| Date | November 2019 | Marks available | 10 | Reference code | 19N.1.HL.TZ0.1 |
| Level | Higher level | Paper | Paper 1 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 1 | Adapted from | N/A |
Question
Explain two reasons why the demand for primary commodities might be price inelastic.
Discuss the significance of price elasticity of demand (PED) for a government imposing an indirect tax on a good.
Markscheme
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
Answers may include:
- definitions of price inelastic demand, primary commodity, demand
- diagram to show price inelastic demand
- explanation of why the demand for primary commodities might be price inelastic that refers to two reasons for low price elasticity of demand, such as the lack of close substitutes, high degree of necessity and low proportion of income spent on the primary commodity
- examples of primary commodities with price inelastic demand.
Award a maximum of level 2 marks if a candidate has only explained one reason why the demand for primary commodities might be price inelastic.
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
Answers may include:
- definitions of indirect tax, price elasticity of demand (PED)
- diagram(s) to show the effect of taxation on the market for a good and how the price elasticity of demand (PED) will impact the outcome
- explanation that the government uses indirect taxes to raise revenue as well as to limit the production/consumption of demerit goods
- examples of specific products upon which a government has imposed indirect taxes in practice
- synthesis or evaluation (discuss).
Discussion may include: consideration of the extent to which government revenue and the production/consumption of the product will be impacted by the PED, consideration of the effect of PED on how the tax burden will be divided between consumers and producers, consideration of the effect of PED on workers (employment), consideration of the difficulties in measuring PED and in determining the socially optimal level of production/consumption (when taxes are imposed to limit the production/consumption of demerit goods).
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
NB: 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.
