CJC_H2_ECONS_P2_Mark_Scheme

1 © Catholic Junior College 9732/02/Prelims /2016 Mark Scheme 2016 Catholic Junior College H2 Economics / 9732 Preliminary Examination Mark Scheme Paper 2

2 © Catholic Junior College 9732/02/Prelims /2016 Mark Scheme Question 1 (a) Based on economic theory, explain how society deals with scarcity. [10] Question Interpretation Command Word  “Explain how” – to elaborate in detail, the processes that lead to eventual effects/outcomes Content:  Central Problem of Economics - Scarcity  Rational decision-making by Consumers (to maximise satisfaction) & Producers (to maximise profits) using Marginalist Principle  Price adjustment process in Price mechanism Context:  Give examples of decisions made by consumers and producers Suggested Answer Introduction The central problem of economics is scarcity whereby the limited resources are unable to fulfil the unlimited wants of economic agents in the society. This situation necessitates choice making where rational decisions are made by consumers and producers. Consumers and producers will make rational decision based on the marginalist principle: Consumers choose how much to consume to maximize satisfaction; Producers choose how much to produce, how to produce and which goods to produce to maximize profits. The interactions between consumers and producers give rise to the market forces of demand and supply, where the price mechanism in the free market will help to allocate the resources efficiently. In this essay, we will be exploring how all these will be achi eved in the society. Body Paragraph 1 – Consumers’ Perspective P: In order to decide on how much good to consume, consumers will try to maximize the welfare (consumer surplus) / satisfaction from the consumption of the good. Figure 1: Demand Curve of a Consumer E: Consumers buy an additional unit of the good (for eg, a plate of chicken rice) if the satisfaction derived is greater than (or equal to) the price (P) he/she has to pay for the good (marginal cost).

3 © Catholic Junior College 9732/02/Prelims /2016 Mark Scheme E: According to the law of diminishing marginal returns, as the consumers consumes greater quantity of a good the marginal satisfaction (or marginal benefit, MB) keeps falling and hence the willingness to pay additional price falls. This also explains the downward slope of the demand curve. E: At any quantity lesser than q, the consumer’s MB (measured by the demand curve) is higher than the MC (measured by the market price, P) they are paying. Therefore it is optimal for them to increase consumption until MB=MC, i.e. until q. This is where MC=MB and the consumers have the greatest consumer surplus as illustrated by the shaded area on the diagram. Thus given price, P, consumers will decide to consume up to q. E: This is also the same for quantity beyond q, where the MC is more than the MB for consumption of additional plate of chicke