Economics 9708/42 May/June 2024: question paper and mark scheme

Mark scheme

1(a) Explain what is meant by internal economies of scale, using an example 3 from the information. Internal economies of scale are a reduction in long run average costs (LRAC) 1 as the firm increases its output 1 Technical economies or Purchasing economies 1 Candidates may use Better electrode design, etc from the information 1 1(b) Consider what is meant by minimum efficient scale and to what extent 3 the data in Table 1.1 suggest this has been achieved. Minimum efficient scale (MES) is the first output level on the long run average cost (LRAC) curve when further reductions in average costs no longer take place. 1 Technology A suggests that MES has not been reached. 1 Technology B suggests that MES may have been reached. 1. 1(c) Analyse, with the aid of a diagram, the likely impact of the change to EV 6 on the labour market for workers producing ICE in southern Germany. Identifies the unemployment as Structural / Occupational 1, This will reduce wages as demand falls. 1 Need for re-training 1 Diagram award marks as follows: Shift of demand from D to D1 (1) Shows a fall in wages W to W1 and Fall in labour L to L1 / increase in unemployment (1) Axes/labels (1) 1(d) Evaluate, the likely macroeconomic effects of the switch to EV for both 8 Saudi Arabia and Singapore. S Arabia: exports reduced 1, X-M of AD reduced 1, expect level of output to fall 1, governments may increase G to offset fall in exports 1, supply may be restricted to maintain price of oil and X-M remains indeterminate 1. Max 3 Singapore: taxation receipts reduced 1 the pattern of consumption may change 1, but government spending may decrease to offset fall in tax revenue 1. Taxation may increase for other goods or on income.1 Budget deficit 1 Max 3 Evaluation 2 marks e.g. S’Pore: Effect depends on whether electricity to fuel EV is produced by alternatives to oil. 1 Saudi Arabia, S’pore: Effect depends upon alternative source of taxation revenue. 1 Needs a different evaluative comment for S Arabia and S’pore 2 x 1mark Accept all valid responses. EITHER

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2 Market failure exists in all economies. 20 Evaluate, with the aid of a diagram(s), the meaning of market failure and two policies a government may use to correct market failure. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis Identification and explanation of market failure regarding this question may relate to allocative inefficiency, productive inefficiency or information failure. Market failure can be explained by defining allocative efficiency and linking this to the requirement to allocate resources to maximise consumer satisfaction. This can be supported by a diagram illustrating a level of output where AR = MC or MSB = MSC which is consistent with an outcome that achieves allocative efficiency. Productive inefficiency occurs when the firm is not producing at its minimum average costs. Forms of competition other than perfect competition may be used to show both the lack of allocative and productive efficiency. Government intervention takes place to address the failure of market forces to allocate resources efficiently. In this case positive externalities would lead to under-consumption of a good or service. The negative externality leads to an over production of the good. A wide range of government intervention can be used to correct market failure. These may include: subsidies to increase consumption indirect taxation producers use of advertising the direct provision of goods and services price restrictions/quantity direction A clearly labelled, accurate diagram can be used to show the impact of a positive/negative externality on the level of output and the welfare change will be identified. The diagram could show the market equilibrium point which does not take into account the existence of market failure and may compare this with the efficient level of output when the market failure is taken into account. The diagram may be amended or re-drawn to show the impact of a chosen policy(ies) and the impact on consumption or production shown. Reference to the diagram and the outcomes it illustrates showed be made in the text. 2 AO3 Evaluation A government might introduce a subsidy/indirect tax to encourage consumers/producers to change behaviour, however it is difficult to measure the precise value of the subsidy/indirect tax. Subsidies are costly in that the funds might have been used by governments for other purposes. This means governments will have to make a value judgement when deciding whether to provide a subsidy. Indirect taxes may be used to offset the effect of the market failure. Also, the impact on price and output in some circumstances takes a long time to become effective depending on the length of contract or production process. Advertising is often costly and it is not always certain that it will have a sufficiently persuasive effect to ensure the correct level of output/ consumption is reached. Direct provision is also costly and sometimes less efficient than that provided through market forces. It is possible to show that government intervention can reduce the level of inefficiency caused by the existence of positive externalities, but it is not clear whether the net effect of government intervention will always be positive. Some types of intervention will be more effective than others depending on the nature of the good/service under consideration. Accept all valid responses. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6 OR

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3 Evaluate, with the aid of a diagram(s), whether excess profit (super- 20 normal profit) is always necessary for the continued existence of firms in perfect competition and monopoly. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: Definitions of perfect competition and monopoly. The assumptions/characteristics of perfect competition and monopoly. Understanding of the difference between the short run (SR) and the long run (LR). The implications of the assumptions/characteristics for changes in the SR/LR Analysis of the short-run equilibrium for both a perfectly competitive firm and a monopoly. Illustration of the ability of firms in both forms of market structure to earn excess profits in the short run and long run. Consideration of the long-run: the change in equilibrium for a perfectly competitive firm and the lack of change in that of a monopoly. The diagram could show the market equilibrium for both the short-run and long-run for both perfect competition and monopoly. Reference to the diagram(s) and the outcomes illustrated should be made in the text. AO3 Evaluation SNP are not controlled by the firm in perfect competition but a product of increased demand to which the firm reacts by equating MR to MC. The nature of SNP is transitory. In monopoly the firm will secure long-term SNP by pursuing profit maximization MR = MC. SNP are long term. The monopolist may use the SNP to realise dynamic efficiency such as investing in better production techniques. The monopolist may not fully exploit the ability to extract SNP but may pursue alternative strategies such as sales revenue maximization. Natural monopoly may exist and therefore SNP may not be earned. Monopolies may not necessarily earn supernormal profits. Accept all valid responses. EITHER

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4 In 2022, many countries experienced a high rate of inflation caused by 20 disruptions to the supply of goods and services arising from the Covid- 19 pandemic and the conflict between Russia and Ukraine. In one country, the government cut taxes and the central bank raised interest rates. Evaluate the likely impact of these policies on that government’s ability to control inflation. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis An understanding that the stated causes of inflation are due to a reduction in supply for the countries experiencing the inflation. This may be regarded as cost-push/imported inflation. Analysis of the effect of the causes in terms of an aggregate supply (AS)/aggregate demand (AD) analysis or a Leakages and Injections approach. An explanation of the impact of tax reduction on consumer demand or retained profits for industry. An explanation of the impact of higher interest rates either on consumer demand or on investment. This can be developed either through the monetary transmission mechanism analysis or AS/AD analysis. An explanation of the impact of lower taxes on consumer demand or on investment. This can be developed through AS/AD analysis. AS/AD Explanation and analysis of the effects of tax reductions and Interest rate on economic growth and unemployment/equality. 4 AO3 Evaluation Evaluation may be concerned with the effects of the changes produced by the two policies and the effects on the analyses used to reduce inflation. An initial analysis of the policy approach to reducing the level of inflation which may be in terms of how accurate the government is in determining the amount of spending reduction or increase in the rate of interest required. An initial analysis of the policy approach to reducing the level of inflation which may be in terms of how accurate the government is in determining the amount of spending reduction or increase in the rate of interest required. The time lags between policy implementation and outcome may also be discussed as might expectation and the role they play in determining policy outcomes. Recognition that the policies are concerned with AD and the problems are largely due to supply shortages. The short run and long run implications of the policies on achieving the alternative aims may be evaluated. The opportunity costs of policies may be commented upon. Accept all valid responses AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6 OR

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5 Evaluate the likely impact of globalisation on a low-income country’s 20 standard of living. Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question. AO1 and AO2 out of 14 marks. AO3 out of 6 marks. Indicative content Responses may include: AO1 Knowledge and understanding and AO2 Analysis Definitions of globalisation in terms of the development of world-wide international trade links: the flow of goods, services capital and people between countries. The sub-division of manufacturing processes which are then undertaken in different countries. Candidates may quote phone, car manufacturing, world football brands, law firms as examples. Definition of a low income country. An understanding of the difference effects of globalisation as resource extraction and manufacturing activity. Definition of the standard of living in terms of both material real GNI per head and what that may purchase and non-material improvements in life: social, health education and working conditions. Effect of globalisation of long term (potential) economic growth shown by a rightward shift of the production possibility frontier (PPF). Sources of funding for globalisation: government foreign aid, MNCs and Commercial loans. Analysis of investment on a country’s national income reference to the circular flow of income Injections, the Multiplier, or an AD/AS analysis. The analysis extends to explain the effect on other economic variables: employment, interest rates, the balance of payments. Impact of increased investment on a country ‘s aggregate supply/PPF. 5 AO3 Evaluation Destruction of host country’s indigenous industry by large scale production. Negative impact on employment exceeds benefit of employment. Globalisation may establish a local Monopoly which exploits the consumers with higher prices and lower output. Globalisation may lead to MNC using transfer pricing to remove profits from developing country to tax haven reducing the ability of a developing country to invest in education and health. The jobs created may be low-skilled with the multinational employing expatriate workers for the more senior and skilled roles. Resources are exploited without regard for local customs. Iron ore extraction in Australia destroyed sacred aboriginal site. The forcible removal of indigenous people to allow for resource extraction. Private capital is often reluctant to allow debt forgiveness when economic trouble affects a country e.g., Sri Lanka. The positive and negative effects on economic variables: employment, interest rates, the balance of payments. AO1 Knowledge and understanding and AO2 Analysis 14 AO3 Evaluation 6