Economics 9708/21 October/November 2020: question paper and mark scheme

Mark scheme

1(a) Describe the functions of an entrepreneur in the production 2 Candidates need to have both of these functions process. to gain 2 marks • For a reference to taking decisions/organising, combining or coordinating the factors of production (1 mark) • For a reference to taking a risk (1 mark) 1(b) How does a customs union differ from a free trade area? 2 Customs union: • an agreement between two or more countries • For clear explanation of a customs union (1 mark) to remove trade barriers and reduce or • For a clear explanation of a free trade area (1 mark) eliminate customs duties on mutual trade • a customs union has a common external tariff The key difference between them is the common external tariff; this is against non-member countries part of a customs union, but not part of a free trade area. This difference needs to be made explicit to gain both marks, e.g. through Free trade area: words such as ‘whereas’ or ‘however’. • an agreement between two or more countries that allows the countries to freely trade with each other • a free trade area does not have a common external tariff; the countries are allowed to charge whatever tariffs they want against non-member countries 1(c) Use a supply and demand diagram to explain how the exchange 4 rate against the euro was maintained as shown in Fig. 1.1. • For a supply and demand diagram showing the equilibrium at 0.7 Latvian Lats per euro (Up to 2 marks) • For an explanation of how a government can intervene in a A government can intervene in a market to market to maintain a particular price/exchange rate throughout maintain this particular exchange rate on a the period from 2007 to 2013 (Up to 2 marks) regular basis through: • sales of foreign reserves 4 marks maximum • buying/selling of currency on the foreign exchange market 1(d)(i) Explain what is meant by a ‘budget deficit’. 2 • A budget shows the details of government expenditure and government revenue (1 mark) • A budget deficit is the amount by which government expenditure exceeds government revenue (1 mark) 1(d)(ii) Analyse, using a diagram, how fiscal measures to reduce the 4 Measures to reduce government expenditure: budget deficit could be used by the Latvian government to lower • deflationary fiscal policy to reduce public the relatively high rate of inflation. expenditure • policy of government to move from a budget • Analysis of the impact of fiscal measures of reducing government deficit to a balanced budget expenditure and increasing government taxation to lower the relatively high rate of inflation in Latvia (Up to 2 marks) Measures to increase government taxation: • For an AD/AS diagram showing the shift of the AD curve to the • increases in direct taxes, e.g. taxes on left and a lowering of the general price level (Up to 2 marks) income • increases in indirect taxes, e.g. taxes on expenditure Impact on inflation: • the impact of reduced government expenditure and increased government taxation will be to reduce inflationary pressure in the economy 1(e) Discuss whether it is better for Latvia to specialise in banking 6 Advantages of Latvia specialising in banking services rather than having a more diversified economy services: • advantages of specialisation, such as in • For a discussion of the advantages of Latvia specialising in relation to comparative advantage and the banking services (Up to 3 marks) existence of a lower opportunity cost ratio • For a discussion of the advantages of Latvia having a more • builds up expertise diversified economy (Up to 3 marks) • further establishes its reputation as a banking • centre 5 marks maximum • banking services do not have significant Reserve 1 mark for a conclusion transport costs, especially online banking 6 marks maximum Advantages of Latvia having a more diversified economy: • avoids over-specialisation • this could be advantageous if there is a reduced demand for financial services • spreads risks

Mark scheme

2(a) Explain, with the help of examples, how imperfect information 8 Merit good: among consumers affects their consumption of merit goods and • a particular type of private good demerit goods. • it is rival and excludable • it has intrinsic benefits for an individual Up to 2 marks for Knowledge and Understanding • examples include education or health care Demerit good: • Knowledge and understanding of imperfect information in relation • a particular type of private good to a merit good and a demerit good, with the help of suitable • it is rival and excludable examples (Up to 2 marks) • it is potentially damaging for an individual • examples include alcohol or tobacco 2 marks maximum Imperfect information and a merit good: Up to 6 marks for Application • problem of information failure • merit goods are likely to be under-consumed • Application of the idea of imperfect information to the under- and under-produced consumption of a merit good (Up to 3 marks) • consumers do not fully appreciate the value of a merit good • Application of the idea of imperfect information to the over- Imperfect information and a demerit good: consumption of a demerit good (Up to 3 marks) • problem of information failure 6 marks maximum • demerit goods are likely to be over-consumed and over-produced • consumers do not fully understand the potential dangers of a demerit good 2(b) Discuss why in most mixed economies, resources are mainly 12 Features of market forces: allocated using market forces and the price mechanism. • existence of price mechanism • prices operate as signals to indicate Up to 8 marks for Analysis consumer preferences • private sector ownership/decision-making • Analysis of market forces/price mechanism element with no or very little government intervention (Up to 4 marks) • Analysis of government intervention element (the use of the word Features of government intervention: ‘mainly’ makes it clear that market forces/price mechanism is not • existence of public sector the exclusive method of resource allocation) (Up to 4 marks) • public goods and merit goods can be provided by the government 8 marks maximum Up to 4 marks for Evaluation For exercising some judgement on why in most mixed economies, resources are mainly, but not exclusively, allocated using market forces and the price mechanism Reserve 1 mark for a conclusion 4 marks maximum

Mark scheme

3(a) Cross elasticity of demand for bread with respect to the price of 8 rice is +1.4 while the cross elasticity of demand for bread with respect to the price of butter is -0.7. Explain why the cross elasticity of demand figures for bread differ. Up to 2 marks for Knowledge and Understanding • What is meant by XED (1 mark) Cross elasticity of demand: • The formula for XED (1 mark) • the percentage/proportionate change in the quantity demanded of Good A divided by the 2 marks maximum percentage/proportionate change in the price Up to 6 marks for Application of Good B • Application to goods as substitutes/positive XED (1 mark) • Application to bread and rice as substitutes (1 mark) • Application to figure and strong relationship (1 mark) • Application to goods as complements/negative XED (1 mark) • Application to bread and butter as complements (1 mark) • Application to figure and weak relationship (1 mark) 6 marks maximum 3(b) Explain the implications of price elasticity of demand and 12 Potential usefulness of PED: income elasticity of demand for business decisions. Discuss • it can be helpful in giving a business an which measure is likely to be more useful to a business. indication of the extent to which a change in price may affect revenue Up to 8 marks for Analysis • this will show that to increase revenue, the price of an elastic good should be reduced • Analysis of the usefulness of price elasticity of demand to a and the price of an inelastic good should be business (Up to 4 marks) increased • however, to be able to make appropriate • Analysis of the usefulness of income elasticity of demand to a calculations, a businessman will need to take business (Up to 4 marks) into account the availability of substitutes, the width of the definition of the product, the 8 marks maximum amount spent on the product and the time Up to 4 marks for Evaluation period under consideration For exercising some judgement on the relative extent to which price Potential usefulness of YED: elasticity of demand and income elasticity of demand can be of use to • it can be helpful in giving a business an a business indication of the extent to which a change in income may affect revenue Reserve 1 mark for a conclusion • however, to be able to make appropriate 4 marks maximum calculations, a businessman will need to take into account whether a good is a normal or an inferior good, the proportion of income that is spent on a particular good, the width of the definition of the product and the level of economic development of the particular economy

Mark scheme

4(a) Explain, with the aid of a diagram, the impact of a subsidy to 8 domestic producers of a product on the export revenue from that product. Up to 2 marks for Knowledge and Understanding Both knowledge and understanding marks are for For correct diagram: the diagram • Vertical axis correctly labelled: P/Price Horizontal axis correctly labelled: Q/Quantity (1 mark) • Shift of the supply curve to the right and new equilibrium price and equilibrium quantity shown (1 mark) 2 marks maximum Impact of a subsidy in a market: Up to 6 marks for Application • government payment of a subsidy to a firm will reduce the costs of production • Explanation in relation to the impact of a subsidy to domestic • this will encourage firms to supply more output producers of a product on the export revenue from that product. at any given price (Up to 3 marks) • this will cause the supply curve to shift to the right • Explanation in relation to the effect of PED/PES on export • the equilibrium price in the market will be revenue (Up to 3 marks) lower • the equilibrium quantity in the market will be 6 marks maximum higher • the effect on change in revenue will depend on PED/PES 4(b) Discuss whether supply-side policies are an effective way of 12 Supply-side policies could include: correcting a deficit on an economy’s current account of the • increasing incentives to work by lowering balance of payments. income tax and unemployment benefits, but this will not necessarily lead to an increase in Up to 8 marks for Analysis the supply of labour, especially if there are no jobs • The potential advantages of supply-side policies • increasing expenditure on education and (Up to 4 marks) training, but this will not necessarily lead to an increase in labour productivity or to an • The potential disadvantages of supply-side policies increase in the occupational mobility of labour, (Up to 4 marks) and its effect can take a long time to show • reducing the power of trade unions, but this 8 marks maximum will not necessarily lead to a reduction in the number of days lost through industrial action • encouraging the privatisation of firms, but this Up to 4 marks for Evaluation will not necessarily lead to an increase in the efficiency of firms and a way of correcting For exercising some judgement on whether supply-side policies are such a deficit an effective way of correcting a deficit on an economy’s current • encouraging deregulation, e.g. through account of the balance of payments reducing the barriers of entry into an industry, but this will not necessarily lead to an increase Reserve 1 mark for a conclusion in the number of firms entering an industry • providing more information about job 4 marks maximum vacancies in different parts of a country, but this will not necessarily lead to the correction of a current account deficit