A-LevelEconomicsThe price system and the microeconomy9708/41 · Oct/Nov 2018 · Q325 Marks

Explain what is meant by consumer equilibrium and consider whether the assumptions underlying consumer equilibrium are realistic.

(a)Explain what is meant by consumer equilibrium and consider whether the assumptions underlying consumer equilibrium are realistic.[12]
(b)Analyse the differences between a normal good, an inferior good and a Giffen good. Discuss whether knowledge of these differences is all that is required by a company considering changing the price of its product.[13]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

[12] Equilibrium is a relation between the marginal utility and the price. Can be explained using either marginal utility or indifference curves – marginal rate of substitution equal to the price ratio. Consideration of the assumptions rationality, sovereignty, the ability to measure utility, the relation between utility and price.
[9-12] L4: for a clear explanation and a sound comment on the relation between the price and the satisfaction obtained, referring to more than one good. Clear comment on the assumptions.
[7-8] L3: for a less developed answer but which still refers to the equilibrium but probably concentrates on only one good. Weaker consideration of the assumptions.
[5-6] L2: for a brief attempt which does not clearly bring out the significance of the marginal analysis or which does not deal with any of the assumptions.
[1-4] L1: for an answer that has some basic correct facts but includes irrelevancies and errors of theory.
[13] Analysis of the difference between income and substitution effects and the overall effect on demand of a change in price. Whether demand will increase, and by how much for a price fall depends on the classification of the good but also on the price elasticity of demand. The company would also need to know if it increased production how that would affect costs – and thus profits.
[9-13] L4: there are three aspects to the question: a clear explanation of the analysis - income, substitution; a comment on the effect on demand and a comment on the relation to revenue via elasticity. Good reasoned structure.
[7-8] L3: for a less developed analysis of the income substitution effects, or of the link to demand, or a weaker link to the revenue. Two aspects done reasonable well, or three less developed.
[5-6] L2: for an answer that either deals with one aspect well, or two with less clarity.
[1-4] L1: for an answer that has some basic correct facts but includes irrelevancies and errors of theory.