Explain two factors that would lead to an increase in the demand for a product.

Discuss the view that competitive markets will always achieve allocative efficiency.

Answers may include:

• definition of demand
• diagram to show a supply and demand with a shift of the demand curve to the right
• explanation of how changes to the non-price determinants of demand produce shifts in demand
• examples of specific products, with reference to determinants of demand.

NB If only one non-price factor is explained, a maximum of Level 2 can be achieved.
Also, be aware of confusion between price and non-price factors and the difference between an increase in demand and an increase in the quantity demanded.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of allocative efficiency, competitive market
• diagram to illustrate the principle of allocative efficiency, eg demand = supply, marginal benefit= marginal cost
• explanation that allocative efficiency occurs where market equilibrium occurs, where social (community) surplus is maximized with respect to producer and consumer surplus; marginal benefit equals marginal cost
• example(s) of competitive markets or markets where there is market failure
• synthesis or evaluation (discuss).

Discussion may include: the difference between private and social optimality; challenges to the view expressed in the question in terms of such market failures as positive and negative externalities, merit goods and demerit goods, lack of provision of public goods, lack of information.

NB If candidates go straight into an evaluation of the view without sufficient explanation of how competitive markets achieve allocative efficiency, a maximum of mid L3 should be awarded.

N.B.: It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.