Economics Year-1 (2008-09) Version 2 ANSWERS

THE NCUK INTERNATIONAL FOUNDATION YEAR (IFY)EconomicsMark SchemeConcepts SyllabusreferenceAnswer1 Ecproblem A A2 Ecgrowth V D3 Externalities D C4 PED G A5 PES I A6 Consumerandproducer surplusJ C7 Costs N A8 PCdiagram R A9 Monopoly S D10 GNP V D11 Circular flow ofincomeU6 D12 Publicgoods Z3 D13 AD/ASdiagram W D14 Fiscalpolicy Z4 B15 GovernmentfinanceZ5 C16 Incomemultiplier U A17 Phillipscurve AE D18 Trade AE B19 Redistribincome AA C20 Interest rates &exchange ratesAE B21 Market failure D Examples of negative externalities22Green taxes L4 & D3 D & S diagram showing effect of taxon supply - S shifts left raising price,and reducing outputs.23 Externalities D PMC + Externality = SMCPMB – Externality = SMBEquilibrium occurs where SMC = SMB24Policy to correctexternality D Consumers are made to pay the truecost of road travel which is > privatecost, hence they consume less. Usingbus or train instead.25 Policy to correctexternality D Less polluting companies can selltheir permits to dirty companieswhose costs therefore are highermaking them less competitive. In thelong run the quantity of permits isgradually reduced.26 Paradox of thrift U Keynes27 Monetarypolicy AB Reduce interest rates.28 Agg Demand W Consumption29 Macro policy U Can redistribute income to lowerincome households who have higherMPC’s hence increasing totalconsumption and boosting sales andproduction.30Paradox of Thrift U Consumers would take this asconfirmation of a downturn and wouldsave harder in order to try to protectthe value of their savings.Micro Economics1a What causes markets to become oligopolistic?[10]Description of characteristics of oligopolistic markets:Number of firms, sizes, number of potential market entrants, barriersto entry, product differentiation, interdependence. (6 marks)How competitive process reduces competition. (4 marks)•Economies of scale•Natural cost advantage•Product differentiation•Anti competitive practicesUp to 2 marks per point developed, 1 mark if just mentioned,to a max of 4 in total.1b Explain why the firm in an oligopoly is believed to have a[10]kinked demand curve.Explanation of elastic PED above kink. (3 marks)Explanation of inelastic PED below kink. (3 marks)Price stability due to discontinuity in AR so causing MR to be constantover a large range of costs and hence the same price being the profitmaximising price over a range of costs(4 marks)2a How do firms grow?[8]In 2 ways:•Internal growth – through increasing output by taking onmore workers, building more factories, offices, extending theirfranchise operations…. (4 )Up to 2 marks for each point plus explanation.1 mark only for listing a way of growing through internal expansion.•Growth through merger, amalgamation or take over. (4marks)Up to 2 marks for each point plus explanation.2b Discuss the costs and benefits of growing through merger.[12]1 marks for each cost/benefit listed, and then up to2 more marks forexplanation of the cost /benefit and evaluation of its importance todifferent types of businesses.Up to 8 marks for costs, and up to 8 marks for benefits to a max of12 in total.3a Explain how price elasticity affects Demand AND Supply.Shows understanding of PES and PED (4 marks)Should explain in words and using formulas for the full marks.Links PES and PED to slope of curves (3 marks)Should show how the slope is different for inelastic and elastic,CORRECTLY for both Demand and Supply.Shows understanding of changing PES and PED along length orposition of curves (3 marks)PED falls along the length of the D curve. Student DOES NOT have to show arithmetically why this is the case but just appreciates that this is so.[10]3bFor PES the starting pointof the curve showswhether it is elastic orinelastic .Supply curves beginningon the Price axis will beelastic, and those on thequantity axis will beinelastic. Those that startat the origin haveelasticity of 1.How do elasticities of demand affect a firm’s pricingdecisions?Shows how PED affects revenue when price rises (4 marks)Students should explain, either in words and/or using diagrams, thatas price is raised for a product with inelastic demand the totalrevenue rises.Simple statement of this relationship should be awarded 1 mark only.A clear explanation of why revenue increases, using diagrams and[10]explanation should be awarded up to 3 marks.If the student applies the concept of responsiveness to the revenue earned expertly then award all 4 marks.Shows how PED affects revenue when price falls (4 marks)As above.Draws appropriate conclusions (2 marks)Generalises in some way, and states that firms with less competition, or producing essential products are able to charge higher prices, and earn more revenue. Or vice versa.Macro economics4a Why do governments tax households and businesses?[8]Max 2 marks per reason 1 for mentioning the reason and 2nd markfor explaining.•To raise revenue•To redistribute income•To correct market failures like externalities•To manage the economy[12] 4b Compare and contrast direct and indirect taxes.Defines each correctly (4 marks 2 marks per correct definition, 1mark per partially correct definition)Students can use Adam Smith’s canons to base their answer on•Cost of collection•Timing of collection•Means of payment•Levied according to ability to pay•But can also assess them in terms of incidence – who pays,and fairness of the burden.•Which agency levies them – Inland Revenue or Customs andExcise•Are they applied across EU, or other countries….Similarities developed (1- 4 marks)Award marks according to the clarity of explanation, and depth ofunderstanding of the student.Lists a similarity 1 mark per similarity to a max of 3 marks.Analyses it – award a 2nd mark per similarity analysedDifferences developed (1- 4 marks)Award marks according to the clarity of explanation, and depth ofunderstanding of the student.Lists a similarity 1 mark per difference to a max of 3 marks.Analyses it – award a 2nd mark per similarity analysed5a How do banks create credit, and how does this affect different[10]measures of the money supply?Understanding of different measures of the money supply. (2 marks)Half marks if they can only list a few measures withoutunderstanding the difference, must show a grasp of the differencebetween broad and narrow money supply measures to get 2nd mark.Competent explanation of the process (6 marks)1-2 marks : student understands the fact that lending can multiply acash sum into more ‘money’3-4 marks : student actually explains how the lending process‘creates’ spending power, showing a good understanding.5th and 6th marks: a well explained correct multiplier, showing howdifferent cash ratios effect bank’s abilities to create credit.Effect of bank credit on wider definitions demonstrated (2 marks)5b What roles does the Bank of England play in the management[10]of the UK economy?Five functions possibleFunctions named 1 mark each•Since 1997 It has been responsible for setting interest rates in UK•Note issue•Supervise financial system•Manage gold reserves•Government’s banker•Banking sector’s bankerFunctions named and explained, up to 3 marks each to max of 10marks.6a Define Unemployment and explain how it is measured.[8]Definition (2 marks)Officially, the unemployed are people who are registered as able,available and willing to work at the going wage rate but who cannotfind work despite an active search for work. This last point isimportant for being classified as unemployed, one must showevidence of being active in the labour market. ( tutor2u)Explanation of measures (3 marks each)•ILO•Claimant measure6b Why might unemployment occur in an economy? [12] Up to 3 marks per correct explanation of cause.Possible points covered :•Demand deficient /cyclical•Classical / real wage•Frictional•Search•Seasonal•Technological•Structural1 mark for naming the cause, 2nd and 3rd marks for explaining how this causes unemployment.。