2025 DHS Paper 1 - Mark Scheme

Question 1 Suggested Answers (a) Compare the projected sales of battery -electric vehicles and internal combustion vehicles between 2018 and 2030. [2] ● Difference (level): Each year between 2018 and 2030, the sale of battery- electric vehicles is always projected to be less than the sales of internal combustion vehicles. [1] ● Difference (direction): The sales of battery-electric vehicles is projected to increase over the period while the sales of internal combustion vehicles is projected to fall over the period. [1] (b) With reference to Extract 1, explain one way in which electric vehicle (EV) manufacturers can enjoy cost savings from an increase in scale of production. [2] (Explain 1 example of IEOS using evidence from Extract 1) ● [Use of one example from Ext 1] By increasing its scale of production, EV manufacturers would be able to spread the costs of indivisible capital equipment such as its assembly lines (Ext 1) over a larger output. [1] ● This would allow it to enjoy internal economies of scale leading to a fall in its average costs of production. [1] Other examples: IEOS from bulk purchase of EV components, IEOS from specialisation of roles, etc... (c) With reference to Extract 2, explain how the use of electric vehicles (EVs) may result in positive externalities. [2] ● Through the use of electric cars, third parties such as those living near roads and highways are able to enjoy cleaner air and less noise pollution as the air is cleaner and quieter (Extract 1) as motorist have switched to using EVs. This would benefit these third parties in terms of reduced medical bills from less respiratory or hearing problems . [1m to identify specific third party, 1m to explain the benefit] (d) Extract 2 highlights how Norway has transitioned away from internal combustion engine vehicles to EVs. Using a demand and supply diagram, explain how the government policies mentioned in Extract 2 have led to more electric cars on the roads. [6] Students are to identify the two policies mentioned (i.e., VAT exemptions and higher taxes from ICE cars) and explain how the combined effect leads to more electric cars. Extract 2 highlights how Norway has used two policies – exemption from value-added tax (VAT) for EVs and higher taxes on internal combustion engine (ICE) cars, to encourage more EV usage.

Through exemptions from VAT for EVs, this would mean reduction/removal of an indirect tax on EVs which would reduce the marginal costs of EV producers leading to an increase in supply of EVs. [1] The higher taxes on ICE cars lead to a rise in marginal cost for ICE car producers which leads to a fall in supply of ICE cars and results in a increase in the price of ICE cars. Given that ICE cars and EVs are substitutes for one another with a positive cross elasticity of demand (XED>0) as they are both forms of private transport, the rise in price of ICE cars leads to a fall in the qty dd of ICE cars. This causes a rise in the demand for EVs. [2] Figure 1: Market for EVs [1m for a complete diagram illustrating both shifts] The ↑supply and ↑demand for EVs has led to an initial shortage of QsQd at initial price, P1. This creates upward pressure on prices. Utility -maximising consumers, constrained by their budget, reduce quantity demanded. The units of output that can only be produced at higher marginal cost now become profitable at higher prices, incentivising firms to increase qty ss to capture the positive marginal profits. Overall, there is an increase eqm qty of EVs from Q1 to Q2, leading to more EVs on the roads. [2] (e) Discuss whether a “price war” (Extract 3) is the best strategy for EV manufacturers to raise their profits. [8] Extract 3 describe the brutal price war among EV producers in China. This evidence of price competition is one of many strategies a firm can use to raise their profits. R1: Price wars can raise profits of EV manufacturers in the long run In the Short run, firms such as BYD will lower their price of EVs in order to raise their qty dd by undercutting their competitors. Competitors will likely follow suit (Ext 3) and similarly lower prices in a tit-for-tat price war. The firms may end up lowering prices below their average costs (or competitors’ average cost). As seen in Figure 2 below, the firm’s AR and MR are AR1 and MR1 respectively. The firm has

lowered price to P1, below its average cost, C1. This will result in the firm and its competitors ending up with subnormal profits of C1abP1. Figure 2: Price Wars This is a form of predatory pricing whereby the firm intends to eliminate their competitors from the market. In the long run, the firm is assumed to be in a better position to sustain the losses over an extended period of time as it may have past accumulated profits to tide it over. In this case, BYD as the largest firm in the market (Table 1) is likely to have enjoyed significant past supernormal profits. In addition, given its large market share, it would be able to enjoy more internal economies of scale (explained in part b) which allows it to minimise its losses relative to its smaller competitors. The firm would eventually gain larger market shares and long-run profits when their rivals are either unable or unwilling to sustain further losses and exit the industry. This increases the remaining firms market shares leading to a rise in the firms’ demands to AR2. The firm can now set prices at the profit-maximising output level of Q2, where MC=MR. The firm’s output is now P2cdC2. The success of this strategy depends on whether the firm has sufficient resources to sustain itself through a price war. In addition, the Chinese government has also said that it was tackle unfair competition, which could mean that it could imposes fines or other penalties on firms that engage in such a strategy. R2: Non-price strategies via product differentiation can raise profits of EV manufacturers Due to the short run subnormal profits that would be experienced by a firm when undergoing a price war, the firm could consider using non-price strategies such as product differentiation in order to distinguish its product from competing firms. For example, BYD can look at improving real differences such as the battery range of their EVs (Ext 4) which would favourably change consumers tastes and

preferences towards BYD’s EVs. Alternatively, BYD can focus on imaginary differences through marketing. For example, they can improve consumers understanding of the battery range of their EVs (Ext 4) so as to similarly raise the demand of for its EVs. This would increase the AR and MR (similar to the diagram above) leading to increased profits for the firm. The limitation of such a strategy is that it is uncertain. Any investments into developing new or better features has a degree of uncertainty whereby the investment made yield little or no positive impact on demand. Alternative strategies: Collusion, Process innovation Strategies to avoid: limit pricing or raising BTEs (these only serve to protect a firm’s profits and not increase its profits) In conclusion, the best strategy for firms to raise their profits would be to not use price wars and instead to use product differentiation. Given that there is a strong possibility of enforcement by the government against price wars, it may not be feasible and thus not the best strategy. Instead, EV producers should focus on product differentiation which is supported by the government. LORMS L2 Answer is relevant and balanced, comprising well -developed explanations of both price competition (“price war”) and one other strategy to raise the firm’s profits. This is supported by relevant evidence and diagrams where applicable. 4 – 6 L1 Answer is largely irrelevant, inaccurate and/or consists of limited explanation of how either price wars and a