12-1-15 http://www.theguardian.com/business/2015/jan/12/oil-slump-uk-petrol-prices-fall)

(a) What is the expected percentage change in the quantity of petrol demanded if the price elasticity of demand is –0.2? (1) A –0.4% B +0.4% C –4% D +4%

June 2016 · AS Paper 1 · Q5(b) 3 marks AO1=1, AO2=2 Short answer

Data and extracts for question 5

(b) The price elasticity of demand for petrol is –0.2. Explain the change to the total revenue of petrol stations as a result of cutting their prices. (3)

Examiner's comment

The more able responses for this question immediately used a price inelastic demand diagram to explain how a cut in their price would result in a fall in total revenue. Elongated answers often started by stating the PED formula and re-working the above question 5(a) before then moving on to a long written response. Written responses did not always carefully identify that a twenty percent fall in price resulting in little change in quantity demanded meant there would be a fall in total revenue, instead the resulting change was argued to be a rise in revenue or no change at all. The most common limitation to candidate answers was the absence of any mention of the change in total revenue. This answer achieved 3 out of 3 marks. The initial response is not relevant. The candidate has been drawn in by thee initial reference to PED rather than looking at the question in full. Unfortunately the answer they provide regarding PED is the answer to question 5(a). The answer referring to 'Oil (petrol) is a price inelastic product' provides a concise response earning full marks. The candidate identifies that 0.2 is price inelastic, explains what this means regarding a price fall (1+1 marks for Application) and how this results in a fall in total revenue (1 mark for Knowledge). Ensure you carefully read the question in full. In some cases knowledge marks were lost for not identifying the fall in prices would result in a fall in revenue or defining total revenue. This answer achieved 1 out of 3 marks. The initial sentence identifying the change in revenue is accurate (1 mark for knowledge). The candidate then moves on to what may happen next. They may be referring to an extension in demand or a shift out in demand but it comes across as confused. A diagram will often help make clear what you are trying to say. In this case a diagram indicating an extension in demand, given demand is price inelastic, may have avoided the confusion for this candidate. Practice and use diagrams.

Examiner's report extract for June 2016 Paper 1 question 5(b)

June 2016 · AS Paper 1 · Q6(b) 10 marks AO1=2, AO2=2, AO3=2, AO4=4 10-mark response

Data and extracts for question 6

The market for housing Figure 1 – Estimates of the price elasticity of supply of new housing, selected countries 2.5 2.0 1.5 Price elasticity of supply 1.0 0.5 0.0 (Source: adapted from Caldera Sánchez, A. and Å. Johansson (2011), “The Price Responsiveness of Housing Supply in OECD Countries”, Figure 3, OECD Economics Department Working Papers, No. 837, OECD Publishing. http://dx.doi.org/10.1787/5kgk9qhrnn33-en) Figure 2 – Index of UK house prices (1993 = 100) 400 375 350 325 300 275 250 225 200 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 (Source: http://www.nationwide.co.uk/about/house-price-index/download-data#~ ) Extract A Problems facing UK first time buyers Over a third of aspiring first time buyers in the UK have given up hope of ever being able to save for a deposit to buy a property, new research has found. A deposit is the minimum amount that must be paid upfront when buying a property, which is a proportion of the price of the property. The UK Government has a Help to Buy scheme designed to help people buy a home. The 5 government subsidises the mortgage (loan) needed to buy a property, so buyers require a smaller amount saved as a deposit. Under this scheme, first time buyers need as little as a 5% deposit to qualify for a mortgage. This is due to end in the first few months of 2017. The research from mortgage insurer Genworth says this will mean a return to 20% deposits, which would see the average time needed to save for a deposit rise from three 10 years to over 10 years. “Trying to buy your first home in the current climate is like chasing a runaway train. Even with good salaries that could comfortably support a mortgage, thousands of aspiring first time buyers can only save modest sums, especially those who are already paying rent. This deposit trap is why many feel they are left with the all or nothing choice of 15 borrowing from family or waving goodbye to ever owning a home,” said Simon Crone, a vice president at Genworth. “Help to Buy has significantly improved access to mortgages with deposits that are actually realistic to save. The numbers using the scheme may be modest, but it has made significant inroads in the short-term to boost access at the lower end of the property 20 market,” he pointed out. (Source: adapted from http://www.propertywire.com/news/europe/ uk-first-time-buyers-201409309641.html September 2014) Extract B Housing and flood defences A radical new approach to housing and a £2.3 billion of investment in flood defences were announced as part of the UK Government’s new National Infrastructure Plan 2014. One key proposal is for the government to plan, build and sell homes. An initial programme on a government-owned former airfield near Cambridge will see the development of 10 000 homes. This approach will fast track the development by 5 providing certainty and making new homes available more quickly. The government will make the initial investment but expects that later costs will be met through the sale of land and homes. It will also evaluate the feasibility and economic effects of rolling out this model on a wider scale, to support and accelerate housing supply. The plan also commits to £2.3 billion of capital investment to over 1400 flood defence 10 projects in a 6-year programme of investment. As a result, over 300 000 homes will be better protected and over £30 billion of economic damages prevented. Major projects that will benefit include £42 million for the Oxford Flood Alleviation Scheme, £80 million for the Humber Estuary and over £17 million for Tonbridge, Yalding and the surrounding communities. 15 (Source: adapted from https://www.gov.uk/government/news/ambitious-plans-for-housing-flood-defence- and-roads-set-out-in-national-infrastructure-plan-2014)

(b) With reference to Extract A, assess the likely impact of the Help to Buy scheme on the market for rented properties in the UK. (10)

Examiner's comment

The question required candidates to assess the impact of the Help to Buy scheme on the market for rented properties in the UK, with reference to Extract A. It proved to differentiate effectively between the quality of responses particularly at the top and lower end of the mark range. Typical responses carefully used the data to identify that this was a subsidy and would make home ownership more attractive thus reducing demand for rented properties as a substitute. Level 2 responses tended to limit themselves to the impact on the price ignoring the broad elements of the question associated with the market for rented properties. The more able responses, which were able to access Level 3, then moved on to identify there was a negative cross price elasticity of demand or make use of a diagram for the rented sector looking at the impact on the price for those renting and how landlords would be affected. Typically this then allowed them to question how close a substitute rented properties were or question the size of the assistance provided or long term availability of the Scheme as mentioned in Extract A. However a few answers mainly provided an answer on the impact on the housing market or when explaining the impact on the rented sector did not move on to evaluate this. Responses which provided thin evaluation by just mentioning magnitude or time scale only achieved a Level 1 evaluative award. 10 out of 10 marks awarded. The candidate achieves all 6 Knowledge, Application and Analysis marks available by securely achieving top Level 3 (L3KAA). They immediately answer the question by saying there would be a fall in demand for rented accommodation. They link their knowledge of Help to Buy acting as a substitute by applying the data in a relevant and well-focused way, by how it will make housing more attractive and thereby reduce demand for the rental sector. The candidate then demonstrates their understanding of the concept of cross price elasticity of demand as the core concept in the question. The definition of cross elasticity of supply is accurate and in depth by identifying it is positive indicating home ownership and rented properties substitutes. The next page includes evaluative comments. The evaluation is well balanced against the initial arguments, explained in depth and in context. Make sure you develop key knowledge with concise explanations and precise use of data. This response was very theoretical whereas other high scoring responses focused more on the impact on landlords and those renting; either approach is to be welcomed. Similarly well balanced evaluation will also be well explained and in context as in this example; albeit perhaps not so extensive given time constraints. 1 out of 10 marks awarded. This candidate does not answer the question. They are awarded a low Level 1 response (1 mark) for identifying Help to Buy as a subsidy but the information provided is irrelevant to answering the question. Evaluation cannot be awarded as they are not answering the question. It is essential that candidates take the time to carefully understand the demand of the question. In this case identifying the cause (Help to Buy making home ownership more attractive) and the effect (impact on rented market); then identifying what the question is asking you to focus on, i.e. evaluating the effect on the market for rented properties in the UK, with reference to Extract A.

Examiner's report extract for June 2016 Paper 1 question 6(b)

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Price, income and cross elasticities of demand Theme 1

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