2025 VJC Paper 2 - Mark Scheme

Victoria Junior College Economics Department1 2025 H2 Economics Preliminary Examination Paper 2 – Suggested Responses & Mark Scheme Question 1 In many parts of the world, essential goods and services such as rice and electricity are scarce due to limited natural resources and increasing demand. In deciding how best to address the problem of scarcity, economists typically assume that consumers and producers act in self - interest. (a) Explain how the pursuit of self -interest and price signals could help to address the question of how much essential goods and services to produce. [10] (b) Discuss possible policy measures that a government can use to ensure a fairer distribution of essential goods and services. [15] Part (a) R1: Explain how the pursuit of self-interest could help to address the question of how much essential goods and services to produce [Use of marginalist principle] R2: Explain how price signals could help to address the question of how much essential goods and services to produce. Introduction Economists often assume that individuals act out of self -interest, guided by the marginalist principle, which states that rational agents make decisions at the margin —consuming or producing an additional unit as long as the marginal benefit outweighs the m arginal cost. In markets, this behaviour is coordinated through price signals, which convey information about scarcity and preferences. Together, self-interest and price signals help determine how much of essential goods and services (e.g., electricity, ri ce, public transport etc.) should be produced. Body R1: Explain how the pursuit of self-interest could help to address the question of how much essential goods and services to produce [Use of marginalist principle] In a free market system, consumers’ and producers’ buying and selling decisions are driven by their self-interests. Consumers consume based on self -interest, seeking to maximise net total private benefits from consuming goods and services. Consumers signal their preferences for different goods/services to firms by the different prices that they are willing and able to pay for them. The demand curve, which maps the relationship of quantity demanded of a good to its price, shows the highest prices that consumers are willing and able to pay for an additional unit of a good. This is equal to the marginal private benefit (MPB) derived from the good. Consumers are willing to buy an additional unit of a good/service when the MPB derived from

Victoria Junior College Economics Department2 consuming it (which is the additional satisfaction enjoyed) exceeds or is at least equal to the price of the good (marginal private cost (MPC) incurred by consumer