Mark Scheme

Section A — Structured Questions

1. (a) (up to 2) Demand = the quantity of a good or service that consumers are willing and able to buy at a given price over a period of time. [2] (b) (up to 4) Two factors explained: rise in consumer incomes (people can afford more); fall in the price of a complement; rise in the price of a substitute (e.g. tea); change in tastes/fashion or advertising; larger population. 1 + 1 development each. [4] (c)(i) Equilibrium price = $6, because at $6 the quantity demanded equals the quantity supplied (both 50,000) (1 + 1). [2] (c)(ii) (up to 4) At $2, quantity demanded (90,000) is greater than quantity supplied (30,000), so there is a shortage/excess demand of 60,000; this would tend to push the price up towards the equilibrium as consumers compete to buy. [4]

2. (a) (up to 2) PED = a measure of the responsiveness of quantity demanded to a change in price; = % change in quantity demanded ÷ % change in price. [2] (b) (up to 4) % change in quantity = (4600 − 5000)/5000 × 100 = −8%; % change in price = (2.40 − 2.00)/2.00 × 100 = +20% (M1 M1). PED = −8 ÷ 20 = −0.4 (A1); |0.4| < 1, so demand is inelastic (A1). [4] (c) (up to 4) Two reasons: petrol is a necessity for many (needed to travel/work); there are few close substitutes; it takes up a small proportion of income for some users; it is habitual. 1 + 1 each. [4]

3. (a) (up to 2) A negative externality = a cost of production or consumption that falls on a third party who is not involved in the transaction (e.g. pollution affecting local residents). [2] (b) (up to 6) Market failure explained: the factory does not pay for the pollution, so the price does not reflect the full social cost; the community bears the cost (dirty water, health effects), so resources are misallocated and the good is over-produced. One government action described: tax the factory (making it pay for the pollution); regulation/laws limiting pollution with fines; tradable permits. Explanation (up to 4) + action (up to 2). [6]

4. (a) (up to 2) Inflation = a sustained/general rise in the average price level of goods and services over time (and a fall in the value/purchasing power of money). [2] (b) (up to 4) Using data: inflation rose from 3% to 9% (rising each year); unemployment fell from 6% to 4%. Award for describing both trends with figures. [4] (c) (up to 4) Two problems: purchasing power falls — money buys less, so living standards drop, especially for those on fixed incomes; savings lose value; uncertainty discourages investment; workers demand higher wages (wage-price spiral). 1 + 1 each. [4]

Section B — Extended Response

5. (up to 8) Levels-marked. Explain policies to reduce unemployment with how each works:

• Demand-side: government spending/lower taxes/lower interest rates raise aggregate demand → firms produce more → hire more workers.
• Supply-side: training/education schemes improve workers' skills so they can fill vacancies; subsidies/incentives to firms to hire; improving job information.
• Levels: 6–8 = two or more policies clearly explained with mechanism; 3–5 = one explained or several described; 1–2 = basic. [8]

6. (up to 12) Levels-marked discussion of free trade, both sides, with a conclusion.

• For: access to a wider range of goods; lower prices through competition and specialisation (comparative advantage); larger markets for exporters; economies of scale; can raise living standards and growth.
• Against: domestic ("infant") industries may be unable to compete and close, causing unemployment; over-reliance on imports; loss of some industries; possible exploitation; not all groups benefit equally.
• Level 4 (10–12): developed arguments on both sides, applied, with a justified conclusion; Level 3 (7–9): both sides with some development; Level 2 (4–6): limited/one-sided; Level 1 (1–3): basic. Credit a reasoned conclusion (e.g. trade usually benefits overall but with losers who may need support/protection in some cases). [12]

Sample Answers with Examiner Commentary

Question 2(b) — Sample Answers

Grade A response. "First I work out the percentage changes. The quantity demanded fell from 5000 to 4600, a change of −400, so the percentage change is (−400 ÷ 5000) × 100 = −8%. The price rose from $2.00 to $2.40, a change of +$0.40, so the percentage change is (0.40 ÷ 2.00) × 100 = +20%. Price elasticity of demand = percentage change in quantity demanded ÷ percentage change in price = −8 ÷ 20 = −0.4. Because the value is less than 1 (ignoring the minus sign), demand for bus tickets is price inelastic — the quantity demanded changed by proportionally less than the price."

Mark: 4/4. Examiner commentary: A model calculation. The candidate works out both percentage changes separately and clearly, applies the PED formula correctly, and — crucially for the second half of the question — interprets the result: a value below 1 in magnitude means inelastic demand, with a correct explanation of what that means. Showing each step protects the method marks, and the interpretation is not forgotten, which is where weaker answers often drop a mark.

Grade C response. "The price went up and demand went down a bit. 4600 ÷ 5000 = 0.92, so demand is inelastic because it did not change much."

Mark: 1/4. Examiner commentary: The candidate reaches the correct conclusion — that demand is inelastic — and earns one mark for that judgement, but the method is not sound. Dividing the two quantities (4600 ÷ 5000) does not calculate elasticity; the PED formula requires the percentage change in quantity divided by the percentage change in price. The candidate needed to find −8% and +20% and divide them to get −0.4. Learning and applying the formula step by step, as in the higher response, would secure the three method and accuracy marks that are missing here.

Question 6 — Sample Answers

Grade A response (extract). "Free international trade can bring important benefits to a country. By trading freely, a country can specialise in the goods it produces most efficiently and import others more cheaply, following the idea of comparative advantage. Consumers gain access to a wider range of goods at lower prices because of greater competition, and exporting firms can sell to much larger markets, allowing them to grow and benefit from economies of scale. This can raise living standards and economic growth.

However, free trade does not benefit everyone equally. New or 'infant' industries in a developing country may be unable to compete with established foreign firms, and could be forced to close, causing unemployment. A country may also become over-reliant on imports for essential goods, which is risky if supplies are disrupted. For these reasons some governments use tariffs or quotas to protect certain industries, at least temporarily.

In conclusion, free trade usually benefits a country overall by lowering prices and encouraging efficiency and growth, but it does create losers as well as winners. So the statement is too strong: trade is generally beneficial, but governments may sometimes need to protect vulnerable industries or support those who lose out."

Mark: 11/12. Examiner commentary: A Level 4 answer. It gives developed arguments on both sides — comparative advantage, lower prices and economies of scale for; infant industries, unemployment and over-reliance against — and applies economic terms accurately. The conclusion is genuinely justified and directly addresses the word "always" in the statement, arguing that trade is generally but not universally beneficial. That direct engagement with the exact wording of the claim, plus a balanced, reasoned judgement, is what places it at the top. A little more use of specific examples would earn the final mark.

Question 3(b) — Sample Answers

Grade A response. "When the factory pollutes the river, this is market failure because the price of the factory's goods does not include the cost of the pollution. The factory only pays its private costs, such as materials and wages, but the pollution creates an external cost that falls on the local community, who suffer dirty water and possible health problems. Because this cost is not paid by the factory, the good is under-priced and over-produced compared with what would be best for society as a whole, so resources are misallocated — this is why it is a market failure. One way the government could reduce the problem is to place a tax on the factory equal to the cost of the pollution. This makes the factory pay for the external cost (the 'polluter pays' principle), raising its costs and encouraging it to produce less or to pollute less by investing in cleaner technology."

Mark: 6/6. Examiner commentary: A full-mark response. The candidate explains why the pollution is a market failure rather than just asserting it: the private cost paid by the factory does not include the external cost borne by the community, so the good is over-produced and resources are misallocated. That chain of reasoning is exactly what the six marks reward. The chosen government policy — a pollution tax — is then explained with its mechanism (internalising the external cost, the polluter-pays principle, the incentive to pollute less), not merely named. Precise use of terms like "external cost" and "misallocated" shows secure understanding.

Grade C response. "It is market failure because the factory is polluting the river and that is bad for the people who live nearby. The government could stop it by making a law to ban the pollution or by fining the factory."

Mark: 3/6. Examiner commentary: The candidate identifies that pollution harms third parties and suggests a sensible policy (regulation/fines), which earns roughly half the marks. What is missing is the economic explanation of why this is market failure: that the factory's price does not reflect the full social cost, so the good is over-produced and resources are misallocated. "Bad for the people who live nearby" describes the harm but does not use the concept of external costs. Explaining the externality in economic terms, and briefly saying how the chosen policy corrects it, would gain the remaining marks.