With reference to the concept of excess demand, explain how a decrease in supply of a good would lead to a new market equilibrium.

A government decides to impose an indirect tax on unhealthy drinks. Discuss the consequences for the stakeholders in these markets.

Answers may include:

• definitions of demand, supply, excess demand, market equilibrium
• diagrams to show a leftward shift of supply with excess demand and an increase in price
• explanation of adjustments to a new market equilibrium in the case of a leftward shift of supply
• examples of decreases in supply affecting market equilibrium.

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

Answers may include:

• definitions of indirect tax and stakeholders
• diagram to show the impact of an indirect tax
• explanation of how an indirect tax might affect consumers, producers and the government
• examples of unhealthy drinks and taxes on such products
• synthesis or evaluation (discussion) of the consequences for the different stakeholders.

Discussion may include: the importance of price and cross elasticities of demand, equity issues, micro and macro-economic consequences.

Some responses may approach unhealthy food as a demerit good leading to market failure / negative externalities of consumption. This can be credited equally if it leads to a valid discussion.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

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