In the UK, bus journeys outside London have fallen by nearly 40% since 1980. This fall in demand has been largely due to a rise in bus fares, a rise in income and changes in the price and quality of substitutes. On some routes there are monopolies operating and this lack of competition can push up the price.

Mark scheme

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

1. [2] (a) A rival product / a product that can be used instead of another (1) e.g. bus travel and car travel / oranges and apples (1).
2. [4] (b) May be able to charge high prices / price maker (1) due to lack of competition (1) enabling it to earn a high profit (1). May produce at lower costs (1) due to economies of scale / charge lower prices (1). May produce high quality products (1) as high profits enable it to invest and innovate (1). May be able to compete with foreign firms (1) gain a wider market / export more (1). May have stronger bargaining power with suppliers (1) keeping costs low (1).
3. [6] (c) Formula or definition of PED (1). If demand is elastic, a rise in price will cause a fall in revenue (1) because the quantity demanded will fall by more than the rise in price (1) in percentage terms (1) example of type of product with elastic demand e.g. a luxury (1). If demand is inelastic, a rise in price will cause a rise in revenue (1) because the quantity demanded will fall by less than the rise in price (1) in percentage terms (1) example of a product with inelastic demand e.g. one without a substitute (1). If demand is perfectly inelastic, a rise in price will cause an equally proportionate rise in revenue (1) because the quantity demanded will not change (1). If demand is perfectly elastic, a rise in price will cause revenue to fall to zero (1) because people will stop buying the product (1). If demand is unitary, a rise in price will leave total revenue unchanged (1) as the proportionate change in quantity demanded and price will be the same (1).
4. [8] (d) Up to 5 marks for why it should: A subsidy will lower costs, (1) it may encourage a rise in bus travel (1) reducing bus fares (1). It may reduce poverty / redistribute income (1) the poor tend to use buses more than the rich (1) better quality travel (1). Bus travel creates fewer external costs than car travel (1) reduce pollution (1) reduce traffic congestion (1) increase employment / reduce unemployment (1) increase labour mobility (1). Up to 5 marks for why it should not: It will involve an opportunity cost (1) the government might instead spend more on e.g. education / raise taxes (1). Bus companies may not pass on the subsidy to passengers (1) subsidies may make bus companies complacent (1) not try to keep their costs low (1) may not improve quality (1). Rail transport may be more efficient (1) may provide more social benefits (1) generate lower social costs (1).