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Mark Scheme (Results) Summer 2014 Pearson Edexcel GCE in Economics (6EC03) Paper 01

Mark Scheme (Results) Summer 2014 Pearson Edexcel GCE in

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Text of Mark Scheme (Results) Summer 2014 Pearson Edexcel GCE in

GCE2
Edexcel and BTEC Qualificat ions
Edexcel and BTEC qualif icat ions are awarded by Pearson, the UK’s largest awarding
body. We provide a wide range of qualif icat ions including academic, vocat ional,
occupat ional and specific programmes for employers. For further informat ion visit our
qualif icat ions websites at www.edexcel.com or www.btec.co.uk. Alternat ively, you can
get in touch with us using the details on our contact us page
at www.edexcel.com/ contactus.
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Summer 2014
All the material in this publicat ion is copyr ight
© Pearson Educat ion Ltd 2014
3
• All candidates must receive the same t reatment .
Exam iners must mark the first candidate in exact ly the
same way as they mark the last .
• Mark schemes should be applied posit ively. Candidates
must be rewarded for what they have shown they can do
rather than penalised for om issions.
• Exam iners should mark according to the m ark scheme not
according to their percept ion of where the grade
boundaries may lie.
• There is no ceiling on achievement . All marks on the mark
scheme should be used appropr iately.
• All the marks on the mark scheme are designed to be
awarded. Exam iners should always award full marks if
deserved, i.e. if the answer matches the mark scheme.
Exam iners should also be prepared to award zero marks if
the candidate’s response is not worthy of credit according
to the mark scheme.
• Where some judgement is required, mark schemes will
provide the pr inciples by which marks will be awarded and
exemplif icat ion may be lim ited.
• When examiners are in doubt regarding the applicat ion of
the mark scheme to a candidate’s response, the team
leader must be consulted.
has replaced it with an alternat ive response.
I f the key is incorrect then the maximum explanat ion mark is 2, i.e.
0+ 2= 2
Knockout m arks ( or reject ion m arks) :
Candidates can be awarded up to 2 marks, 1 per point , for knocking out
incorrect answers. This only counts if they have given a valid economic
reason to go with their answer, where they have added value to the
quest ion.
E.g. for quest ion 1, explaining it ’s not horizontal integrat ion because that is
where you merge/ takeover a firm at the same stage in the product ion
process/ indust ry.
Candidates can also receive knockout marks without explicit ly select ing a
let ter, if it ’s a clear reference is made to a key .
4
1 Correct opt ion B ( 1 m ark)
Vert ical – at a different stage of the same indust ry or
process of product ion or same final product (1)
Backwards - it is previous/ earlier/ towards raw
materials/ away from consumer (1)
Reasons or benefits of merger (1+ 1) e.g. rat ionalisat ion
Applicat ion to the dairy indust ry (1) e.g. Proper Welsh is
a pr imary indust ry. Only award the applicat ion marks if
relevant to backward integrat ion.
Knock out examples
involves merging with a firm in a different indust ry
I t cannot be C because forward integrat ion is towards
the consumer
2 Correct opt ion E ( 1 m ark)
Definit ion of a pr ice taker e.g. has to sell at the market
price (1)
Horizontal or perfect ly elast ic demand curve (1) – could
also be awarded from their diagram (not both)
Explanat ion of perfect compet it ion: one characterist ic,
e.g. no barr iers to ent ry or exit , m any firms,
homogenous product (1) ;
(1 – if not previously awarded) ; link to market
equilibr ium in a separate market or indust ry diagram
(1)
Applicat ion to cherr ies – they seem very sim ilar (1)
Examples of knock out :
I t is not A as we assume they are a profit maxim iser
operat ing where MC= MR
I t is not C as MC= AC is the product ive efficiency point
and this will only happen in the LR
( 4 )
6
Definit ion profit sat isficing (making enough profit to keep
shareholders happy/ sufficient / j ust enough/ target / fixed
amount) (1)
Reasoning, e.g. they may have other object ives (1)
I t may mean long run profit maxim isat ion (1)
Reason why this occurs e.g. divorce of ownership from
cont rol, pr incipal agent problem (1)
Diagram to illust rate m inimum profit as range of output
levels (1)
reasons than profit e.g. winning matches, at tendance at
matches, brand development (1 + 1)
Example of knock out :
I t ’s not C as profit maxim ising is where MC= MR
I t ’s not A as low div idends are likely to make share
prices fall (or other logical reasons why share prices
change)
( 4 )
7
Output
per
week
Total
revenue
1 40 40 25 25 15
2 60 30 34 17 9
3 78 26 52 17.3 18
4 96 24 96 24 44
5 105 21 150 30 54
Definit ion sales maxim isat ion AC= AR or TC= TR; or selling as
much as you can without making a loss (1)
I dent if icat ion that at sales maxim isat ion there are normal
profits or no supernormal profits/ loss (1)
Filling in columns with correct AR, TC, AC, TR-TC or total
profit (1 mark for each correct column up to 4 units is
sufficient ) : (1 + 1+ 1)
Diagram showing AC= AR (1)
Output is at £96 m illion TR/ TC or £24 m illion AR/ AC (1)
( 4 )
8
5 Correct Opt ion A ( 1 m ark)
Definit ion of oligopoly e.g. a few firms dom inate the
market (1)
Supermarkets are interdependent (1)
Other f irms will follow if pr ices are cut (1)
Firms will not follow if pr ices r ise or other asymmetric
react ion comments (1)
Diagram showing a kinked demand curve with
annotat ion or explanat ion of inelast ic sect ion for
downward moving pr ices or elast ic sect ion for upward
moving pr ices (1 + 1) – Note kinked demand curve is not
required
Pay off mat r ix correct ly showing that the firm will not
change prices (1 + 1)
Applicat ion – bread is regular ly purchased and therefore
easy to spot price changes (1) or often a loss leader (1)
Example of a knock out :
I t ’s not C as if it is tacit collusion it has not been
cont rolled by the regulator/ compet it ion authorit ies
I t ’s not D because supermarkets use non price
compet it ion such as loyalty cards and customer service
schemes
( 4 )
9
6 Correct ion Opt ion C ( 1 Mark)
Definit ion of contestability e.g. no/ low barr iers to ent ry
or exit or no sunk costs (1) . May be implicit .
Reasons why barr iers to ent ry m ight r ise (or reduced exit
opt ions) (1 + 1 + 1) e.g. economies of scale, power to
advert ise, giv ing firm s monopoly power to lim it
compet it ion or raise prices. The reasons must be linked
to contestability not compet it iveness.
Role of the regulator, e.g. protect consumer
interest / welfare (1)
I dent if icat ion that it is horizontal integrat ion (1)
Example of knock out :
I t ’s not D because the market size could get bigger or
smaller
I t ’s not B because consumer surplus is likely to fall if
pr ices r ise
7 Correct ion Opt ion B
Definit ion of allocat ive efficiency, e.g. the price is equal
to the marginal cost (AR= MC or P= MC) (1)
Explanat ion of monopoly – single firm dom inates or
25% + market share (1)
Explanat ion that the price has been set at a point that
maxim ises (consumer/ producer) welfare (1) ;
Monopoly may do this as marginal cost pr icing has been
imposed by the government (1)
Annotat ion of diagram showing consumer/ producer
welfare(1)
Example of knock outs (can also come from annotat ing
the diagram)
I t ’s not C because M is not at the lowest point of AC
I t ’s not D because this is revenue maxim isat ion (or the
area KLMN represents SNP for a revenue maxim ising
firm)
I t ’s not D as shown by a correct ly annotated profit
maxim ising area on their diagram (connect ing AR and
AC at output T – this will involve a new hor izontal line
meet ing the AC curve)
( 4 )
11
Meaning of PFI : major
issued by governments to private firms (1)
I t is then leased or rented to the public sector (1)
over 25-30 years (1)
Benefits to the government e.g. – it does not have to
borrow this year (off the balance sheet ) , can spend on
current demands, useful in t imes of f iscal austerity,
makes efficient use of specialists, reduces r isk for
government , leads to more immediate public services,
creates compet it ion at point of tendering, “ the
government ’s credit card” (1 + 1+ 1)
Costs to the government e.g. - leading to higher overall
costs in the long run (1) – these may be incorporated
within knock out marks
Examples of knock outs:
I t ’s not C as PFI will decrease x- inefficiency as there is
compet it ion dur ing the tendering process
I t ’s not D as to exit the cont ract there will be penalty
costs
I t ’s not B as the government achieve a lower rate due to
carrying less r isk
Quest ion
Num ber
Answ er Mark
9 a Theory (2) : Oligopoly (1) where a few firm s dominate
the market , or sim ilar explanat ion (1)
OR Monopoly (1) where one firm dom inates the
market / one firm with more than 25% market share
( legal definit ion)
Applicat ion (2) :
2 f irm concent rat ion rat io of 61% (2)
3 firm CR of 75% (2)
4 firm CR 81% (2)
5 firm CR 83% (2)
Other applicat ion (1 + 1) e.g. – Wrigley has 35%
market share or Cadbury’s has 26% (1) which is
greater than the 25% legal m inimum (1) other
evidence of oligopoly behaviour e.g. st rong brand
names, collusive behaviour, barr iers to ent ry, high
sunk cost , high cost of research (1)
Reserve one applicat ion mark for use of Figure 1
( 4 )
9 b KAA 4 (may or may not include a definit ion mark)
Definit ion (1) : A patent is a legal protect ion of a
design idea or process (1) or, a k ind of copyr ight (1)
Benefits of patents (2+ 2 or 3 + 1) m ight include:
For firms:
• Helps to develop a compet it ive advantage via a
unique feature
• Barr iers to ent ry
• Give firms short / medium term abnormal profits
• Enables firms to develop into new market
Benefits to economy as a whole:
• Encourage Research and Development
• Exist ing firms can take r isks with new idea
• new ideas from universit ies will have pract ical
uses
efficiency
• I nvestment in research in turn in the long run
may benefit society as a whole e.g. cancer
• External benefits e.g. less passive smoking
Benefits to other stakeholders:
cleaning pavements
improved quality
( 8 )
13
Evaluat ion (2+ 2 or 3+ 1 or 4+ 0) :
• Patents allow supernormal profits to be made
(quest ion of fairness) ,
• Patents st if le compet it ion or innovat ion by
others;
e.g. subsidies to university research
• crowding out of other innovat ion
• leading to higher pr ices or reduced choice
• disadvantages of monopoly
• Other problems of patents e.g. – cost to
achieve, only held for a lim ited t ime, not fair to
firms who cannot gain them, enforcement
issues
14
Answ er Mark
9 b KAA 4 (may or may not include a definit ion mark)
Definit ion (1) : A patent is a legal protect ion of a design
idea or process (1) or, a k ind of copyr ight ( 1)
Benefits of patents (2+ 2 or 3 + 1) m ight include:
For firms:
• Helps to develop a compet it ive advantage via a
unique feature
• Barr iers to ent ry
• Give firms short / medium term abnormal profits
• Enables firms to develop into new market
Benefits to economy as a whole:
• Encourage Research and Development
• Exist ing firms can take r isks with new idea
• New ideas from universit ies will have pract ical
uses
• Macro benefits, e.g. mult iplier effects
• I nvestment in research in turn in the long run
may benefit society as a whole e.g. cancer
• External benefits e.g. less passive smoking
Benefits to other stakeholders:
cleaning pavements
quality
Evaluat ion (2+ 2 or 3+ 1 or 4+ 0) :
• Patents allow supernormal profits to be made
(quest ion of fairness) ,
• Patents st if le compet it ion or innovat ion by
others;
subsidies to universit y research
• Crowding out of other innovat ion
• Leading to higher pr ices or reduced choice
• Disadvantages of monopoly
• Other problems of patents e.g. – cost to achieve,
only held for a lim ited t ime, not fair to f irm s who
cannot gain them, enforcement issues
( 8 )
15
Shift showing increasing costs (e.g. legal costs) or
falling/ insufficient demand (1) and loss area/ smaller
profit connected with MC= MR (1)
Reasons m ight include (2+ 2 or 3+ 1) :
• Nicot ine gum manufacturers are act ing in a
threatening way (game theory m ight be used to
develop this argument)
supernormal profits
• Huge costs of operat ing in US relat ive to other
count r ies, and other set up costs, e.g. £500 000
annual cost base in US
• I t has reached shut down point or not making
enough profit
• I t does not expect demand to grow sufficient ly
in the future
• Challenge to patent
market problems
• Lack of commercial opportunit ies in US
• Bet ter opportunit ies elsewhere
Evaluat ion 6 marks: (3x2 marks or 2x3 marks) . Points
m ight include:
data provided
I reland/ EU
other count r ies to break into – higher market ing
barr iers
ent rants are deterred
of the factors
subsidise losses in the US, the amount of
retained profits within Revolymer
• I n the LR the situat ion may improve e.g. –
working with commercialisat ion partners as in
Canada (ext ract 2 line 10)
• Comment on the £360 000 cost of closing down.
I t m ight have been bet ter to stay in the US.
• Pr ior it isat ion of the reasons with just if icat ion
16
Answ er Mark
9 d Award up to 4 st rategies (4x2 marks) , or ( 3+ 3+ 2) or
(2x4 marks)
• Pr icing policies (may count as more than one
st rategy) : predatory, lim it pr icing, sales max
• Non-pricing st rategies, e.g. heavy market ing
(may count as more than one st rategy)
• Cross subsidisat ion
• Collusion
• New ideas m ight be developed to create barr iers
to ent ry
• Merger & acquisit ion act iv ity is likely e.g. new
ent rants being bought up
• Challenge legal patents that have been awarded
Award appropr iate use of game theory to develop a
point
KAA CAP 6/ 8 if no reference to chewing gum
manufacturers
Evaluat ion 8 marks (4x2 marks) , or (3+ 3+ 2 marks) or
(2x4 marks) :
• there m ight not be a react ion – very small firm ,
already failing in US, niche market
• Other magnitude points, e.g. size of profits of
exist ing firms m ight mean that new ent rants
cannot compete in m arket ing
• US market is unlike Europe market . Might be
more room for growth in Europe or elsewhere.
• Depends on whether we are in recession or
growth ( is the product a luxury?)
• Discussion involving game theory can earn
evaluat ion m arks, e.g. the behaviour depends
on the size of the payoffs
• Size of f ines, and magnitude of other legal
powers
• Crit ical j udgement of st rategies set out under
KAA
• Pr ior it isat ion with just if icat ion
1 6
Quest ion
Num ber
1 0 a Theory ( 2 ) –
Pr ice (AR) is less than or equal to AVC OR Pr ice (AR) is
less than or equal to AC ( long run) – (1) OR TR is less
than or equal to TVC (1)
Explanat ion of the above. For example the firm is:
• making less than normal profit (1)
• making a loss which exceeds the VC (1) or
making a loss (1)
• able to make a smaller loss if it discont inued
product ion (1)
costs/ working capital (1) i.e. an implicit
understanding of variable costs, which m ight be
achieved using applicat ion
A diagram showing pr ice below AVC (1) with loss area
shown (1) or other explanat ion using a valid diagram.
Note that the diagram marks are part of the theory.
Applicat ion ( 2 ) : Jessops was making a loss of £12
m illion (1) despite revenues of £304.6 m illion (1)
Since £12m illion is greater than the fixed costs (£8
m illion) so the firm is losing £4 m illion on variable
costs alone (1 + 1)
Example of var iable costs: Jessops is not even covering
the costs of its cameras (1)
Example of f ixed costs: Jessops is not covering rent (1)
( 4 )
18
Answ er Mark
1 0 b KAA 4 marks. Reserve 2 marks for diagram.
2 marks
costs changes allow up to 4 marks. The answers must
be developed in different ways.
Diagram 2 marks.:
1 mark for shift (AR and MR shift , or AC shift (Costs
had r isen (n.b. f ixed costs must be related to data, and
no shift in MC)) , 1 mark for loss area correct ly linked
to MC= MR, and cost and revenue curves.
Reasons for loss (2 marks: 1+ 1 or 2+ 0) m ight include:
• Rising costs, with applicat ion
• Falling demand for cameras as a whole, with
applicat ion
smaller market power for each firm
• Consumers buying on the I nternet
• Cameras in mobile phones
Evaluat ion 4 marks: (2+ 2 or 3+ 1 or 4+ 0)
• both demand and cost shifts can be shown to
magnify the impact
• Jones m ight be over-opt im ist ic about end of
recession – losses may cont inue
• Jones is going to cut costs and increase demand
– profits will occur in future, but is temporarily
suffering losses
losses
causes of loss, e.g. how other firms have got on,
e.g. London Camera Exchange
• Camera phones are not a good subst itute for all
buyers
• A £12m illion loss is very small in compar ison to a
£304.6 m illion revenue
factor
( 8 )
19
Answ er Mark
1 0 c KAA 6 marks Allow up to (2x 3 marks) or (3x2 marks)
or Diagram (2) plus (2+ 2) or (3+ 1)
Answer may relate to price discr im inat ion within
Jessops or between firms within any retailing market .
Allow 1 mark for clear explanat ion of pr ice
discr im inat ion (selling the same product at different
prices) (1)
Diagram marks (up to 2 marks)
- I nelast ic AR or D linked to high pr ice and/ or
elast ic linked to low price (1) (can be shown
through gradient of AR or D)
- Profit maxim isat ion output and pr ices
ext rapolated from whole firm diagram (1)
Reasons why price discrim inat ion is possible:
Discussion of fulf ilment of condit ions for pr ice
discr im inat ion:
PED online as more compet it ion
• Monopoly power. Considerat ion of the branding
within the market , and the ability to retain
customers even when pr ices are raised. The
appeal of Jones himself m ight be considered as a
market ing tool.
• Separat ion of the market , e.g. people want to t ry
the product and receive advice in a shop, and
online there is a t ime delay before the goods are
received
• Low costs of prevent ing arbit rage, or sim ilar. For
people shopping in store they may or may not be
prepared to go home and buy the product online.
Also can consider the r isks or other costs of
buying on the internet .
Award applicat ion: as part of these condit ions (up to a
maximum of 3 marks for each condit ion overall) , e.g.
- Jessops sells accessories at higher pr ices in the
high st reet stores but the cameras are very
sim ilar pr ices.
- Online pr ices are lower so people are t ransferr ing
to the online market .
- High st reet stores are closing for this reason
- Jones’s comments on t ry ing the cameras in the
shop, the Apple- ish m odel, etc.
- Jones does not intend to pr ice discr im inate on the
major lines, but instead have very sim ilar prices
to online. He plans to make the money on
accessories
Evaluat ion: 6 (2x3 m arks or 3x2 marks)
• Discussion of whether pr ice discrim inat ion is in fact
possible as a st rategy, e.g. in the long term
arbit rage will become easy
• I t ’s product discr im inat ion not pr ice discr im inat ion
because costs in each market are different
• I t ’s product discr im inat ion not pr ice discr im inat ion
because ‘Try before you buy’ and other advice in the
shop means that the product in the shop is not the
same as the one online (or sim ilar applicat ion
points)
other determ inants of PED
• Jones is willing to stake £4m illion that discrim inat ion
is possible
• Depends on the season, e.g. Chr istmas, and the PED
• Depends on other factors, such as ability to park,
availabilit y of other retail out lets nearby, as to the
willingness of face- to- face shoppers to spend.
• Depends on act ions of compet itors e.g. click and
collect
• Other cr it icisms of pr ice discr im inat ion, e.g. it can be
illegal in some cases, and m ight be invest igated by
the compet it ion authorit ies
21
Answ er Mark
1 0 d Award up to 4 st rategies (4x2 marks) , or ( 3+ 3+ 2
marks) or (2x4 marks)
Any com m ents regarding pr ice discr im inat ion are
NOT perm it ted
St rategies MUST be linked to profit . These m ight
include:
BOGOF if linked to profit
• Non-pricing st rategies (may count as more than
one st rategy) e.g. heavy market ing, loyalt y
cards, good sales informat ion, after sales service,
fr iendly, photo album s, posters whilst you wait
• Exist ing firms m ight cut own costs
• New ideas m ight be developed to create barr iers
to ent ry
• Other barr iers to ent ry discussion
• M&A act ivit y is likely for new ent rants being
bought up
• BOGOF (allowed if not used as a pr icing st rategy)
Award appropr iate use of game theory to develop a
point
KAA CAP 6/ 8 if no reference to high st reet retailers
Evaluat ion 8 marks (4x2 marks) , or (3+ 3+ 2 marks) or
(2x4 marks) :
• it m ight not be possible to make profits – odds
are stacked against high st reet stores as their
costs are higher
• Magnitude issues, e.g. size of cuts in number of
stores by Jones is a significant shift in f ixed costs
• Depends on whether we are in recession or
growth (camera is luxury, large part of income,
YED issues etc)
evaluat ion m arks, e.g. the behaviour depends on
the size of the payoffs
• Depends on the act ions of other firms (game
theory m ight be used)
• Some pract ices are illegal e.g. predatory pr icing
• Cost of policies, e.g. advert ising
• The high st reet retailer can adapt to also become
an online retailer
• Crit ical j udgement of st rategies set out under
KAA
• Pr ior it isat ion with just if icat ion
( 1 6 )
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with its registered office at Edinburgh Gate, Harlow, Essex CM20 2JE
Mark Scheme (Results)