Paper 1: the extended response

📚The paper

The three questions usually come from different units (one micro, one macro, one global economy), and each part (a) and (b) are linked but test different skills. Read both parts of all three questions before you choose: pick the question where you can do part (b) best, since it carries more marks.

How part (a) is marked (10 marks)

The markband rewards four things, and the top band needs all of them:

• Addressing the specific demands of the question: answer exactly what is asked (if it says “two determinants”, explain two, fully).
• Economic theory fully explained: a chain of cause and effect, not a list of points.
• Terms used appropriately throughout: define the key terms of the question at the start.
• Relevant diagram(s), fully explained: accurate, labelled, and referred to in the text (“as shown by the shift from AD₁ to AD₂…”).

Roughly: a response that describes relevant theory with some terms sits around 3–4; one that partly explains it with a diagram 5–6; one that explains it with a diagram that is explained 7–8; and one that fully explains everything 9–10. No evaluation is needed in part (a), and real-world examples are optional.

How part (b) is marked (15 marks)

The same four elements, plus two more:

• Synthesis and evaluation: for the top band, “effective and balanced”: arguments on both sides, weighed, leading to a justified conclusion.
• Real-world examples: for the top band, “identified and fully developed to support the argument”. Naming a country is not enough; explain what happened and how it supports your point.

Bands are 1–3, 4–6, 7–9, 10–12 and 13–15. The jump from 7–9 to 10–12 usually comes from balance (both sides) and developed examples; the jump to 13–15 from effective evaluation: judgments that weigh arguments and depend on stated conditions.

Timing plan

A structure that works

1. Definitions: define the two or three key terms in the question in one or two sentences.
2. Theory with diagram: explain the mechanism step by step, then draw the diagram and refer to it.
3. Application: for part (b), a developed real-world example: country, date, policy, what happened, how it links to the theory.
4. Evaluation: counter-arguments, limitations, and the conditions under which the view holds.
5. Conclusion: a clear, justified judgment that answers the question (“to a large extent, provided that…”).

Evaluation techniques

Examiners look for judgment, not just “on the other hand”. Useful angles:

• Short run versus long run (a depreciation worsens the current account first, then improves it).
• Stakeholders: consumers, producers, workers, government, foreign firms, future generations. Who gains and who loses?
• Size and context: elasticities, how close to full capacity the economy is, the size of the tax or tariff.
• Assumptions: does the theory’s ceteris paribus or rationality assumption hold here?
• Alternatives: is another policy better, or a combination?
• Priorities and values: efficiency versus equity; growth versus sustainability.
• Evidence: what actually happened in your example?

✏️Model answer: part (b)

(b) Using real-world examples, evaluate a tax on sugar-sweetened drinks from the point of view of consumers, producers and the government. [15 marks]
(Modelled on May 2022 SL Paper 1 Q1(b), which set an evaluation of an indirect tax; the drink context is ours.)

Definitions. An indirect tax is a tax on spending, collected from producers, that raises their costs. A specific tax is a fixed amount per unit (for example per litre or per gram of sugar). Stakeholders are the groups affected: consumers, producers, workers, the government and society.

Theory. Sugar-sweetened beverages (SSBs) are a demerit good with a negative externality of consumption: excess consumption raises obesity and diabetes, imposing costs on public health systems and employers, so marginal social benefit lies below marginal private benefit and the market overconsumes. A specific tax shifts supply up by the amount of the tax. The price to consumers rises from P₁ to P_c, the price producers keep falls to P_p, and quantity falls from Q₁ to Q₂, closer to the social optimum.

Consumers pay a higher price and buy less; consumer surplus falls. Because demand for sugary drinks is relatively inelastic for habitual buyers, consumers bear most of the tax, and since poorer households spend a larger share of income on such drinks, the tax is regressive. However, consumers who cut back gain health benefits over time.

Producers receive a lower price per unit and sell less, so revenue and producer surplus fall. In practice many producers reformulate to avoid the tax. The UK’s Soft Drinks Industry Levy (2018) was tiered by sugar content, and manufacturers cut the sugar in many drinks before it began, so the sugar sold in soft drinks fell sharply while sales volumes held up better. Workers may lose jobs if output falls, though reformulation limited this in the UK.

The government gains tax revenue (tax × Q₂), which can be earmarked (the UK used its levy revenue for school sport and breakfast programmes), making the overall package less regressive. Lower obesity reduces future health spending. Society gains if the tax brings output closer to where MSB = MSC, reducing the welfare loss from overconsumption.

Evaluation. The effects depend on price elasticity of demand: if demand is very inelastic, consumption falls little, so health gains are small while revenue is large and the regressive burden heavy. Consumers may substitute to untaxed sugary products (sweets, sweetened tea or coffee drinks sold by street vendors), especially where the informal sector is large, as in Indonesia, where an SSB excise has been planned and repeatedly postponed. Setting the tax at the right level is hard, because the external cost is difficult to measure. A tax works best combined with education and labelling, which shift demand itself. Over the long run, demand becomes more elastic as habits change, so health effects grow.

Conclusion. An SSB tax is likely to benefit society and the government overall, but it imposes costs on consumers, especially low-income ones, and on producers. Its effectiveness depends above all on the design (a tiered tax that encourages reformulation performed well in the UK), the elasticity of demand and the use of the revenue. Where a large informal sector makes substitution easy, it should be one part of a wider strategy rather than the main tool.

Why this reaches the top band. Terms defined; theory fully explained with an accurate diagram referred to in the text; every stakeholder covered; a real-world example (UK levy) developed with what happened and why; a second context (Indonesia) used for evaluation; evaluation that depends on stated conditions (PED, design, substitution, time); and a justified conclusion.

Common ways this question loses marks. A diagram with the tax shown as a demand shift; no mention of who bears the tax; examples named but not explained; evaluation that is a list of disadvantages with no judgment.

Outline answers to part (a) questions

Part (a) questions ask you to explain. Each outline below shows the chain a top-band answer follows. Full notes are on the linked pages.

• “Explain the effect on aggregate demand of a rise in the central bank’s policy rate.” Define interest rate and AD → cost of borrowing up, reward for saving up → C (credit, mortgages) and I fall → currency may appreciate, X − M falls → AD shifts left: AD/AS diagram showing lower real GDP and price level (3.5).
• “Explain what happens to the profits of price-taking firms after new firms enter their industry.” Definitions → short-run abnormal profit diagram → perfect information and free entry → industry supply shifts right → price falls to minimum AC → two-panel long-run diagram (2.11, HL).
• “Explain two reasons why the rupiah might lose value against the US dollar.” Define depreciation and floating exchange rate → cause 1: higher relative inflation (demand for the currency falls, supply rises) → cause 2: lower relative interest rates (portfolio outflows raise supply) → one exchange rate diagram per cause (4.5).