5.

(a) Explain how one possible demand factor and one possible supply factor might
cause an increase in world food prices. [10 marks]

Markscheme:

Definitions

• Demand is the willingness and ability of consumers to pay a sum of money for a good
or service at a given price and at a given point in time.
• Supply is the willingness and ability of producers to offer a given quantity of a good
for sale at a point in time and at a given price.

Explanation

• Explanation that an increase in demand for food could be caused by a change in one
of the non-price factors that affect the demand for food such as an increase in world
income or an increase in world population. For example, an increase in population
affects the demand for basis food types like wheat, rice and chicken, etc. This is
shown by an increase demand in for corn in diagram 1. As demand increases from D
to D1 the price of corn rises. If this increase in demand occurs across all food markets
world food prices will increase.
• Explanation that an decrease in supply of food could be caused by a change in one of
the non-price factors that affect the supply of food such as an increase in production
costs or a supply side shock caused by poor weather conditions. This is shown by a
decrease in supply for corn in diagram 2. As supply decreases from S to S1 the price
of corn rises. If this decrease in supply occurs across all food markets world food
prices will increase.

Diagrams

Increase in demand Fall in supply

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 Marks Descriptor
0 The response does not meet any the descriptors described below
The response indicates little understanding of the requirements of the question
1-2 Limited use of relevant demand and supply theory
Relevant terminology not used in the response
The response indicates some understanding of the requirements of the question
Some relevant demand and supply theory used e.g. either demand or supply
3-4
factors influencing price but not both
Some relevant terminology used in the response
The response shows an understanding of the requirements of the question
Relevant demand and supply theory partially explained
5-6 Some relevant terminology used appropriately
Diagrams illustrating both one demand and one supply factor have
been included
The response shows a clear understanding of the requirements of the question
Relevant demand and supply theory is explained
7-8 Relevant terminology mostly used appropriately
Diagrams showing both illustrating both one demand and one supply factor are
included and explained
The response shows a clear understanding of the requirements of the question
Relevant demand and supply theory is skilfully explained
9-10 Relevant terminology used appropriately
Diagrams showing both illustrating both one demand and one supply factor are
included and fully explained

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(b) Using real-world examples, evaluate the view that the determination of food prices
should left to market forces. [15 marks]

Markscheme:

Definition: Market forces is where price in a market is determined by the free interaction of
demand and supply.

Explanation:

Explanation that the free interaction of demand and supply will lead to the most efficient
allocation of resources in a market. For example, an increase the demand for Italian olives
because of a change in consumer tastes towards olives. In diagram 3 there is an increase in
demand for olive oil which will lead to excess demand at the existing market price of $4 per
litre and the price of olive oil increases for the market to clear. When the price of olive oil
increases because of a rise in demand it provides consumers and producers with information
to make decisions on how they might act in response to the price change. This is the
signalling function of price. The rise in price is also an incentive the producers to increase
quantity supplied to increase profits and an incentive for consumers to decrease quantity
demanded to maximise utility. The incentive function of price.

The incentive and signalling functions of price lead to an efficient allocation of resources in
the Italian olive oil market. At this point the consumer and producer surpluses are maximised
and allocative efficiency is achieved. This is shown in diagram 4.

Diagram 3 Diagram 4

Synthesis (evaluate):

If food is determined by market forces it could lead to the following problems:

• Volatile prices can adversely affect producer incomes which impacts on farming
communities such as rural villages in Italy.

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 • If prices rise to high levels that low incomes cannot afford this can lead to poverty and
malnutrition. This has been the case in poor communities in Southern Italy.
• If market forces cause the decline of agriculture in Italy this could lead to the country
being dependent on overseas food supplies and leave the country vulnerable in times
of economic crisis.

An alternative approach to market forces could be the use of maximum prices, minimum
prices and subsidies. For example, Italy uses agricultural subsidies to support producers and
protect low income consumers.

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.

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 Marks Descriptor
0 The response does not meet the descriptors described below
The response indicates limited understanding of the question
Relevant economic theory not used in the response
1-3 Relevant economic terms not used in the response
No evidence of synthesis or evaluation included
No relevant real-world example(s) included
The response indicates some understanding of the question
Relevant economic theory is described in the response
4-6 Some relevant economic terms used in the response
Synthesis or evaluation included but superficially
Relevant real-world example(s) are identified
The response shows an understanding of the effectiveness of both government
and free market policies in controlling food prices
Relevant economic theory is described and explained
7-9
Some relevant economic terms used appropriately in the response
Synthesis or evaluation included in the response but lacking balance
Relevant real-world example(s) are identified and partially developed
The response demonstrates a full understanding of the effectiveness of both
government and free market policies in controlling food prices
Relevant economic theory is explained
Relevant economic terms are used appropriately
10-12
Appropriate diagrams e.g price ceilings or subsidies are included and explained
Synthesis or evaluation is included in the response but lacks balance
A relevant real-world example(s) are identified and developed to support the
argument
The response demonstrates a full understanding of the effectiveness of
monetary policy and this is fully addressed
Relevant economic theory is fully explained
Relevant economic terms are used appropriately
13-15 Appropriate diagrams e.g. price ceilings or subsidies are included and fully
explained
Balanced synthesis or evaluation is included in the response
A relevant real-world example(s) are identified and fully developed to support
the argument

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