Explain how the price mechanism reallocates resources when there is an increase in demand for a good or service.

To what extent is advertising the most effective way of increasing the consumption of merit goods?

Answers may include:

• definitions of price mechanism, resources, demand
• diagram to show how an increase in demand leads to a reallocation of resources
• explanation of how the signalling and incentive functions of price lead to a reallocation of resources when demand increases for a good or service
• examples of goods and services where the price mechanism has reallocated resources because of an increase in demand.

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

Answers may include:

• definition of merit good
• diagram showing positive externalities to illustrate how advertising can be used to deal with the market failure associated with merit goods
• explanation of the positive externalities associated with merit goods and how advertising can increase the demand and consumption of merit goods
• examples of the advertising of merit goods to increase consumption
• synthesis or evaluation (to what extent).

Evaluation may include: the cost of advertising, the effectiveness of advertising and reference to alternative ways to increase the consumption of merit goods.

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

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