Paper 1: Extended

response paper HL
This section includes 3 sample answers for a paper 1 style examination question on
microeconomics.  The question and mark scheme is based on the IB approach to setting
paper 1 questions.

Examination paper 1: Microeconomics

This section includes 3 sample answers for a paper 1 style examination question on
microeconomics.  The question and mark scheme is based on the IB approach to setting paper
1 questions. Read through the responses and provide a mark for each section using the
markscheme.

Question and markscheme

 1. (a)  Explain two reasons why the demand for primary goods might be price inelastic. [10]
Command term: Explain - Give a detailed account including reasons or causes. 
Answers may include:

● definitions of PED, price inelastic, demand

● explanation of two determinants of the inelastic demand of primary goods,
including: the number and closeness of substitutes, the degree of luxury/necessity,
time and the proportion of income spent on the good
● diagram to show a relatively inelastic demand curve, inelastic section on a
demand curve.

b. Using real world examples, evaluate the importance of income elasticity of demand for a
business selling a good if incomes are rising. [15]
Command term: Evaluate - Meaning weigh up the strengths and limitations of the statement,
reaching a conclusion supported by appropriate evidence and sound argument.
Answers may include:

● Definition: income elasticity of demand

● Explanation: of how income elasticity of demand can be useful to a business
selling different types of goods. This could be normal goods, luxury goods,
necessity goods and inferior goods
 ● Diagram: showing how demand changes for different types of goods as income
increases
● Synthesis (evaluate): the strengths and limitations of YED to help business
decision making when incomes are rising
● Examples: a real-world example of how YED has been used by a business(s)
when they are making decisions.  

Sample 1
(a) Explain two reasons why the demand for primary commodities might be price
inelastic. [10]
Student answer
Primary commodities are goods produced by the primary sector of the economy. For
example, agricultural goods. Price elasticity of demand is the measure of responsiveness of
quantity demanded to a change in the price of a good or service.
And it is measured by the equation % change in QD / % change in price. If the price of rice
increased by 20% and its Qd falls by 10% then the PED of rice would be -0.5. This means for
every 1% increase in price Qd falls by 0.5%.
The diagram shows a rise in price for rice and a decrease in Qd.

 
If a product is price inelastic the quantity demanded will decrease less than proportionately
(Q1 – Q2) relative to the change in price (P1 to P2).
If the good is price elastic the QD decreases by a more than proportionate amount (Q1 - Q2)
relative to an increase in price P1 to P2 compared to products that are price inelastic.

The reason primary goods are more price inelastic is because they have fewer substitutes
compared to manufactured goods. A good like rice will have some substitutes like bread but
there will not be a large number alternatives for the consumer to choose from. If the price of
rice increases some consumers will switch to bread but the number will be relatively few.
Manufactured goods have more substitutes and consumers can switch to an alternative more
easily. For example, if the price of one brand of mobile phone increases buyers can easily
change to another brand of mobile phone. This makes manufactured goods more price elastic.
Another reason primary goods are more price inelastic is because they are often necessities.
Vegetables and other food products are needed by consumers and when the price increases
they will keep buying them to maintain their diets. If the price of rice increases consumers
will keep buying rice because they need it to sustain their diets.
In Vietnam rice is a primary product and it is price inelastic because you have to consume it
even when the price of rice rises. When the price of computers rises in Vietnam consumers
can stop buying them because they are not needed as much as a necessity like food.
Command term: Explain - Give a detailed account including reasons or causes.
There are some good points in this answer. The definitions of PED and primary goods are
mainly clear and correct. The diagrams are accurate and well explained.  The explanation of
primary commodities as necessities and having relatively few substitutes is quite good. There
are examples in the form of rice and computers in Vietnam.
The specific demands of the question are understood and addressed and theory is explained.
Relevant economic terms are used mostly appropriately. Two relevant diagram are included
and explained. This is a very strong answer.
9/10
b. Using real world examples, evaluate the importance of income elasticity of demand
for a business selling a good if incomes are rising. [15]
Student answer
Income elasticity of demand is a measure of the responsiveness of consumers to a change in
income. This will affect the demand for normal goods, necessity goods, luxury goods and
inferior goods. It is measured by the equation -
% change in QD / % change in income.
Normal goods have a positive YED because a rise in income will lead to a rise in Qd. Luxury
goods such as foreign holidays will have a YED that is greater than 1 because Qd will
increase more than proportionately relative to a rise in income. Necessity goods such as
electricity have a YED that is less than 1 because demand rises less than proportionately
relative to a rise in income. Inferior goods such as own label frozen food will have a negative
YED because an increase income will lead to a fall in Qd.
For a business selling different types of goods they can increase their profits by reacting to
changes in income. A company like Apple in Vietnam which sells luxury goods like Iphones
and Ipads will experience a rise in demand if incomes are rising. Apple could increase prices
and profits in this situation. The diagram shows an increase in demand for the Iphone as
income increases.

A company sells inferior goods is the Aeon supermarket in Vietnam which sell own label
supermarket frozen food and will see its revenues fall when incomes rise. The supermarket
might have to cuts prices and see its profits fall when this happens.
A business like Aeon supermarkets in Vietnam which sells a necessity good like rice will see
a small rise in demand when incomes area increasing. This will produce stable sales and
profits for Aeon.
In Vietnam a rise in incomes has led to a big rise in Apple’s revenue and profits in the
country. Apple’s products have are attractive to Vietnamese consumes as their income rise
with people buying new IPads and IPhones. However, the demand for own label products in
Aeon supermarkets in Vietnam has fallen and this has decreased their sales and profits.
This shows how important an understanding of YED is to businesses that are selling different
types of goods. YED can help businesses forecast demand and sales and make decisions
about the products they are going to sell. This has helped Apple in Vietnam and Aoen
supermarkets to decide about stock levels and the types of goods they sell in the market. As
incomes has increased overtime in Vietnam Aeon supermarkets have reduced their stock
levels of own label frozen food.
YED has its limitations though. It only considers how income changes demand and doesn’t
consider how other factors might be affecting demand as well. If prices are falling for
Iphones then demand might be increasing because of this and not rising incomes. Also
consumer taste could be changing in favour of Apple products in Vietnam which would be a
much bigger factor than rising income. For own label frozen food products in Aeon
supermarkets it may be a lack of advertising by the business that causes the fall in demand
and not rising incomes.
Also YED changes overtime and can be difficult to interpret. A value of +1.2 for Apple
products one year could be +1.5 the next year and this would be hard for the firm to use to
forecast changes in sales.
Overall YED will be useful to producers like Apple and Aeon supermarkets in Vietnam
because it can help them forecast and make better decision on things like stock levels. But
these business will need to consider a number of factors when they assessing the revenues
and profits of the goods they are selling and not just YED.
Command term: Evaluate - Meaning weigh up the strengths and limitations of the statement,
reaching a conclusion supported by appropriate evidence and sound argument.
The theory in this answer is accurate with a clear explanation of YED for different types of
goods. This is a strong aspect to this answer. The diagram is accurate and clearly explained.
There is a good understanding of how a rise in income affects the demand for the goods sold
by different types of firms and real world examples are used effectively to illustrate this.
There is some effective evaluation of YED and this is supported by the real world examples.
The effective use of theory, examples, diagrams and evaluation makes this a very strong
answer.
13/15
22/25 This would be a grade 7 answer.

Sample 2
1. (a) Explain two reasons why the demand for primary commodities might be price
inelastic. [10]
Student answer
Primary commodities means goods usually produced through agriculture, mining and fishing.
An example is coffee produced in Brazil. Price elasticity of demand is a measure of
responsiveness of the quantity demanded of a good to a change in price. PED is calculated as
a percentage change in quantity demanded divided by percentage change in price.
In general the price elasticity of demand for primary goods might be price inelastic because
of the relatively small number of substitutes they have. A product like coffee produced in
Brazil is inelastic because it does not have many near substitutes although tea and cocoa can
be considered substitutes. Price inelastic means the change in quantity demanded of coffee is
smaller than the change in price.
The diagram shows an inelastic demand curve for coffee produced in Brazil as the price rises
quantity demanded falls by a smaller amount.

Coffee in Brazil is also inelastic because it a necessity good. Food and drink goods are
necessities because people need them to survive. This means when price increases people
keep consuming them and quantity demanded will fall by a smaller percentage than the
increase in price. In the price of coffee rises a person will keep buying it because it is part of
their life and they will not want to give it up.
This is shown in the diagram when the price of coffee rises from P1 to P2 and QD only falls
from Q1 to Q2. This means producers will spend more on coffee than they did before.
Command term: Explain - Give a detailed account including reasons or causes.
This candidate understands the specific demands of the question and the relevant PED theory
is clearly explained. There is good coverage of why PED is inelastic, and the coffee example
is worked well into the answer. The use of economic terms is accurate, and a reasonable
diagram is included although this could be better. There could be fuller development of the
theory and the example for a top-level answer but this is worth 7 or 8 marks.
7/10
b. Using real world examples, evaluate the importance of income elasticity of demand
for a business selling a good if incomes are rising. [15]
Student answer
Income elasticity of demand (YED) measures the responsiveness of quantity demand for a
good when household incomes change. It is calculated as the percentage change in quantity
demanded for a good divided by the change in income. YED values can be positive or
negative. If the answer is positive the good is normal and if it is negative the good is inferior.
An example of a normal good is cars in Brazil. When incomes rise the demand for cars
increases and this is shown in the diagrams. New cars could also be considered luxury where
YED is above +1.

This would be useful information for car manufacturers like Ford in Brazil because they
would know to increase production and even plan to open new factories. However, a firm like
Ford need to be careful with YED data because it may not be that reliable.

When incomes are going up firms selling inferior goods will see a fall in demand. This is
shown in the diagram below. A firm selling cheap food like basic low quality sausages will
see a fall in demand for its good as incomes rise. The sausages have a negative YED because
as incomes goes up QD goes down.
 

A producer of cheap sausages will see a fall in revenue when incomes in the country are
rising. This could be useful to the producer because they can make plans about reducing
production or changing to a new type of product. 
The problem of using YED in this case is that there might not accurate data for this type of
product and it might not experience a fall in demand when income goes up.
YED is useful for firms when they are producing different types of goods. Firms can use this
when they are planning production and selling their goods. But they must be careful with
YED because the data may not be accurate.
Command term: Evaluate - Meaning weigh up the strengths and limitations of the statement,
reaching a conclusion supported by appropriate evidence and sound argument.
The candidate shows a clear understanding of the demands of the question. Economic theory
is quite well explained but there are some shortcomings. The use of economic terms is quite
effective. Correct diagrams are included but they could be more complete. There is clear
evidence of appropriate synthesis or evaluation but this could be more fully developed.
Relevant real world examples are used but they could be developed further.
9/15
16/25 This is a grade 6 answer.

Sample 3
1. (a)  Explain two reasons why the demand for primary goods might be price inelastic.
[10]
Student answer
Primary good are the ones that are grown or taken from the ground such as oranges that are
harvested. Price elasticity of demand is the responsiveness of quantity demanded to a change
in the price of a good in an economy when the price increases or decreases. It is measured by
the equation -
% change in Qd / % change in P = PED
When PED is infinity the demand is perfectly elastic and when PED = 0 it is perfectly
inelastic. Both situations are really rare but good can get close to perfectly inelastic demand
as happens in the situation of insulin. When PED is between 0 and 1 demand is inelastic.
Primary goods are an example of something that is price inelastic. Manufactured good are
often more that 1 and price elastic.
An farmed product like oranges is likely to have inelastic demand because it is a food good
and a necessity for people. In the diagram an increase in the price of oranges from $2 to $3
leads to only a small fall in QD.

When orangess get more expensive people will keep buying them because they are needed as
part of peoples diets.
The second reason why commodity goods like oranges tend to be inelastic is because they do
not have that many substitutes. For a manufactured good like Samsung phone there are many
alternatives such as Apple and Huawei. For oranges there are other types of fruit but these are
more different which means consumers are more likely to stick with oranges when the price
goes up.
Command term: Explain - Give a detailed account including reasons or causes.
The basic level of understanding in this answer is acceptable although the definitions and use
of economic terms could be clearer. The section on perfect elasticity is not really relevant.
The student is correct about the necessity and substitute argument on primary goods and there
is some correct explanation of how this applied to oranges as an example of a primary good.
The diagram is correct but it could be more complete. There is also some reference to the
diagram in the text.
This answer scores 6/10
b. Using real world examples, evaluate the importance of income elasticity of demand
for a business selling a good if incomes are rising. [15]
Student answer
Income elasticity of demand (YED) is the responsiveness of a change in consumer income to
a change in demand for a good. It is measured by the equation:
% change in QD / % change in income
For a business is especially important to know whether the good they are selling is a luxury
good or an inferior good. A company like Gucci that sells luxury clothes will know that if
incomes rise they will sell more of their goods. This is because the YED for their good is
going to be positive and an increase in income will cause demand to go up.

However, it might be difficult for Gucci to measure the YED of their fashion goods and
predict how much demand will increase.
If a firm is selling instant noodles and increase in income may not be as good for them.
Inferior goods have a YED of less than 0 which means a rise in income could cause demand
for their noodles to fall. When people get a pay rise they a more likely to switch to a luxury
good like steak. The diagram shows a fall in the demand for noodles when peoples incomes
rise and quantity falls from Q to Q1.
Again it will be hard for the business selling noodles to predict the fall in demand that will
occur when incomes rise because YED is not always reliable. YED can be useful though
because it can help business predict future sales and profits.
Command term: Evaluate - Meaning weigh up the strengths and limitations of the statement,
reaching a conclusion supported by appropriate evidence and sound argument.
This answer does cover the impact of a rise in income on luxury goods and inferior good and
this is quite well explained using economic theory. There is no coverage of normal or
necessity goods though and this is a weakness. The diagrams are reasonable, but they could
be more complete. There is a reasonable use of examples (Gucci and noodles) but they could
be developed more fully. There is an attempt at evaluation through a discussion of the
reliability for YED and also why YED might be helpful to business. This could have been
developed more fully using the examples considered.
This is moderate answer with a mark of 8/15.
The overall mark for this answer is 14/25 which is a grade 5 standard.