Economics 9708/22 October/November 2020: question paper and mark scheme

Mark scheme

1(a) With reference to the extract and Fig. 1.1, use supply and demand diagrams to explain the change in the price of natural vanilla 1(a)(i) from 2004 to 2009 3 The extract makes it clear that the fall in price of vanilla from 2004 to 2009 is For an accurately labelled diagram showing a decrease in the demand for because of a decrease in the demand for vanilla vanilla caused by a fall in the price of (1 mark) and the fall in price of vanilla (1 mark) vanillin that is more reliable in supply. For an accompanying explanation of the cause of this decrease in demand for vanilla. The extract indicates that this was a fall in the price of vanillin. (1 mark) 1(a)(ii) from 2015 to 2018 3 The rise in the price of vanilla from 2015 to 2018 was caused by For an accurately labelled diagram showing an increase in the demand for • a decrease in the demand for vanillin vanilla (1 mark) OR a decrease in the supply of vanilla (1mark) each to show as a result of concern about the health a rise in price of vanilla (1 mark) risks which caused an increase in the demand for vanilla. For an accompanying explanation of a valid cause of the change identified in • a decrease in supply of vanilla caused the extract by ‘poor harvests’ and the cyclone • In the case of an increase in demand for vanilla concerns about possible health risks of vanillin (1 mark). A decrease in supply as vanilla farmers • In the case of a decrease in supply the ‘poor harvests’ or the cyclone withdrew from the industry is not an which hit Madagascar (1mark) acceptable explanation because of the time period. Some candidates are providing an explanation of both a decrease in supply and a rise in demand. This is acceptable, but only one reason is required for the mark available. 1(b) Ice cream producers can use natural vanilla or vanillin to produce ice cream. 1(b)(i) State the concept that an economist would use to measure the 1 Accept the formula as sufficient knowledge responsiveness of the demand for natural vanilla to a change in the of the concept if it is clear that the price of vanillin. candidate knows the concept underlying the formula. The relationship would be measured using the concept of cross elasticity of demand (1 mark) 1(b)(ii) Explain the value that you would expect for this measurement. 3 Accept answers where the candidate refers to the text and explains that since For stating that the value would be positive because these goods are the two products are close substitutes you substitutes (1 mark) would expect the value to be high. For an explanation of why a positive relationship would be expected i.e. a fall in the price of vanillin has caused a fall in the demand for vanilla (1 mark) For an explanation that the higher the size of the coefficient the stronger will be the relationship (1 mark) 1(c) Explain why the price elasticity of supply of ice cream made with 4 The most important factors that influence vanillin is likely to be relatively more elastic than the price elasticity of the price elasticity of supply are the ease supply of ice cream made with natural vanilla. with which production can be increased or decreased and the availability of stocks. For a clear understanding of the concept of price elasticity of supply (this The former is determined for e.g. by the could be shown through an accurate formula for PES) (1 mark) nature of the product, the availability of required factors of production any stocks held and the existence of spare capacity. And the distinction between elastic and less elastic in terms of the extent to It is likely that the price elasticity of supply which the quantity of ice cream supplied can respond to a change in price of ice cream made with vanilla is less (1 mark) elastic than that made with vanillin because the text makes it clear that it takes a long time to produce new vanilla For an explanation of why the price elasticity of supply of ice cream made plants (3 years) and many farmers left the with vanillin is likely to be higher than the price elasticity of supply of ice industry in the years that vanilla prices cream made with vanilla (or why the price elasticity of supply of ice cream were falling meaning that there is unlikely made with vanilla is likely to be lower than the price elasticity of supply ice to be any spare capacity. So even though cream made with vanillin. (Up to 2 marks) vanilla prices are rising rapidly the quantity of natural vanilla supplied may be slow to rise. Vanillin on the other hand is made from ‘more reliable sources of plentiful raw materials’ that indicates that an increase in the quantity supplied can be made much more easily and the price elasticity of supply is likely to be more elastic. 1(d) Discuss whether the recent rise in the price of vanilla is on balance 6 The rise in the price of vanilla could be likely to have a positive or negative impact upon Madagascar’s expected to have a positive effect on economy. Madagascar’s economy. There is expected to be an increase in the value of For analysis of the likely positive impact in terms of the current account of the exports that would increase aggregate balance of payments and the possible impact on output, prices and demand and stimulate output and employment. (Up to 3 marks) employment. Much depends however upon the price elasticity of demand for For analysis of the likely negative impact in terms of the current account of vanilla. If the demand is price elastic then the balance of payments and the possible impact on output, prices and export revenues will fall and aggregate employment. (Up to 3 marks) demand will contract. The current account of the balance of payments might become Reserve 1 mark for a reasoned conclusion on whether the rise in price is a deficit. The shortage of natural vanilla likely to have a positive or negative impact upon Madagascar’s economy. So and the rise in its price might result in a 5 marks maximum if no conclusion provided. movement to the use of cheaper vanillin and Madagascar’s exports might fall with a negative impact upon output and employment. In addition a negative impact might arise if export revenues increase, but because of lack of capacity in the economy demand pull inflation is created. Some might argue that Madagascar has a clear comparative advantage in production of vanilla so the impact might be positive as resources are re-allocated back into vanilla production, but some might use the text to question whether it is a good idea to be over reliant upon one crop. 1(d) Candidates need to give a balanced answer that considers both the positive and negative impact before arriving at a reasoned conclusion. Price elasticity of demand could be relevant, but is not essential for full marks.

Mark scheme

2(a) In some countries vaccinations against infectious diseases are offered 8 The imposition of a subsidy will shift the at a price and payment has to be made. supply curve to the right reducing price and increasing quantity. The price will fall Use a diagram to explain how a subsidy given to producers in the and the consumer surplus will increase. market for vaccinations will affect the market price and explain the The impact on each will be determined by impact of this subsidy upon the consumer surplus in this market. factors such as the price elasticity of demand and the price elasticity of supply vaccinations. For knowledge and understanding of the meaning of consumer surplus (2 marks) Up to 2 marks For application using an accurately labelled diagram that shows the shift to the right of the supply curve (1 mark) and the fall in equilibrium price and rise in equilibrium quantity of vaccinations (1 mark). For the consumer surplus before the subsidy (1 mark) and the rise in consumer surplus after the subsidy (1 mark) For application that explains one other factor that determines the fall in price for e.g. the price elasticity of demand, the price elasticity of supply or the size of the subsidy (1 mark) that explains one other factor that determines the change in the consumer surplus for e.g. the price elasticity of demand, the price elasticity of supply or the size of the subsidy. (1 mark) Up to 6 marks 2(b) If the cost of the subsidy is to be paid from tax revenues, discuss 12 Direct taxes include income tax and whether the revenue should be raised through direct taxes or indirect corporation tax. They have the taxes. disadvantage that there is widespread tax evasion especially in less developed For analysis considering the advantages (Up to 3 marks) and economies. On the other hand they can be disadvantages (Up to 3 marks) of raising the revenue through direct taxes used to promote equity. Indirect taxes are less easy to avoid, but they are regressive (4 marks maximum) and are potentially inflationary. Very often high indirect taxes can lead to the For analysis considering the advantages (Up to 3 marks) and development of black markets. disadvantages (Up to 3 marks) of raising the revenue through indirect taxes (4 marks maximum) For evaluative comment with 1 mark reserved for a reasoned conclusion on which type of tax should be used. (Up to 4 marks)

Mark scheme

3(a) Explain how the factor of production enterprise contributes to 8 Enterprise takes the risk of production and aggregate supply in a modern economy and how it differs from the organises the other factors. In a modern other factors of production in terms of the reward for its services. economy this often leads to the divorce of ownership (shareholders) from control For knowledge and understanding of the role of enterprise in the (management). Profit is the reward for production process in a modern economy: enterprise, but profit is the reward for risk and in loss making firms there will be no Enterprise undertakes the organisation of the other factors of production (1 profit. This contrasts with the rewards to mark) It also bears the risk of production (1 mark) labour, land and capital. (2 marks) Aggregate supply, also known as total For application: output, is the total supply of goods and services produced within an economy in a Profit is the reward to enterprise for its services (1 mark) In order to produce given time period. goods and services enterprise needs to hire labour which is rewarded with wages (1 mark), land which is the natural resource rewarded with rent (1 In order to contribute to aggregate supply mark) and capital which is rewarded with interest (1 mark) enterprise organises the other factors of production and takes the risk that costs Enterprise will utilise the other factors of production to produce goods and will not exceed revenue leading to services that increase aggregate supply (1 mark). Aggregate supply will negative profit. increase through an increase in productive potential or a fall in unused resources. (1 mark) (Up to 6 marks) 3(b) Explain how aggregate demand is likely to be affected by an increase in 12 Candidates need to explain how the the money supply and consider whether the impact of such an increase increase in the money supply will affect will be on employment or on the general price level. the selected component. For example, if consumption is considered it is expected For analysis of the way in which aggregate demand will be affected by an that candidates will explain that the increase in the money supply through an explanation of the impact on at least increase in money supply will reduce two components interest rates and make loans cheaper and the reward for saving lower with the result (Up to 4 marks for each component considered) that consumption will increase. 8 marks maximum For evaluative comment on whether the impact is likely to be on employment or the general price level with 1 mark reserved for a reasoned conclusion (Up to 4 marks)

Mark scheme

4(a) China’s terms of trade index fell from 102.1 in March 2018 to 99.7 in 8 Possible causes of a fall in the terms of April 2018. trade include a fall in the price of China’s exports or a rise in the price of China’s State how the terms of trade are measured, and explain three possible imports. causes of the fall in China’s terms of trade shown above. Candidates need to identify a possible For knowledge and understanding that the terms of trade is a measure of cause and then provide a brief explanation the relationship between export prices and import prices (1 mark) and for an of what might cause this. accurate formula that measures changes in the terms of trade index (1 mark) (2 marks) For example: For application explaining three possible causes of a fall in the terms of • a fall in the value of China’s currency trade (Up to 2 marks for each cause explained) will lead to a rise in the price of imports (1 mark) the fall in the (Up to 6 marks) exchange rate could be caused by falling interest rates in China (1 mark) • a reduction in the costs of production in China’s export industries would lead to a fall in the price of China’s exports (1 mark) this reduction in costs could be caused by an increase in export subsidies (1 mark) • a higher rate of inflation in China’s trading partners would lead to the relative price of China’s exports falling (1 mark) this higher rate of inflation in other countries could be caused by excess government spending in those countries (1 mark) 4(b) Discuss whether a rise in the terms of trade or a fall in the terms of 12 A rise in the terms of trade means that a trade is more likely to be of benefit for an economy. given quantity of exports can purchase a greater quantity of imports and the For an analysis of the advantages and disadvantages to an economy of a opposite is true for a fall in the terms of rise in the terms of trade (Up to 4 marks) trade. If the terms of trade rise exports might become uncompetitive however there is a potential rise in living standards. For an analysis of the advantages and disadvantages to an economy of a fall If there is a fall in the terms of trade in the terms of trade (Up to 4 marks) exports become competitive, but inflation might rise as imports become expensive For evaluative comment with 1 mark reserved for a reasoned conclusion giving rise to cost-push inflation.