UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS

GCE Advanced Subsidiary Level and GCE Advanced Level

MARK SCHEME for the October/November 2008 question paper

9708 ECONOMICS
9708/02 Paper 2 (Data Response and Essay – Core),
maximum raw mark 40

This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of
the examination. It shows the basis on which Examiners were instructed to award marks. It does not
indicate the details of the discussions that took place at an Examiners’ meeting before marking began.

All Examiners are instructed that alternative correct answers and unexpected approaches in
candidates’ scripts must be given marks that fairly reflect the relevant knowledge and skills
demonstrated.

Mark schemes must be read in conjunction with the question papers and the report on the
examination.

• CIE will not enter into discussions or correspondence in connection with these mark schemes.

CIE is publishing the mark schemes for the October/November 2008 question papers for most IGCSE,
GCE Advanced Level and Advanced Subsidiary Level syllabuses and some Ordinary Level
syllabuses.

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 Page 2 Mark Scheme Syllabus Paper
GCE A/AS LEVEL – October/November 2008 9708 02

1 (a) Why can the demand for OTR tyres be described as a derived demand? [2]

Demand is derived when a product is wanted for its input to another product (1) + tyres are
needed to equip trucks or contribute to mined output (1)

(b) Explain why the supply of OTR tyres was highly inelastic in 2006. [4]

Inelastic = relatively unresponsive to price change or < 1 (1)

+ explain 3 from no stocks (1), full capacity (1), high cost new investment (1), inability to
switch lines (1), no new factories (1) etc.
but copied list = (1) only max of 4

(c) Analyse, with a demand and supply diagram, the change in the market for OTR tyres
during 2006. [5]
Major demand increase (1), pressure for significant price rise (1),
+ diagram showing supply is inelastic (1), increase in D (1), new equilibrium with higher price
and higher/same output (1)

(d) How might a shortage of OTR tyres affect the productivity of mining companies? [3]

Reduce productivity (1), less output per unit input (1),

+ vehicle breakdown or vehicle check/repair or less mineral production (1),

(e) Discuss whether the shortage of OTR tyres required government intervention. [6]

The focus is whether intervention is desirable not what form it should take.

Intervention might be justified to maintain growth, employment, productivity, balance of trade,

market stability and reduce inflationary pressure, It might be particularly important for
countries reliant on mining.
However, the problem is short term, in the long run extra production is planned, the market is
not a particularly significant one for many countries, intervention might be ineffective with
unwelcome side effects, government may not have the expertise to manage the market, may
result in government failure. Which government should intervene? (1),
(1) mark per explained element with (4) max for each side of argument.

2 (a) Explain the characteristics required by money if it is to carry out its functions
effectively. [8]

Money functions as a medium of exchange, a unit of account, a store of value and a means
of deferred payment. It must be acceptable, recognisable, durable, divisible, uniform, scarce,
convenient and stable in value. The characteristics are needed to make it operate effectively.

Knowledge of functions up to 2 marks

Knowledge of characteristics up to 2 marks
Explanation of links up to 4 marks

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 Page 3 Mark Scheme Syllabus Paper
GCE A/AS LEVEL – October/November 2008 9708 02

(b) Discuss whether a country should welcome a period of deflation (negative inflation).
[12]

Price deflation is a reduction in the general price level and may occur when economic activity
is depressed or the economy is in a slump/recession. The benefits from it go to creditors and
fixed income earners who gain in real terms. It will also help with international price
competitiveness and may improve the balance of trade position. Against this confidence and
profit levels may reduce, leading to lower output and more unemployment. The real burden
of government debt will increase and economic growth may be checked. Government
interest rate policy measures may become ineffective. Japan’s experience has shown a
number of these drawbacks. Generally mild inflation is thought best.

Understanding of deflation up to 4 marks

Analysis of the effects of deflation up to 6 marks} to max of
Discussion of the desirability of the effects up to 6 marks} 10 marks

3 (a) Explain the market failure which arises from the characteristics of public goods. [8]

Public goods are non-excludable and non-rival and include defence and street lighting. The
problem is that they cannot be supplied by the market mechanism as a price cannot be set
because of free riders. They will be underprovided if a non market organisation does not
intervene to reflect the needs of society.

Knowledge of the nature of public goods up to 4 marks

Explanation of the resulting problem for provision up to 4 marks

(b) Discuss whether the use of cost benefit analysis helps to improve economic decision
making. [12]

Cost benefit analysis (CBA) attempts to evaluate the social costs and social benefits of
investment in deciding whether an investment is worthwhile. It involves identifying, valuing
and judging relevant costs and benefits. It takes a wider view than investment appraisal
which concentrates on private profit. The decision is more comprehensive and should be a
more accurate representation of society’s welfare. It may however not be accurate since, the
decisions are subjective, it is difficult to value the savings and costs and to decide which are
to be included. It should however provide better information to help improve the decision
making.

Understanding of the method of CBA up to 4 marks

Analysis of the effectiveness of CBA up to 6 marks} to max
Discussion of the usefulness of CBA up to 6 marks} 10 marks

4 (a) How might opportunity cost help to explain the pattern of international trade? [8]

Opportunity cost is the sacrifice of the next best outcome in taking a decision. International
trade is based on comparative advantage and is determined by specialisation in the product
with the lower opportunity cost. Trade is then at an exchange rate between the opportunity
costs of the countries involved. This results in greater production, trade and consumption,
which reflects differing opportunity costs.

Knowledge of opportunity cost up to 2 marks

Understanding of the basis of trade up to 2 marks
Explanation of the link to opportunity cost up to 4 marks

© UCLES 2008

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Page 4 Mark Scheme Syllabus Paper
GCE A/AS LEVEL – October/November 2008 9708 02

(b) Discuss whether the formation of regional trading groups, such as ASEAN and
NAFTA, is desirable. [12]

Regional blocs may be free trade areas, customs unions ior economic unions. They
encourage free trade between member states and can be bilateral or multilateral. The
benefits should be more trade, more choice, lower costs and higher living standards.
However small scale agreements may have limited impact, may prevent more beneficial,
large scale agreements and cause trade diversion. Smaller members may be at a
disadvantage, as may infant industries, to more powerful members and there may be
problems with complicated regulations. While these agreements may be better than facing
global barriers they may be inferior to wider global agreements.

Understanding of regional trade blocs up to 4 marks

Analysis of the effects of agreements up to 6 marks} max of
Discussion of the overall impact of agreements up to 6 marks} 10 marks

© UCLES 2008

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