A city bus company proposes to reduce passenger fares. Explain whether consumers always buy more of a good at a lower price than a higher price. Consider what might be the effect on demand for bus journeys and the revenue of the bus company of the lower fares.

Mark scheme

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

1. Explanation of change in demand caused by lower price; mention of income and substitution effects and the difference between normal, inferior and Giffen goods. Revenue change will depend partly on the type of good and partly on the price elasticity of demand. Revenue will increase with a normal good with elastic demand. Bus journeys used to be classified as inferior goods but candidates could debate whether that is still the case. Increasingly, they are preferred to travel by car because of congestion and parking charges.
2. L4 (18-25 marks): for a clear explanation of different types of good, of income and substitution effect and of the possible changes on revenue depending on the price elasticity of demand, and a comment on the likely elasticity of bus travel.
3. L3 (14-17 marks): for a more limited explanation of different types of good, with weaker distinctions between income and substitution effects. A comment should be provided on elasticity but the particular link to bus travel will probably be omitted.
4. L2 (10-13 marks): for a brief explanation but with no distinction between income and substitution effect, no link to bus travel in particular and a general comment on price elasticity of demand.
5. L1 (1-9 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.