Feb/Mar 2019 22-

The mobile (cell) phone industry is growing in Asia with more workers being employed. In March
2017, there was a merger between two mobile phone producers, both of which had relatively
high fixed costs. This merger created one of the largest mobile phone firms and moved the
Asian market further from perfect competition and closer to monopoly. It was expected that
profits in the industry would increase as a result of the merger.
(a) Identify two fixed costs. [2]
• rent
• interest on past loans
• insurance
• salaries
(b) Explain two ways monopoly differs from perfect competition. [4]
• one supplier in monopoly (1) many suppliers in perfect competition (1)
• a monopoly has 100% share of the market (1) one perfectly competitive firm will have a small
share of the market (1)
• barriers to entry and exit in monopoly (1) free entry and exit in perfect competition (1)
• a monopoly is a price maker (1) while a perfectly competitive firm is a price taker (1)
• a monopolist may advertise (1) no advertising in perfect competition (1)
• there may be brand loyalty in monopoly (1) but no attachment between buyers and sellers in
perfect competition (1)
• there are no substitutes in a monopoly (1) there are perfect substitutes in perfect competition
(1).
(c) Analyse what determines a firm’s demand for labour. [6]
Demand for the product (1) demand for labour is a derived demand (1) the higher the demand
for the product, the more workers employed (1). Productivity / high skills / qualifications (1) a rise
in productivity will increase the return from employing labour / the higher skills the higher the
demand (1). Wage rate (1) a fall in the wage rate would be likely to increase the demand for
labour (1). The price (1) and productivity (1) of substitutes to labour (1) and complements to
labour (1). Production method (1) demand will be higher if production is labour intensive (1).
(d) Discuss whether or not a merger will increase profits. [8]
Up to 5 marks for why it might:
A merger will reduce competition (1) the merged firm will have increased market share (1) this
may make demand for its products more inelastic (1) may be able to raise price (1). The new
combined firm may be able to take greater advantage of economies of scale (1) so lower
average cost (1) examples (2). The new firm may be able to rationalise (1) cut out duplication
(1) lower average cost (1). There may be more ideas / sharing of ideas (1) increasing innovation
/ raising quality (1). A vertical merger will provide greater control over the quality of raw
materials / outlets (1).
Up to 5 marks for why it might not:
The reduction in competition may reduce competitive pressure on the new firm to keep costs
low (1) and quality high (1) so demand may fall (1). It may be difficult for the two former firms to
adopt common methods of production (1) there may be duplication of equipment and staff (1).
The merged firm may experience diseconomies of scale (1) higher average cost (1) examples
(2).

Oct/Nov 2019 21-

Explain two types of integration (merger).

• horizontal integration (1) firms from same industry and same level of production integrate (1)
• vertical integration (1) firms from same industry but different levels of production integrate (1)
• conglomerate integration (1) firms from different industries integrate (1)

Discuss whether or not an economy benefits from firms which are monopolies.
Up to 5 marks for how it might:
Monopolies can gain more profits (1) they will be able to reinvest more (1) more choices from
the company (1) total demand increases (1) economic growth (1) expand production (1) employ
more workers (1) unemployment decreases (1) more R&D (1) more innovation (1) higher quality
(1) more productivity (1) more exports (1) improved current account position (1).
Up to 5 marks for how it might not:
Lack of competition (1) complacency (1) less productivity (1) less innovation (1) price is higher
(1) inflation (1) exploitation of consumers (1) less choice (1) lower quality (1).

Explain two reasons why a firm may become more capital-intensive as it grows.
• to increase output (1) capital more efficient/productive (1)
• to reduce costs (1) labour costs becoming relatively higher than machines (1) increasing
profits (1)
• may be able to take advantage of technical economies of scale (1) specialist capital may
become viable for a large firm (1)

In 2016, Argentina’s annual inflation was 20%, down from 40% in 2015. Inflation had been high
since 2003. Wages were constantly adjusted upwards. In addition, some employees demanded
more non-wage benefits. Industrial action, often in the form of strikes called by trade unions,
became more common in Argentina.
(a) Identify two non-wage factors that could affect an individual’s choice of occupation. [2]
• opportunity for promotion
• job security
• satisfactory work
• varied work
• pleasant working conditions
• fringe benefits
• location
• danger
(b) Analyse the impact of strikes on an economy. [6]
Disrupted production (1) loss of output (1) decreased productivity (1) less economic growth (1)
increased cost of firms (1) reduced profits (1) rising prices / inflation (1) unemployment (1).
Better working conditions of the workers (1) higher wages (1). Exports decreasing (1) increase
current account deficit / decrease current account surplus (1). Less investment by MNCs (1).
There may be capital investment to replace workers (1).
(c) Discuss whether or not an increase in wages will reduce a firm’s profit. [8]
Up to 5 marks for why it might:
Higher wages will mean a higher wage bill (1) if output does not increase by more than wages,
labour costs per unit will increase (1) costs of production will increase (1) profit is revenue minus
costs (1) with higher costs and the same revenue, profit will fall (1). Prices will rise (1) if demand
is elastic, revenue will fall (1)
Up to 5 marks for why it might not:
Paying higher wages may prevent strikes (1) this can reduce costs of production (1). Higher
wages may motivate workers (1) this can increase productivity (1) reduce costs of production
(1). Higher wages may make it easier to recruit skilled workers (1) this will raise productivity (1)
reduce costs of production (1) increase profits (1) Other costs may be falling (1) e.g. rent,
corporation tax (1). Demand for the firm’s products may be increasing (1) this will raise revenue
(1). Higher wages may be paid to a smaller labour force (1) reducing the wage bill (1). Replace
workers with machines (1) may leave costs unchanged (1).

Explain two functions of money [2]

• medium of exchange (1) avoids double coincidence of wants needed in barter/enables people
to buy and sell products (1)
• unit of account / measure of value (1) easy to compare value of products / putting a value on
products (1) • store of value (1) for savings / future consumption / will not lose value (1)
• standard of deferred payment (1) credit / instalments/enable people to borrow and lend (1)

Oct/Nov 2019 22-

Two reasons why the power of trade unions may decline in the future.​ ​[2]
Fall in membership (1) lower funds / less bargaining power (1). Rise in unemployment / workers
being replaced by machines (1) trade unions may be reluctant to take industrial action for fear
that members will be replaced by unemployed / non-member workers (1). Government may
reduce the power of trade unions (1) making it harder for trade unions to protect workers’ rights
(1). Movement from primary to tertiary sector (1) which may be less unionised / better working
conditions (1).

Discuss whether or not older workers are paid more than young workers. [8]
Up to 5 marks for why they might be:
They have more experience (1) they are likely to have received more training (1) they may have
higher productivity (1) more skilled (1) more reliable / make fewer mistakes (1) in higher demand
(1) lower supply (1). They may have been with the same employer for some time (1) and may
have been promoted (1). Some older workers may be rewarded for staying with the same
employer / young workers may be at start of career (1) be paid a loyalty bonus (1). In some
countries, the minimum wage may rise with age (1).
Up to 5 marks for why they might not be: Some older workers in jobs requiring physical strength
(1) may be less fit / young workers may be fitter (1). Older workers may be less occupationally
mobile (1) geographically immobile (1) and so may not move to gain higher wages (1). Young
workers may be more up to date with advances in technology / new methods / new ideas (1)
their skills may be in higher demand (1). Young workers may be in expanding industries (1).
Young workers may work more hours (1) may be better educated / more qualified (1).

Identify two characteristics of perfect competition. [2]

• many buyers
• many sellers
• no barriers to entry (and exit)
• (firms are) price takers
• Identical / homogeneous product
• no attachment between buyers and sellers
• perfect knowledge

Explain two goals a business organisation may have. [4]

Profit maximisation (1) making as much profit as possible / increasing the gap between revenue
and cost / rewarding entrepreneurs (1). Growth / expansion (1) increasing the size of the firm by
e.g. merging / seeking to gain market power (1) to take advantage of economies of scale (1).
Survival (1) during difficult times such as recession / when a firm is first established the aim may
just be to stay in the market (1). Profit satisficing (1) achieving enough profit to keep
shareholders’ happy while following other objectives (1). Social welfare (1) business
organisations operating in the public sector may e.g. be concerned about the environment /
charging a low price to help the poor (1).

Analyse the main reasons for the differences in the size of firms. [6]
Type of business organisation (1) state-owned enterprises and multinational companies operate
on a larger scale than sole traders (1). Size of market (1) the market for some products is large /
expanding (1) example (1) while others are declining (1) example (1). Some firms have more
access to finance (1) public limited companies can sell shares (1) sole traders cannot (1). Some
firms grow through merging (1) type of merger e.g. horizontal merger (1). Motives of owners (1)
e.g. some prefer the firm to remain small so that they can retain control / ownership (1). Some
firms may be subsidised (1) which may encourage them to produce a higher output (1). Some
firms may be more profitable (1) can reinvest profits / internal growth (1). Length of time in the
market (1) longer there, more time to grow (1). Some firms may be able to take advantage of
economies of scale (1) example of an economy (1). Some firms may experience diseconomies
of scale (1) example (1). Type of product / capital v. labour-intensive (1) e.g. aircraft have to be
produced on a large scale (1).
Oct/Nov 2019 23-

Discuss whether or not introducing more capital-intensive production methods will increase a
firm’s profits. [8]
Up to 5 marks for why it might:
• Machines may introduce more advanced technology (1) increases productivity (1) higher
output means firm benefits from economies of scale (1) less workers means lower labour costs
(1) may reduce average costs / (1) may enable price to be lower (1) revenue will rise (1) if
demand is elastic (1).
• Better quality products could be produced (1) increasing demand (1).
• May increase international competitiveness (1) sell more exports (1).
Up to 5 marks for why it might not:
• Machines may be expensive (1) workers may not be trained in their use (1) average costs
could rise (1) reducing gaps between revenue and cost (1).
• Machines may break down (1) consequences of breakdown e.g. interruptions in supply (1).
• Initial set-up costs may be high (1) profits are reduced in short-run (1).
• A fall in price may cause revenue to fall (1) if demand is inelastic (1). • Consumers may prefer
handmade/personalised products (1) demand may fall (1).
• Labour may be in large supply (1) resulting in low wages (1).
• Government may subsidise firms to employ workers (1) to reduce unemployment (1).

Define wages. [2]

• A payment (1) to a worker (1).
• Amount earned (1) by labour / employees (1).
• Reward (1) for labour (1).

Explain why the opportunity cost of becoming a teacher for one worker may be greater than for
another worker. [4]
• Opportunity cost is the (next) best alternative (1) forgone (1).
• One worker may have earned more than another (1) and so would be giving up more earnings
(1).
• One worker may give up more non-wage benefits (1) example e.g. promotion chances (1).
• One worker has further to travel to work / higher costs of travelling (1) loss of leisure time /
time with family / lower net income (1).

May/June 2019/21-

Discuss whether or not a monopoly will charge high prices. [5]

Up to 3 marks for why it might:
A monopoly is a single seller (1) has high market power (1) is a price maker (1) demand for its
product may be inelastic (1) due to lack of substitutes (1) can raise revenue by raising price (1)
may be seeking to maximise profit (1). A monopoly may be inefficient (1) due to lack of
competition (1) resulting in higher costs and prices (1).
Up to 3 marks for why it might not:
A monopoly may have low average cost of production (1) due to economies of scale (1)
example (1). A monopoly may not be a profit maximiser (1) example of another objective (1). A
monopoly may have a product with elastic demand (1) e.g. may be producing a luxury (1). A
monopoly may be concerned that charging high prices will encourage new firms to enter the
market (1) reducing its market power (1). A monopoly may fear government intervention (1) and
keep prices low (1). A monopoly may be government controlled (1) and charge low prices (1).

Discuss whether or not consumers would benefit from a firm changing from being a public
limited company to a public corporation (state owned enterprise). [8]
Up to 5 marks for why they might
A public corporation’s main goal may be social costs and benefits (1) may be subsidised by the
government (1) it may charge a low price (1) making it more affordable (1). A public corporation
may be less likely to go out of business (1) ensuring continuity of supplies (1). A public
corporation may take a longer-term view (1) investing in new technology (1). A public
corporation may follow health and safety rules / regulations (1) increasing the safety of products
(1).
Up to 5 marks for why they might not:
A lack of profit motive (1) may increase inefficiency (1). A public corporation is likely to be a
monopoly (1) the lack of competition (1) may result in higher prices (1) lower quality (1). A public
corporation may lack funds to invest (1) during periods of recession (1).

Identify two functions of money.

• Medium of exchange
• Store of value
• Unit of account (measure of value)
• Standard of deferred payments

Analyse why skilled workers are usually paid more than unskilled workers. [6]
The demand for skilled workers is likely to be higher (1) due to their higher productivity /
education (1) expectation of a higher rate of return / sales (1) better quality goods and services
(1) resulting in greater profits (1). The supply of skilled workers is likely to be lower / more
inelastic (1) due to the shortage of people with skills / qualifications (1). Skilled workers may
have more bargaining power (1) harder to replace / may cause more disruption by taking
industrial action (1).

Explain two disadvantages a worker could experience from specialising.

Monotony / boredom / lower efficiency (1) doing the same task over and over again (1). Workers
may not develop a range of skills (1) this may limit their earning potential (1). Workers may
become dependent on other workers (1) this may reduce their earning potential (1). There may
be a greater risk of unemployment (1) which could lead to lower income / living standards / due
to lack of wider skills (1).
May/June/2019/22-

Identify two types of business organisation that operate in the private sector. [2]
• sole trader
• public limited companies
• cooperatives
• multinationals

Discuss whether a large firm will earn more profit per unit sold than a small firm. [8]
Up to 5 marks for why it might:
May be able to take advantage of economies of scale (1) examples (2) lower average cost (1)
permitting a lower price to be charged raising sales / enabling more profit to be made even if the
price charged is the same (1). May have funds available to spend on advertising (1) create a
brand image / brand loyalty (1) allowing the firm to raise price (1). May have more market power
(1) may be able to keep competitors out of the market/have high barriers to entry (1) allowing
the firm to raise price (1).
Up to 5 marks for why it might not:
Large firm may experience diseconomies of scale (1) examples (2) higher average cost (1).
Small firms may be subsidised by the government (1) lower average cost/extra source of
revenue (1). Small firms may be producing a new product (1) for which there may be a high
demand (1). Small firms may be in a niche market (1) consumers may be willing to pay a high
price (1). Small firms may respond quicker to a change in demand (1) reducing surpluses and
shortages (1). Small firms may provide a personal service / develop a personal contact (1)
increasing demand / enabling a higher price to be charged (1).

Analyse how improvements in education can affect the pattern of employment. [6]
May be more skilled workers (1) increase qualifications (1) workers may seek better paid jobs
(1) jobs with better working conditions (1). There is likely to be a reduction in primary sector
employment (1) an increase in secondary / tertiary sector employment (1). May be an increase
in women in employment (1) if girls benefit from improvements in education (1). May increase
employment of teachers (1) if e.g. class sizes are reduced (1). May encourage an increase in
migrant workers (1) attracted by better education for their children (1).

Analyse the possible reasons why a producer’s fixed cost may increase. [6]
Fixed costs are costs that do not alter with output (1) in the short run (1). Rent may increase (1)
landlords may decide to charge more for factories and offices (1). The amount charged for
insurance may increase (1) insurance companies may be seeking higher profits / their costs
may have risen (1). Interest paid on loans may increase (1) e.g. the central bank may have
increased the rate of interest (1). A firm may have moved to a larger factory / changed its
production process / using more capital goods (1) leading to higher fixed capital costs (1).
Inflation may occur (1) increasing e.g. the cost of workers with long-term contracts (1).
May/June/2019/23-

Explain two benefits a firm can gain by borrowing. [4]

• it can pay running costs / when the firm goes into losses, it can be used as emergency
money(1)
• it can invest/purchase capital (1) to lower costs/improve efficiency (1) to increase profits (1)
• it can improve products/add new products (1) by spending on R&D (1)
• it can spend on advertising (1) to increase demand/market share (1)
• in a recession, it can help to cover its costs (1) in order to stay in business, e.g. paying wages,
covering debts (1)

Define public limited company. [2]

A company whose shares are traded on a stock exchange (1) these shares can be bought and
sold by the public (1) the company has limited liability (1).

Explain two reasons why a firm would want to specialise in producing only one product. [4]
• a firm can specialise in what it is best at producing (1) increasing efficiency / productivity (1)
achieve economies of scale (1) decrease cost of production (1) leading to higher output / higher
profits (1)
• increasing global demand (1) which would raise revenue (1)
• resources are well suited to the product (1) e.g. good climate (1)
• a firm can gain a good reputation in producing the product (1) specialisation may improve the
quality of the product (1) increasing demand for the product (1)

Analyse how the ability of firms to produce on a larger scale is beneficial to consumers. [6]
Producing on a larger scale may enable economies of scale (1) example (1) when average
costs decrease (1). Price of the product may fall (1) enabling consumers to buy more of the
product (1) improving living standards (1). Producing on a larger scale reduces shortages (1)
increases the quantity of products available to consumers (1). Producing on a larger scale may
enable more to be spent on R&D (1) increasing the quality of products available to consumers
(1).

Define labour. [2]

The human factor of production (1) mental and physical effort (1) required for production (1).

Discuss whether or not a rise in the working-age population, as a percentage of the total
population, will be beneficial to a country. [8]
Up to 5 marks why it might be:
Increase in working age population will increase the size of labour force / supply of labour (1)
increasing incomes (1) consumption (1) and increasing output / economic growth (1). Cost of
labour may decrease (1) overall cost of production decreases (1) attracting foreign investments /
MNCs (1) increasing aggregate demand (1) The working age population may spend more than
other age groups (1). It will reduce the dependency ratio (1) reducing pressures on government
spending (1).
Up to 5 marks why it might not be:
If birth rates are low, population might soon be ageing (1) leading to unsustainable growth (1)
decreasing future output (1). If no jobs are available, unemployment will increase (1) example of
problems associated with unemployment (1). Working-age people may be unskilled / have skills
in the wrong areas (1) slows economic growth (1). More people working may cause increased
external costs (1) e.g. pollution, congestion (1).

2020 specimen paper-

Discuss whether or not an increase in wages will always attract more people to work [6]

Upto 4 marks for why they might:

❖ Unemployment may remain high (1) resulting in people searching for jobs (1).
❖ Wages are a key influencing factor in the jobs that people select to do (1) increases in
wages can raise living standard(1) enabling people to consume more goods and
services (1).
❖ Higher wages may enable some people to escape poverty (1) allowing them to afford
basic essentials (1).
❖ Population is increasing (1) more people are likely to be entering the labour force (1).

Upto 4 marks for why they might not:

❖ Wages may rise more in other industries (1) reducing the relative pay in the cut flower
industry (1).
❖ Wages may rise by less than inflation (1) reducing real wages (1).
❖ Workers do not base their decisions just on wages/non-wage factors may be better in
other industries (1) examples e.g.better promotion opportunities, better working
conditions, longer holidays (up to 2 marks ).

Identify two characteristics of money. [2]

1. general acceptability/limited in supply

2. Portability
3. Divisible
4. Recognisable
5. Homogeneous
May/June/2020/21

Explain two benefits an economy may gain from having a young labour force. [4]

May be more flexible (1) switch from doing different tasks (1). May be more mobile (1) able to
switch from one job to another or from one place to another place (1). May be more up to date
with advances in technology (1) more productive/able to use advanced tehnology (1).

Discuss whether or not a national minimum wage will reduce poverty. [8]

Why it might:

• is set above the equilibrium level, will raise the pay of the low-paid • may reduce relative
poverty by reducing the gap between high and low income earners • may reduce absolute
poverty by enabling low paid workers greater access to basic necessities • may raise
employment, if it motivates workers and raises productivity • may raise employment if it
increases total (aggregate) demand.

Why it might not:

• may not have any impact if set below the equilibrium level • unemployment may rise as it may
increase firms’ costs of production • will not help the poor who are unable to work • may not
reduce relative poverty if it results in other workers pressing for, and getting, wage rises to
maintain their wage differentials • some receiving it may not be in poor households.

Explain two challenges facing small firms. [4]

Lack of finance/difficulty raising finance (1) banks may be more reluctant to lend to small firms
(1). May not be able to take advantage of economies of scale (1) may have higher average cost
(1). Not well known (1) difficult to attract consumers (1). May face fierce competition from large
firms (1) which may lower their prices/spend more on advertising (1). Risk of failure (1) due to
inexperience of owners (1).

State two objectives of firms [2]

Any two from: survival, social welfare, profit maximisation and growth.

May/June/2020/22

Discuss whether cars should be produced by the private sector or the public sector. [8]

Why cars should be produced by the private sector:

• may be a more competitive market and so prices may be lower • profit incentive may raise
efficiency and encourage firms to produce what consumers want and keep costs low • may be
higher investment which could improve quality and lower costs • may be easier to raise finance
as can sell shares • may be forced to be efficient as may not be supported by the government

Why cars should be produced by the public sector:

• a private sector monopoly may abuse market power and may restrict supply and raise price •
public sector firm to charge low prices/prices below cost for cheap cars to help the poor • public
sector firms may take into account external costs and benefits/welfare • the state may have
more financial resources and be able to invest on a larger scale.

State two functions of money, other than a store of value. [2]

Medium of exchange, measure of value (unit of account) and standard of deferred payments.

Explain two advantages banknotes have as a form of money. [4]

Generally acceptable (1) people are prepared to accept them in exchange for products and to
settle debts (1). Portable (1) banknotes are light to carry around (1). Divisible (1) notes of
different denominations (1). Recognisable (1) notes have distinct features on them known to the
population (1). Limited in supply (1) the central bank prints a set number of notes (1).
Homogeneous (1) all banknotes of the same value are identical (1).

Analyse the influences on the mobility of workers. [6]

Coherent analysis which might include: Occupational mobility is influenced by education (1) the
more qualifications workers have (1) the more choice of jobs they will have (1). Occupational
mobility is influenced by training (1) the more skills workers have (1) the easier they will find it to
switch jobs (1). Geographical mobility is influenced by the price/availability of housing (1) The
cheaper/more available housing is (1) the easier will workers find it to work in other areas (1).
Geographical mobility is influenced by family ties (1) people may be reluctant to move because
children are at school/partners have job in a particular area (1). Mobility between countries will
be influenced by immigration controls (1).

Discuss whether or not mergers benefit an economy, [8]

Why they might:

• may enable the new firm to take greater advantage of economies of scale, lower average cost
and lower prices, resulting in lower inflation • may enable the new firm to earn higher profits and
spend more on research and development and investment. This could raise the quality of
products and increase economic growth • may enable the new firm to compete more effectively
internationally which could improve the current account position • a vertical merger can increase
the efficiency of production by coordinating the production stages. This could increase
productive potential.
Why they might not:

• the new firm may experience diseconomies of scale, higher average cost and higher prices.
This may increase the inflation rate • a horizontal merger will reduce competition which can
increase prices, reduce choice, lower efficiency and reduce quality. This may reduce
international price competitiveness which may harm the country’s current account position. It
could also lower the country’s economic growth rate • the new firm may rationalise and this may
result in unemployment

May/June/2020/23

Explain two types of mergers [4]

Horizontal (1) when two or more firms from the same industry and the same stage of production
merge (1). Vertical (1) when two or more firms from the same industry but different stage of
production merge (1). Conglomerate (1) when two or more firms from different industries merge
(1).

Discuss whether or not workers benefit from division of labour. [8]

Why it is a benefit:

• saves time • increased skills • increased productivity • increased wages

Why it is not a benefit:

• increased boredom • limited skills • lack of motivation • lack of occupational mobility •

overdependence on others

2015/2016

Define Monetary Policy [2]

Decisions on interest rates, the money supply and the exchange rate.

Explain two functions of money. [4]

Medium of exchange (1)
It can be used as a way to trade goods and services, accepted in buying and selling (1)
Standard of deferred payment and money can allow people to borrow and lend (1)
Helps compare the value of other products (1)

Analyse why engaging in division of labour may increase a firm’s costs of production. [6]
division of labour involves workers specialising in particular tasks (1)
 workers may become bored (1) they may make mistakes (1) products may have to be rejected
(1) productivity may fall (1)
there may be a high turnover of workers (1) this will increase the cost of hiring workers (1)
workers may not be employed on tasks they are best at (1) this will mean productivity will be
below potential (1)
if key workers are sick or leave (1) it may be difficult to cover for their absence (1) this can
disrupt the production process (1)
more specialised workers may demand higher wages (1) increasing labour costs (1)

Discuss whether a reduction in a country’s trade protection will improve its economic
performance. [8]
Up to 5 marks for why it might:
• may increase competition (1) this may put pressure on domestic firms to keep prices low (1)
reduce inflation (1)
• price of imported raw materials may fall (1) this may lower costs of production (1) reduce
cost-push inflation (1)
• finished imports may be cheaper (1) more imports can increase choice for consumers (1)
• other countries may reciprocate (1) lower trade protection measures (1) enable the country to
export more (1) raise output (1) increase employment (1) Up to 5 marks for why it might not:
• may drive infant industries out of business (1) reduce output and employment in the long run
(1) may harm the current account position (1)
• may cause declining industries to go out of business more quickly (1) causing unemployment
(1) • may increase dumping (1) foreign firms may be selling below cost price (1) unfair
competition that may drive domestic firms out of business (1)
• may lower government tax revenue (1) reduce expenditure on, e.g. health care, education (1) •
may become dependent on other countries (1) risk of a supply-side shock (1)

Define ‘private limited company’. [2]

• in the private sector (1)
• sells shares/is a joint-stock company (1)
• the shares are not (usually) traded on a stock exchange (1) only sold to known individuals (1)
• has limited liability (1)
• the owners/shareholders vote for a board of directors (1) (limited to 50 shareholders)

Explain two influences on what factors of production a firm uses. [4]

• the type of product produced/size of the firm (1) for instance, producing nuclear power is
capital-intensive (1)
• the productivity of factors of production (1) if, for instance, labour becomes more skilled, a firm
might become more labour-intensive (1)
• the availability of factors of production (1) in some countries there may be a shortage of oil or
people of working age (1)
• the relative cost of factors of production (1) if capital is relatively expensive, labour-intensive
methods of production may be used (1)

Analyse how an increase in the size of a firm can increase its profit. [6]
• the increase in size may have resulted from the firm selling more products/increasing output
(1) if revenue rises by more than costs, profit will increase (1)
• a larger firm may be able to take greater advantage of economies of scale (1)
• fall in average costs (1) e.g. buying, managerial, technical, risk bearing (2)
• a firm may have grown in size by merging/taking over rival firms (1) this will give it greater
market power (1) allowing it to push up price (1)

Discuss whether an economy would benefit from a foreign producer setting up in the
country. [8]
Up to 5 marks for why it might:
• increase GDP (1) raise living standards (1)
• create new jobs (1) lower unemployment (1) less spent on benefits (1)
• pay higher than local wages (1)
• bring new knowledge and skills (1) boosting productivity (1)
• pay (corporation) taxes (1) increasing government revenue (1)
• increased (inward) investment (1)
• creates competition for domestic firms (1) making them cut costs/become more efficient (1)
• contribute to the country’s exports (1) improve the current account position (1)
• sell more cheaply in the country (1) as lower transport costs (1)
• country benefits from improved infrastructure (e.g. roads) built by foreign producer (1)
• creates demand for products of local firms e.g. components (1)

Up to 5 marks for why it might not:

• may drive local producers out of business (1) so not adding to GDP, employment, etc. (1)
• may create external costs (1) e.g. pollution (1) may set up in the country to get round
regulations at home (1)
• top jobs may be taken by workers from the MNC’s home country (1) jobs created for locals
may be unskilled (1)
• profits earned from the firm may be sent home (1) so not benefiting the home economy (1)
• it may have a powerful influence on the government (1) reducing budget revenues by
demanding tax relief/subsidies (1)

Define ‘horizontal integration’. [2]

A merger/takeover between firms (1) producing the same product at the same stage of
production. (1)
Explain two characteristics of perfect competition. [4]
• many buyers and sellers (1) so no one buyer or seller can influence price (1)
• no barriers to entry and exit (1) so any new firm can start producing the product/nothing which
makes it difficult for a firm not currently making the product from starting to make it/no
restrictions on firms in the industry stop producing the products (1)
• firms are price takers (1) their supply is such a tiny proportion of total supply that changes in it
will have no effect on price (1)
• homogeneous product/all the products are the same (1) so the products of different producers
are perfect substitutes for each other (1)
• perfect information (1) buyers and sellers are fully aware of price and profits earned in the
market (1)

Analyse how two supply-side policy measures could improve the performance of airline
industry. [6]
Up to 4 marks for anyone policy measure analysed: • privatisation (1) may introduce
competition (1) increase profit incentive (1) encourage firms to be efficient/reduce costs (1)
• cut in corporation tax/tax incentives given (1) increase funds available for investment (1)
improve technology (1) raise productivity (1) lower costs of production (1)
• Improved education and training (1) raise skills of workers (1) increasing productivity (1) lower
costs of production (1)
• cut in income tax (1) increase the motivation of workers (1) raise productivity (1) lower costs of
production (1)
• deregulation (1) removing laws and rules may reduce firms’ costs (1) enabling them to invest
more (1)
• subsidies (1) may encourage firms to invest in advanced technology, engage in research and
development and/or train workers (1) lower costs of production/increase productive capacity (1)

Discuss whether price is likely to be higher in a monopoly than in a perfectly competitive

market. [8]
Up to 5 marks for why it might:
• lack of competition (1) gives a monopoly market power (1) if profit maximisers (1) may push
up price (1) by restricting supply (1)
• lack of consumer choice/consumers can switch to rival producers in a perfectly competitive
market (1) an increase in demand raises price (1) which will encourage new firms to enter the
industry (1) reducing price (1)
• demand is often inelastic, e.g. water (1) increased demand raises price by greater proportion
(1)
• a monopoly may be experiencing diseconomies of scale (1) example of diseconomies of scale
(1) this will raise average costs of production (1)
Up to 5 marks for why it might not:
• a monopoly may be able to take advantage of economies of scale (1) example of economies
of scale (1) with lower average costs, price may be lower (1) whilst still enabling a monopoly to
enjoy high profits (1)
• with high profits, a monopoly may be able to spend more on research and development/new
technology (1) this can reduce costs of production (1) enabling a monopoly to charge a lower
price (1)
• a monopoly may be state-owned (1) it may choose to charge a low price to ensure everyone
can afford it (1)
• private sector monopolies may not be profit maximisers (1) they may charge a lower price (1)
in order to grow the business (1)
• monopolies may still face overseas competition (1) keeping prices down (1)

Define ‘capital-intensive’. [2]

• A production method that uses a large proportion of capital (1) relative to labour (1).

Explain two characteristics of perfect competition. [4]

• Many buyers and sellers (1) making each firm a price taker/a very low market concentration
ratio (1).
• Free entry and exit (1) absence of barriers to entry and exit/results in only normal profits being
earned in the long run (1).
• Homogeneous product (1) an absence of anything that differentiates the product e.g.
branding/demand for one firm’s product will be perfectly elastic (1).
• Perfect knowledge (1) firms and buyers aware of profits/prices (1).

Analyse two internal diseconomies of scale that a large firm may experience. [6]
• Difficulties controlling/managing the firm/managerial diseconomies (1) there are
more layers of management in a large firm (1) may take longer to make decisions (1).
• Communication problems (1) there are more layers of communication/communication
may be indirect (1) messages may be misinterpreted/take time to reach recipients (1).
• Labour diseconomies (1) Workers may feel less appreciated/have low morale (1) so
may become demotivated (1) which could reduce labour productivity/efficiency (1).
• Poor industrial relations (1) industrial action e.g. strikes may occur (1) due to the time
it takes to address workers’ grievances (1) more people to argue with (1).

Discuss whether consumers would benefit from an increase in imports. [8]

​Up to 5 marks for why they might:
• Imports may make available products not produced in the country (1) due to e.g. differences
in climate/resources (1).
• Imports may increase choice (1) provide differentiated products (1) provide good quality
products (1) • Imports may be cheaper (1) this may also put pressure on domestic firms to
improve the quality of their products (1).
• The price of imported raw materials may be cheaper (1) this could lower costs of production
(1) lowering prices (1).
Up to 5 marks for why they might not:
• Imports may drive domestic firms out of business may be created and this may increase
prices in the long run (2)
• A monopoly may be created which may reduce quality in the long run (2)
• Foreign firms may be engaging in dumping (1).
• Imports may be of harmful products/demerit goods (1) example (1) such products would harm
people’s health (1).

Why can the economic problem never be solved? [2]

• Wants will grow more (1) than resources (1).
• Wants are infinite/unlimited (1) whilst resources are finite/limited (1).

Explain two reasons why workers specialising can reduce the average cost of
production. [4]
• Workers can specialise in what they are best at (1) increasing productivity/efficiency (1).
• Workers can be trained more quickly (1) cost of training reduced/do not have to be trained in
every task (1).
• Less equipment is needed (1) cutting the amount of capital needed (1).
• Less time needs to be taken in moving between tasks (1) more time focused on production
(1).
• It may be easier to mechanise the process (1) increase productivity (1).
• Increased efficiency/higher quality production (1) reduces wastage (1).

Analyse how an increase in bank lending can increase economic growth. [6]
• An increase in bank lending to households may increase consumer expenditure (1) higher
total (aggregate) demand (1) may encourage firms to increase their output (1) this will raise real
GDP (1).
• An increase in bank lending may increase investment/spending on capital goods/ expand
business (1) this will increase demand for capital goods (1) it will also increase productive
capacity (1) causing potential economic growth (1).
• An increase in bank lending to people undertaking education/training (1) may increase labour
productivity (1) increasing GDP (1) and potential economic growth (1).

Discuss whether consumers benefit from horizontal mergers. [8]

• A horizontal merger is a merger between two firms at the same stage of production producing
the same product (1).
Up to 5 marks for why it might:
 • They may enable the firms to take greater advantage of economies of scale (1) example (1)
this will reduce average cost of production (1) this may lower prices to consumers (1).
• They may enable the firms to earn more profit (1) which they can spend on research and
development (1) increasing innovation (1) raising the quality of the product (1)

Up to 5 marks for why it might not:

• They may result in the firms experiencing diseconomies of scale (1) example (1) this will
increase average cost of production (1) this may raise prices to consumers (1).
• The firms may gain greater market share (1) move it closer to monopoly (1) this may result in
higher prices (1).

Define ‘productivity’. [2]

Output per worker/factor (1) hour/time period (1).

Explain the difference between average fixed cost and average variable cost. [4]
Average fixed cost is total fixed cost divided by output/fixed cost per unit (1) costs that fall with
output/may be illustrated on a diagram/example of a fixed cost (1). Average variable cost is total
variable cost divided by output/variable cost per unit (1) costs that may fall or rise with
output/may be illustrated on a diagram/example of a variable cost (1).

Analyse the advantages that a country may gain from specialising in a product such as
smartphones. [6]
Output/GDP/GDP per head may be higher (1) resulting in higher living standards (1) as a
country can concentrate on what it is best at producing (1) make best use of resources (1).
Providing a product in a large quantity (1) may lower average cost/ enable advantage to be
taken of economies of scale (1) example of an economy of scale (1). World demand for
smartphones is high/increasing (1) smartphones are increasing in popularity/becoming more of
a necessity (1). May gain a good reputation for producing the product (1) which will increase
demand (1). Specialising encourages countries to trade (1) providing consumers with more
variety/cheaper products (1).
(d) Discuss whether protectionism saves jobs. [8]
Up to 5 marks for why it might:
Tariffs raise the price of imports (1) quotas places a limit on imports/other method of
protectionism described (1) higher price of imports/lower quantity (1) may make imports less
competitive (1) consumers may switch from imports to domestic products/reduce quantity of
imports produced (1) maintain domestic production (1) stop unemployment occurring in
domestic firms (1). Protectionism may stop declining (sunset) industries closing quickly (1)
causing structural unemployment (1).

Up to 5 marks for why it might not:

Foreign products might still be cheaper (1) better quality (1). There may be retaliation (1) with
governments of other countries imposing trade restrictions (1) which may reduce exports (1)
causing unemployment in the export industries (1). Tariffs may increase raw material costs (1)
domestic firms may have to switch to more lower quality imported raw materials (1) domestic
firms’ international competitiveness could fall (1) causing unemployment in, e.g. car industry
dependent on imported steel (1). Demand for labour may fall for other reasons (1), e.g.
introduction of new technology by domestic firms may result in structural unemployment (1).
May protect jobs in the home country but create unemployment in other countries (1) by making
their products less price competitive (1). Note. if a candidate refers to two or more methods of
protection, e.g. tariffs and quotas but does not explain how they work, award only one mark.
Note. maximum mark of 4 if there is not an explicit link to jobs.

Define ‘unemployment’. [2]

People without jobs (1) who are willing and able to work (1). Or: Resources not being used (1)
to produce goods and services (1).

Explain two benefits that a firm may gain from producing in another country. [4]
Avoid trade restrictions (1), e.g. will not have to pay tariffs imposed on products (1). Lower
transport costs (1) enabling the firm to sell at a lower price (1). Access to cheaper/more skilled
labour (1) lowering costs of production/ improve the quality of the products produced (1). Access
to cheaper/better quality raw materials (1) lowering costs of production/improve the quality of
the products produced (1). Closer contact with foreign consumers (1) enabling the firm to pick
up more quickly on changes in demand (1). Possible government subsidies (1) to set up in
areas of high unemployment (1). Lower taxes (1) which may increase profits (1).
Using a production possibility curve diagram, analyse the effect of a decrease in
unemployment on an economy’s output. [6]
Up to 4 marks for the diagram:

• axis correctly labelled in terms of two different products or types of products (1)
• the curve or downward sloping line drawn to axes (1)
• a production point inside the PPC (1)
• a production point on or moving closer to the frontier (1). Up to 3 marks for written comments:
• unemployed resources mean an economy is producing inside the PPC (1)
• a decrease in unemployment means more resources are being used (1) • greater use of
resources increases output (1).

Discuss whether it is better to work in the public sector or the private sector. [8]

Up to 5 marks for why it may be better to work in the public sector:

There may be greater job security (1) a government may be reluctant to dismiss workers (1) as
it will increase unemployment (1) greater job security may put less pressure on workers (1).
Working conditions may be better (1) and wages higher (1) as the government is not profit
motivated (1). May be able to enjoy longer holidays (1) if the government is a generous
employer (1). Promotion chances may be higher (1) if there is a large public sector (1). May be
more able to join a trade union (1) to protect rights (1). May be paid higher pensions (1).

Up to 5 marks for why it may be better to work in the private sector:

Working conditions/wages may be better in the private sector (1) if firms are competing for
workers (1). Private sector firms may earn high profits (1) enabling them to pay high
wages/provide good working conditions (1). There may be greater diversity of jobs in the private
sector (1), e.g. could work for a small firm (1).

Identify who owns a public corporation and who owns a public limited company. [2]
The government (state) owns a public corporation (1). Shareholders own a public limited
company (1). A public corporation is owned by the public sector whereas a public limited
company is owned by the private sector (1).
Explain why fixed costs are high in the aircraft-making industry. [4]
Fixed costs are costs that do not change with output (1). There is a considerable value of
capital equipment used in making aircraft/it is a capital intensive industry (1) loans may have to
be taken out to pay for capital equipment (1) interest on loans have to be paid even if no output
is made (1) the equipment may have to be rented (1) rent has to be paid even if no output is
made (1). Aircraft making factories have to be very large (1) high rental costs (1) high business
rates (1).

Analyse what determines a firm’s demand for capital goods. [6]

The expected demand for the product produced (1) the higher the output, the more capital
goods needed (1). Advances in technology (1) new capital equipment is likely to be more
productive (1). The price of the capital equipment (1) the cheaper the price, the more capital
equipment that is likely to be bought (1). The rate of interest (1) firms often borrow to buy capital
equipment (1). The level of profits (1) higher profits increase firms’ willingness and ability to buy
capital goods (1). Corporation taxes (1) lower taxes will increase firms’ willingness and ability to
buy capital goods (1). Government subsidies (1) these provide funds for firms to buy capital
goods (1). Note. a maximum of 3 marks for a list-like approach.

​Discuss whether the quality of products is likely to be higher in a monopoly or in a

perfectly competitive market. [8]
Up to 5 marks for why it might:
A monopoly can earn higher profits (1) some of the higher profits could be spent on research
and development (1). A monopoly knows it can protect any profits it makes (1) due to high
barriers to entry and exit (1) this may encourage it to produce high quality products (1). A
monopoly may enjoy economies of scale (1) including R & D economy (1).
​Up to 5 marks for why it might not:
A monopoly may lack competitive pressure to produce a good quality product (1) consumers
may still buy the product even it is of a poor quality (1) as they have no choice (1). A monopoly
may experience diseconomies of scale (1) management problems (1) poor industrial relations
(1) may result in lower quality products (1).

Define ‘equilibrium price’. [2]

• the price which equates demand and supply (2)
• market clearing price (1) which ensures no surplus or shortage (1)
• the price which will not change (1) unless market conditions change (1)

Explain two reasons why borrowing may decrease. [4]

1 mark for identification and 1 mark for explanation: • a rise in the rate of interest (1) will
increase the cost of borrowing (1) • a reduction in the availability of loans (1) will make it more
difficult to borrow (1) • a rise in income (1) may reduce the need to borrow (1) • an increase in
the state provision of health care/education (1) may mean that people do not have to borrow to
cover health care/education expenses (1) • a reduction in the price of expensive items e.g.
houses, cars (1) may mean that people can buy the items without borrowing (1) • a reduction in
confidence about the future (1) may mean that people will be afraid they will not be able to
repay loans (1) • a change in age structure (1) the young may borrow more than those of middle
age (1) • a change in social attitudes (1) it may become less acceptable to borrow (1) • an
increase in government subsidies to firms (1) may reduce the need for firms to borrow from
banks (1)

Discuss whether the building of houses should be subsidised. [8]

Up to 5 marks for why they should be:

• subsidising houses will provide an incentive to build houses (1) increase the supply of houses
(1) reduce the price of houses (1) this may make it easier for the poor to buy houses (1)
increase the quality of the lives of the poor (1)
• subsidising houses will increase economic activity (1) to produce more houses would require
more labour (1) this would reduce unemployment (1)
• housing is a necessity (1) so building more houses may reduce poverty/homelessness (1)

Up to 5 marks for why they should not be:

• would involve an opportunity cost (1) government spending could be used on other areas e.g.
education/health care (1)
• may generate external costs (1) for example, pollution and destruction of the natural
environment (1)
• there may be no demand for extra houses (1) in this case there will be an oversupply of
houses/inefficient use of resources (1)
• building firms may become reliant on subsidies (1) and this increase inefficiency (1)

Define ‘multinational company’. [2]

• a company that has its headquarters/is based in a country (1) but produces in a number of
countries (1)

Explain why governments may discourage strikes. [4]

• strikes disrupt output/service provision (1) this may result in customers being lost (1)
• increase firms’ costs of production (1) and lose international competitiveness (1)
• lower output/incomes/GDP (1) and therefore lower living standards (1)
• may reduce exports (1) and so harm the balance of payments position (1)
• may cause unemployment (1) leading to higher spending on welfare benefits (1)
• may discourage FDI (1) and job opportunities (1)
• lower output will reduce tax revenue (1) and so reduce the government’s ability to spend

Analyse three reasons why trade union membership may decrease in a country. [6]
• trade union subscriptions may increase (1) making it more expensive for people to join a trade
union (1)
• legislation may reduce the power of trade unions (1) this would make membership less
valuable (1)
 • employers may not recognise trade unions/be reluctant to employ members of trade unions
(1) this may make people reluctant to join as it would reduce their employment opportunities
• unemployment may mean that there are fewer people in employment to belong to trade
unions (1) it will weaken the power of trade unions (1)
• in a boom period/high level of economic activity (1) workers may gain wage rises/better
working conditions without belonging to a trade union (1)
• workers may be satisfied with pay and conditions (1) may not agree with actions of trade
union (1)
• government action to improve the pay and/or conditions of workers e.g. introduction of
national minimum wage (1) reduces the need for collective bargaining (1)

Discuss whether a rise in the wages a firm pays would reduce its profits. [8]

Up to 5 marks for why it might:

• higher wages will mean a higher wage bill (1) if output does not increase by more than wages,
labour costs per unit will increase (1) costs of production will increase (1) profit is revenue minus
costs (1) with higher costs and the same revenue, profit will fall (1)

Up to 5 marks for why it might not:

• paying higher wages may prevent strikes (1) this can reduce costs of production (1) • higher
wages may motivate workers (1) this can increase productivity (1) reduce costs of production (1)
• higher wages may make it easier to recruit workers (1) this can reduce costs of production (1) •
higher wages may make it easier to recruit skilled workers (1) this will raise productivity (1)
reduce costs of production (1) • other costs may be falling (1) e.g. rent, corporation tax (1) •
demand for the firm’s products may be increasing (1) this will raise revenue (1) • higher wages
may be paid to a smaller labour force (1) reducing the wage bill (1)

May-June 2013 Paper 21

1. Co-operatives reward customer loyalty. Mr Kojima’s grocery store, near Tokyo’s fish
market, has been in business since his grandfather started it almost 100 years ago. His
store is part of a group of co-operatives, called Zen Nippon Shokuhin, which has nearly
2000 small stores. The co-operatives plan to introduce a loyalty card which rewards
customers who use the stores regularly. They do this by giving special offers only to
loyalty card holders.These stores have enjoyed a great deal of success in recent years.
Sales have increased by 20%. Customers like the personal service they receive from a
local store. Sales in Japanese supermarkets, in contrast, have fallen for fourteen years
in a row. Some economists, however, consider small stores such as Mr Kojima’s to be
rather outdated. They also think the inefficiency of these small stores may be one
possible cause of the low level of productivity of Japan’s service sector.
(a) Define the term ‘productivity’. [2]

Productivity measures the efficiency with which resources are used (1). It can be
defined as the output per person or per unit of capital employed (1) over a given
period of time (1). Any answer which recognises the difference between
productivity and production should be awarded at least 1 mark.

(b) Describe two features of a co-operative. [4]

● the idea of working together to share profits

● according to the amount that consumers had spent
● the co-operative exists for the benefit of its members
● the owners of a co-operative are the members
● this gives them voting rights
● but each member only has one vote
● many co-operatives stress the importance of social principles
● usually have limited liability

(c) Apart from a loyalty card, explain other ways in which small stores, such as those in
Japan, can attract customers. [6]

● price
● quality of service/opening hours
● extent of advertising
● location of store
● provision of delivery service

(d) Discuss why small stores sometimes find it difficult to compete with large
supermarkets. [8]

Advantages of small stores:

● personal attention
● closer to home
● longer opening hours
● avoidance of diseconomies of scale

Disadvantages of small stores:

● prices likely to be more expensive (though bulk buying will reduce prices)
 ● limited range of stock

Advantages of large supermarkets:

● lower prices through economies of scale

● wider range of stock

Disadvantages of large supermarkets:

● less personal
● possibility of long queues
● higher costs and prices due to diseconomies of scale

3. Earnings in Nigeria vary a great deal. Some workers are highly paid, but
others are paid very little. Trade unions are trying to increase the wages of their
members.

(a) Using a demand and supply diagram, analyse how a trade union can increase
the wages of their members. [6]

● axes correctly labelled (wage/price and employment/quantity) (1)

● demand and supply curves correctly labelled (1)
● shift of supply curve to the left (1)
● rise in wage/price and fall in employment/quantity (1)

Analysis based on restricting supply:

● by making labour more scarce in the industry (1)

● the wage levels of those still in the industry will increase (1)

Demand and supply diagram based on promoting the training of workers/raising

productivity:

● axes correctly labelled (wage/price and employment/quantity) (1) ​•

demand and supply curves correctly labelled (1)
● shift of the demand curve to the right (1)
● rise in wage/price and rise in employment/quantity (1)
Analysis based on increasing demand:

● by promoting training/raising productivity (1)

● more skilled workers will be in higher demand (1)

Demand and supply diagram based on supporting a minimum wage:

● axes correctly labelled (wage/price and employment/quantity) (1)

● demand and supply curves correctly labelled (1)
● minimum wage set above the equilibrium (1)
● rise in wage/price and fall in employment/quantity (1)

Analysis based on supporting a minimum wage:

● trade unions may support a national minimum wage (1)

● this may push the wage rate above the equilibrium level (1)

(b) Explain why a skilled worker is likely to be paid more than an unskilled
worker. [6]

● reward for higher level of skill, training and qualifications

● they are likely, therefore, to have a higher level of productivity (they may
have some idea of marginal revenue productivity, although it is not on the
syllabus)
● such workers are relatively scarce/in shorter supply compared to unskilled
workers
● it is less easy to recruit skilled than unskilled workers

(c) Discuss what is likely to influence the success of trade unions in trying to
increase the average wages of workers in an economy. [8]

Partnership:

● between 2 and 20 people own and control the business

● relatively easy to set up ​•​ a deed of partnership is usually written
● profits are distributed between partners
● unlimited liability (although there are some limited partnerships which do
have limited liability)
Private Limited Company:

● owned and controlled by the shareholders

● more complex to set up; certain legal documents are required
● profits distributed to shareholders through a dividend
● limited liability

May-June 2013 22

1 The communications monopoly in MexicoMexico’s telephone and television

industries are near-monopolies. Over 80% of telephone landlines are
connected to Telmex, and over 70% of the mobile (cell) phone market is
controlled by one firm, Telcel. It is a similar situation in the television industry
where one firm, Televisa, controls over 70% of the country’s free-to-air
television market. All three firms are public limited companies.Although this
situation has existed for some time, a number of smaller companies have
been campaigning for more competition to benefit consumers.Mexico’s
Federal Competition Commission, an organisation which monitors competition
in different industries in the country, has agreed that consumers would benefit
from greater competition. It has stated that monopolies are against the public
interest. For example, in 2011, mobile phone charges in Mexico were 43.5%
higher than rates charged in North America and Europe. The Mexican
Government, however, has been reluctant to intervene. It believes that it
would be better to allow market forces to determine the number of firms in a
market and the prices that they charge.

(a) Describe two features of a public limited company. [4]

limited liability
a joint stock company
name is followed by plc
a minimum number of shareholders
no maximum number of shareholders
shares can be bought and sold on a stock exchange
operates in the private sector
often run by a board of directors
legal requirement to publish financial information
a separate legal identity

(b) Explain two reasons why firms differ in size in an economy, such as
Mexico. [4]

size of demand/may be a local or niche market

potential benefits of economies of scale
potential problems of diseconomies of scale
extent of capital required
some firms may only have recently been established
need for personal services/attention
differences in firms’ objectives/owner choice differences in brand loyalty
(c) Explain how a government might intervene to reduce mobile phone
charges. [4]
impose a maximum price
provide a subsidy
encourage new firms to enter the market
establish a publicly run firm
reduce taxes affecting firms competition policies

(d) Discuss whether monopolies are always against the public interest. [8]

Disadvantages of monopolies: ​•​ they can be inefficient (either productively or

allocatively efficient, but these two terms are not on the syllabus) ​•​ price will
tend to be higher than in perfect competition ​•​ output will tend to be lower
than in perfect competition ​•​ products may be of poor quality as a result of
lack of competition ​•​ abnormal profits in the long run Advantages of
monopolies: ​•​ large profits can be reinvested to improve the quality of
products, such as expenditure on research and development ​•​ there may be
opportunities for economies of scale ​•​ this could lead to a lowering of cost
and, possibly, price ​•​ avoids wasteful duplication of capital equipment
Advantages of monopolies: ​•​ large profits can be reinvested to improve the
quality of products, such as expenditure on research and development ​•​ there
may be opportunities for economies of scale ​•​ this could lead to a lowering of
cost and, possibly, price ​•​ avoids wasteful duplication of capital equipment

2. Producers aim to achieve a high rate of productivity. Production in some

industries tends to be labour-intensive while in others it is largely
capital-intensive.

(a) Using examples, define the factors of production, land and capital. [4]
land – natural resources/gifts of nature available for production, e.g. farmland
labour – all physical and mental effort of workers, e.g. teacher
capital – all man-made goods used in production, e.g. machinery
enterprise – the risk bearing and decision making function, e.g. entrepreneur
or example of a function

(b) Distinguish between an increase in productivity and an increase in

production. [6]
Definition of opportunity cost: the (next) best (1) alternative foregone (1) as a
result of making a decision
Diagram of production possibility curve – axes correctly labelled (1) and curve
correct shape (bowed out or straight downward sloping) (1)
Explanation – idea of moving along one axis (1) has the effect of a reverse
movement along the other axis (1)

(c) Discuss to what extent production should be encouraged to move from

being labour-intensive to being capital-intensive. [10]
Yes: ​•​ more houses would reduce the number of homeless ​•​ the increase in
supply might reduce the price of houses ​•​ making them more affordable ​•
may improve the quality of houses ​•​ employment/multiplier effects

No: the decision to build more houses will involve an opportunity cost in terms
of: ​•​ the alternative use of the land ​•​ the alternative use of the money
required to build the houses ​•​ the alternative use of the labour and capital
involved in building the houses ​•​ may already be a surplus of houses. ​•​ some
resources may not be suitable for building houses ​•​ may generate
environmental costs.

2013 Oct-Nov 21
4 Money performs an important role in an economy.

(a) Explain how money functions as (i) a unit of account and (ii) a standard for
deferred payments. [4]
Up to 2 marks for a unit of account: ​•​ the price of an item can be measured in
terms of how many units of currency it is worth. Money can, therefore, be
used to place a value on an item (1). Prices are expressed in monetary terms;
this function of acting as a unit of account (or measure of value) enables
buyers and sellers to agree on what items are worth, relative to each other (1)

Up to 2 marks for a standard for deferred payments: ​•​ this function of money
enables borrowers to borrow money and pay it back at a future date (1); in this
way, money allows people to borrow and lend and an agreement can be
reached about the amount to be repaid in the future (1)

(b) Analyse the role that commercial banks can perform in an economy. [6]
ovision of: ​•​ current accounts (1) allows customers to make and receive
payments/money transmission services (1) e.g. by cheque, direct debits, debit
cards (1) ​•​ deposit/savings accounts (1) interest paid to savers (1) ​•​ loans (1)
interest charged on the full amount of the loan (1) may be used for a variety of
purposes e.g. to buy a car (1) mortgages to buy a house (1) ​•​ overdrafts (1)
interest charged on the amount borrowed (1) may be authorised or
unauthorised (1) ​•​ foreign currency/travellers’ cheques (1) used by people
visiting other countries (1) ​•​ financial advice (1) e.g. on purchase of shares (1)
•​ safe deposit facilities (1) e.g. to keep important documents (1) ​•​ by lending
money they can increase total consumer spending (1) in the economy and
total investment by firms (1). (Do not reward reference to functions of central
bank such as setting interest rates)

(c) Discuss whether the rate of interest is the only influence on a person’s
decision to borrow money from a bank. [10]

Up to 7 marks for the importance of the rate of interest: ​•​ the rate of interest is
the price (1) of borrowing money (1) reward for lending (1) ​•​ a fall in the rate
of interest will reduce the cost of loans/overdrafts (1) encouraging a rise in
borrowing (1) ​•​ a rise in the rate of interest will increase the cost of
loans/overdrafts (1) encouraging a fall in borrowing (1) ​•​ a person may take
into account not only the current but also the expected future interest rate (1)
less likely to borrow if the rate of interest is expected to rise (1) central banks
change the interest rate to influence borrowing (1) e.g. to reduce the inflation
rate it will raise the rate of interest (1)

Up to 7 marks for other influences on a decision to borrow money: ​•​ the ability
to repay loans/overdrafts (1) those with high income (1) or who are wealthy (1)
are more likely to be able to repay ​•​ the need for the loan/overdraft (1) e.g.
someone in financial difficulty may need to seek a loan/overdraft (1) ​•​ the
availability of loans/overdrafts (1) a bank will not be willing to lend to someone
it thinks will not be able to repay (1) ​•​ future inflation (1) this may reduce the
real cost of the loan/overdraft (1) ​•​ confidence (1) a person may be more
willing to borrow if she/he thinks her/his job is secure/income will rise (1) ​•
advertising by banks of the borrowing facilities that are available (1) increase
awareness of the opportunities (1) ​•​ social attitudes to borrowing money (1) a
person may be reluctant to get into debt (1) ​•​ in some countries banks are not
allowed to charge interest (1) some religions prohibit usury (1)

5 The types of business organisations in India vary a great deal.

(a) Describe two features of a partnership. [4]
•​ unlimited liability (although limited liability can sometimes operate) (1) so
that the amount owners can lose is not restricted to money they have put into
the business (1)​•​ unincorporated (1) partners share profits/losses (1) ​•​ a
relatively low maximum number e.g. 20(1) restricts the business size (1) ​•
partners may specialise (1) so there is a sharing of skills/expertise (1) ​•
usually involves a legal document called a Deed of Partnership (1) setting out
the terms of the partnership (1)
(b) Explain why a partnership might become a private limited company. [5]
•​to benefit from limited liability (1) so that the amount that owners can lose is
restricted to the amount they have put into the business (1) ​•​ to expand by
issuing shares (1) this raises more capital (1) allows the firm to expand its
output (1) ​•​ a private limited company usually has a higher maximum number
of owners (1) and so will be able to benefit from economies of scale (1)
example (1) ​•​ to have a board of directors (1) which appoints a managing
director who takes responsibility for running the business (1)

(c) Distinguish between internal and external economies of scale. [4]

Internal economies of scale Up to 2 marks: ​•​ advantages that a firm can gain
from itself growing in size (1) in the form of lower average costs (1) ​•​ one
example e.g. buying, technical, financial, managerial, risk bearing (1)

External economies of scale Up to 2 marks: ​•​ advantages that firms can gain
from the industry growing in size (1) in the form of lower average costs (1) ​•
one example e.g. skilled labour force, specialist markets, improved
infrastructure, specialist supplies (1)

(d) Discuss whether all small firms will eventually become large firms. [7]
Up to 4 marks for why they might:​•​ if small firms respond to changes in
consumer demand (1) they may increase sales (1) successful small firms will
gain high profits (1) this can finance expansion (1) ​•​ banks may be willing to
lend to small firms (1) providing the finance for expansion (1) ​•​ the
government may provide subsidies for small firms (1) lowering their costs of
production (1) increasing their supply (1) ​•​ small firms may combine to take
advantage of economies of scale (1) will lower cost of production (1) increase
profits (1)

Up to 4 marks for why they might not: ​•​ size of the market may be limited (1)
demand for some products may be low (1) ​•​ preference of owners/managers
(1) it may be easier/less stressful to run a small firm (1) ​•​ preference of
consumers (1) people may want a personal service (1) ​•​ difficulty of raising
finance to expand (1) banks may be reluctant to lend to some small
firms/charge them too high a rate of interest (1) ​•​ market might be dominated
by large firms (1) this creates barriers to expansion for small firms (1)

Oct-Nov 2013 22
3. A person is choosing between different occupations and realises that there
are both wage and non-wage factors that need to be taken into account.

(a) Describe the non-wage factors that can influence a person’s choice of
occupation. [4]
•​ job satisfaction (1) e.g. a person may enjoy a challenging occupation/an
occupation such as nursing that involves helping people (1) ​•​ type of
work/working conditions (1) for instance, an occupation may usually be
undertaken in a clean and safe environment (1) ​•​ working hours (1) most
people like to avoid occupations which involve very long hours or unsociable
hours (1)​•​ size of the firm (1) some people like to work in occupations that are
usually undertaken in small firms as there may be closer contact with
employers and fellow workers/some people like to work in occupations that
are usually undertaken in large firms as there may be greater diversity in tasks
undertaken and greater promotion prospects (1) ​•​ career
prospects/opportunity for promotion (1) some occupations have clear career
progression e.g. teaching (1) ​•​ fringe benefits (1) such as subsidised
housing/a company car (1)​•​ number/length of holidays (1) most people like
regular and long holidays (1) ​•​ pension scheme (1) people are attracted by a
generous and safe pension scheme (1)​•​ job security (1) people are likely to
be reluctant to undertake an occupation in which workers are often made
redundant/the industry is in decline (1)​•​ location of job/distance and time to
travel (1) most people prefer to work close to home/some people’s choice may
be restricted to a particular area because of the difficulty/cost of travel (1)

(b) Explain the different forms of payment that a worker can receive. [4]
•​ wage (1) payment for carrying out a particular job/explanation of piece rate
and/or time rate (1) ​•​ salary (1) based on a fixed annual amount (1) ​•
overtime (1) payment for work in excess of the standard, contracted hours (1)
•​ bonus (1) extra payment acting as an incentive/payment for performance
above that usually expected (1) ​•​ commission (1) payment based on the
percentage of sales a worker makes (1)

(c) Consider the likely changes in earnings over an individual’s lifetime. [3]
•​ entry to the workforce: earnings relatively low (1) ​•​ increase in
skills/experience: earnings rise significantly (1) ​•​ older/end-of-career workers:
earnings fall (1)

Reward other logical suggestions based on economics e.g.

promotion/demotion, outcomes of peer reviews, loss of jobs

(d) Discuss whether a worker in the services sector is always likely to receive
a higher wage than one in the manufacturing sector. [9]
Up to 5 marks for why might: ​•​ service sector includes banking (banker),
insurance (insurance worker), health (doctor) and education (teacher) etc. (1)
•​ increase in demand for services will increase demand for labour (1) pushing
up the wages of workers (1) ​•​ profits in the service sector may be high (1)
increasing ability of firms to pay higher wages (1) ​•​ workers in the services
sector may be more skilled than those in the manufacturing sector (1)
increasing their productivity/bargaining strength (1) ​•​ idea of
deindustrialisation (1) unemployment increasing in manufacturing (1)

Up to 5 marks for why might not: ​•​ manufacturing sector includes e.g. car
production (car workers), food processing (food processing workers) and
furniture making (carpenters) (1) ​•​ demand for workers in some
manufacturing industries may be increasing more than demand for workers in
service sector industries (1) ​•​ not all workers in the service sector are skilled
(1) may have low productivity/bargaining strength (1) ​•​ some workers in the
manufacturing sector will be in more promoted posts (1) will have more
experience (1) ​•​ more workers in the manufacturing sector may belong to
trade unions (1) may have stronger bargaining power (1)

Oct-Nov 2013 23
2. Labour is one of the most important factors of production.

(a) Using examples, define the factor of production, labour. [4]

•​ labour represents human effort/capital/contribution (1) ​•​ the physical (1) and
mental (1) contributions of employees to the production process (accept
skilled and unskilled)​•​ any two examples of jobs, this could be specific
examples of physical contribution, e.g. mining or car production (1) and
mental contribution, e.g. teacher or lawyer (1)

(b) Explain why production is sometimes very labour-intensive. [6]

•​ very labour-intensive would mean there is a high proportion of labour
relative to capital (1) ​•​ labour may be in plentiful supply in the economy (1)
and so is relatively cheap (1) ​•​ other factors, e.g. capital, may be less
available (1) perhaps because of expense (1) ​•​ sometimes jobs require
labour/good or service cannot be mass produced (1) e.g. car repairs as
opposed to car production (1) ​•​ the production of some goods and services
requires personal attention (1) e.g. hairdressing (1)

(c) Discuss whether a worker should always be encouraged to join a trade

union. [10]
Up to 7 marks for why should be encouraged: ​•​ a trade union will provide a
worker with more collective strength (1) this could be helpful in negotiating
wage rises (1) improvements in worker conditions (1) ​•​ a trade union may
provide a member with a range of other benefits (1), e.g. training/ subsidised
part-time education courses (1) in some countries trade unions provide
members with unemployment benefits (1) ​•​ a trade union may influence a
government (1), e.g. to increase a minimum wage which workers can benefit
from (1)

Up to 7 marks for why should not be encouraged: ​•​ the trade union(s) in a
particular industry may not be very powerful (1) especially if membership is
low (1) and finance is limited (1) ​•​ the cost of membership may be expensive
(1) ​•​ there may be difficulties in being a trade union member in some
countries/some governments discourage trade union membership (1) ​•
industrial action can be disruptive (1) a worker may not receive an income
while on strike (1) a worker may lose her/his job as a result of industrial action
(1)

4. People all over the world are continually being encouraged to spend their
money rather than save it.

(a) Describe three influences on spending, apart from changes in taxation. [6]
•​ the need/want for the products (1) distinction between necessities and
non-essential products (1) ​•​ disposable income/wealth (1) spending will be
greater in amount when income/wealth is higher as purchasing power will be
higher (1) ​•​ anticipated inflation rate in the future (1) people will spend more
when they expect prices to rise/or spend less if they think inflation will be
eliminated (1) ​•​ confidence (1) during boom times/when people expect
employment to remain high they will spend more (1) ​•​ interest rate (1) a high
interest rate will discourage borrowing/encourage saving and so reduce
spending (1) ​•​ other factors affecting pattern of spending, e.g. married/single,
age, time of year, e.g. Christmas, new technology – identification (1)
development (1)
(b) Explain how people’s spending could be affected by changes in both direct
and indirect taxes.[6]
Up to 4 marks for direct tax: ​•​ increase in income tax would reduce
disposable income (1) and so make spending less likely (opposite effect with
a reduction in income tax) (1) ​•​ change in tax bands would affect spending
(1), e.g. if lower rate starts at a lower level of income; same applies if top rate
starts at a lower level of income (1)
Up to 4 marks for indirect tax: ​•​ increase in a sales tax (e.g. VAT or GST)
would make products more expensive (1) and discourage spending (opposite
effect with a reduction in indirect tax) (1) ​•​ if a sales tax was taken off a
product (e.g. zero-rated) (1) it would make products less expensive and
encourage spending (1)

(c) Discuss whether a government should be concerned if people began to

spend most of their money.
Up to 5 marks for why should be concerned: ​•​ high levels of spending could
cause inflation (1) demand-pull inflation (1) ​•​ people may not have sufficient
savings (1) to cope with unexpected events (1) may get into financial
difficulties and have to rely on the state (1) ​•​ lack of savings could reduce
funds for lacking/investment (1) which would reduce economic growth (1) ​•
people may spend more on imports (1) exports could be diverted to the home
market (1) worsen the current account position of the balance of payments (1)
•​ if increased spending is on demerit goods (1) creates social costs (1)

Up to 5 marks for less of a concern: ​•​ high levels of spending could

encourage firms to increase their output (1) leading to economic growth (1)
and a fall in unemployment (1) higher output could result in firms taking
greater advantage of economies of scale (1) lower costs of production could
make firms more internationally competitive (1) ​•​ high levels of spending
would increase tax revenue (1) both direct and indirect (1) this could be spent
on, e.g. health care (1) ​•​ high levels of spending may attract multinational
companies (1) due to a larger market (1) ​•​ raises additional tax revenue for
the government (1) which can be spent on improving services/infrastructure
(1)

5 Firms can vary greatly in size from a sole proprietor to a very large
monopoly.
(a) Describe the advantages and disadvantages of a sole proprietor business
organisation. [4]
Up to 2 marks for advantages: ​•​ owner is in complete control/takes all the
important decisions (1) ​•​ quick to make decisions/flexible (1) ​•​ easy to set
up/low start up costs/no complicated paperwork (1) ​•​ all profits go to the sole
trader (1) ​•​ personal contact with customers/workers (1)

Up to 2 marks for disadvantages: ​•​ owner does not have the legal protection
of limited liability/the debt is unlimited (1) ​•​ owner may have to work long
hours (1) ​•​ expansion can be very difficult due to lack of finance (1) ​•​ lack of
continuity (1) ​•​ success may be limited by lack of skills of owner/poor health
of owner (1)

(b) Explain the different goals that such a business organisation might have.
[5]

•​ profit maximisation (1) trying to earn as much profit as possible (1)​•​ profit
satisficing (1) keeping shareholders happy whilst pursuing some other
goals/no shareholders to satisfy if sole proprietor (1) ​•​ survival (1) especially
during periods of low demand/recession (1)​•​ sales revenue maximisation (1)
can make it easier to raise revenue/sell in bulk (1)​•​ growth (1) increase pay of
managers/increase market power (1)​•​ ethical/community reputation (1) create
a good image which can attract consumers (1) ​•​ providing high quality goods
and services (1) to retain customer satisfaction (1)

(c) Analyse two reasons for the different sizes of firms in an economy. [4]
•​ size of market/extent of demand (1) if there is a large demand, the firm is
likely to be large (1) some firms are small because they are supplying a niche
market (1)​•​ capital to finance expansion (1) some firms may find it easier to
borrow from banks or sell shares (1)​•​ type of business organisation (1), e.g.
sole trader v public limited company (1)​•​ preference of owner (1) an owner
may not want the stress of running a larger company (1)​•​ age of the firms (1)
firms tend to start relatively small (1)
1 mark for a basic analysis of each reason, and 1 mark for a development of
the analysis of each.

(d) Discuss whether a monopoly is always in the best interest of consumers.

[7]
Up to 4 marks for why it might: ​•​ if large, it may enjoy economies of scale (1)
this would reduce costs of production (1) which may lower prices (1) ​•
supernormal profits could be spent on innovation/research and development
(1) raise the quality of products (1) ​•​ may be more likely to innovate/spend on
research and development (1) as know any profits earned can be protected
(1)

Up to 4 marks for why it might not: ​•​ lack of competition could result in higher
prices (1) and lack of choice (1) ​•​ output may be lower (1) supply restricted to
drive up price (1) ​•​ inefficiency may occur (1) the monopoly may not feel the
pressure to keep costs down (1) or respond to changes in consumer demand
(1)
Maximum of 3 marks for a list.

May-Jun 2014 21
4. Co-operatives play a key role in the Kenyan economy, accounting for 43%
of the country’s output. They operate in a number of industries, some of which
come close to a monopoly and some of which are more competitive. There
are many co-operative farms growing cotton. The Kenyan Government is
seeking to develop a vertically integrated textile industry.

(a) Describe two characteristics of a co-operative. [4]

1 mark each for two characteristics: ​•​ jointly owned by their members (could
be workers or customers)/members are shareholders ​•​ they exist for the
mutual benefit of the members ​•​ members share profits ​•​ each member has a
vote ​•​ have limited liability 1 mark each of two descriptions: ​•​ co-operatives
may be owned by a number of groups, e.g. workers, consumers ​•​ profits can
be distributed to consumers on the basis of how much they spend ​•​ farming
co-operatives may benefit from buying and selling in bulk ​•​ voting is not
based on size of shares held ​•​ members can only lose their investment in the
co-operative society

b) Explain three ways in which a monopoly differs from perfect competition. [6]

1 mark for identifying each of three ways, e.g.: ​•​ the number of buyers and
sellers in the market/industry ​•​ whether there is free entry or exit into the
market ​•​ amount of information firms and consumers possess ​•​ influence on
price ​•​ products are homogeneous in perfect competition and may not be in
monopoly ​•​ level of profit earned in the long-run

1 mark for each of three explanations: ​•​ many buyers and sellers in perfect
competition but only one seller in monopoly ​•​ barriers to entry and exit in a
monopoly but free entry and exit in perfect competition ​•​ perfect information in
perfect competition but not monopoly ​•​ firms in perfect competition are price
takers and monopolies are price makers ​•​ in perfect competition the products
made by the firms are exactly the same ​•​ monopolies make abnormal profits
whereas firms in perfect competition only make abnormal profits in the short
run

(c) Analyse the advantages of vertical integration. [4]

1 mark for a definition of vertical integration/for a distinction between

backwards integration and forwards integration.

Up to 2 marks: ensures supply of raw materials at a reasonable price/reduces

the chain of production “cuts out the middle man” (1) as the firm can directly
provide raw materials for manufacture (1).

Up to 2 marks: may restrict access of competitors to raw materials (1) which

may make their prices higher or restrict their output (1).
Up to 2 marks: ensures outlets for products (1), which ensures products get to
market (1).
Up to 2 marks: ensures products are well displayed and promoted (1) which
can increase demand (1).

Up to 2 marks: may enable economies of scale to be gained (1), relevant

example, e.g. financial economies.

(d) Discuss what impact a rise in output is likely to have on a farmer’s profit.
[6]

Up to 4 marks for why it might increase:

Up to 2 marks: if demand has increased at the same time (1), revenue may
rise (1).

Up to 2 marks: if price has been lowered to sell more (1), revenue will rise if
demand is elastic (1).

Up to 2 marks: higher output may reduce average costs (1) as greater

advantage may be taken of economies of scale (1). 1 mark for profit will rise if
revenue increases by more than costs.

Up to 4 marks for why it might not increase:

Up to 2 marks: there may be no demand for the extra output (1) and so
revenue may not change (1).

Up to 2 marks: if price has been lowered and demand is inelastic (1), revenue
will fall (1).

Up to 2 marks: higher output may increase average costs (1), diseconomies of

scale may be experienced (1). 1 mark for profit may fall if costs rise by more
than revenue.

May-June 2014 22
4. The number of people employed in the banking sector in Turkey is
increasing. The sector consists of a number of commercial banks, some of
which are growing in size, and the Central Bank of the Republic of Turkey.

(a) Describe two functions of a central bank. [4]

mark each for two functions identified e.g.: ​•​ issuing bank notes ​•​ banker to
the government ​•​ banker to commercial banks ​•​ managing the national debt
•​ lender of last resort ​•​ implementing monetary policy 1 mark each for two
descriptions e.g.: ​•​ influences the money supply ​•​ operates an account for the
government which enables it to receive revenue and make payments ​•
commercial banks’ accounts at the central bank enable them to make and
receive payments between each other and to withdraw money ​•​ issues
government securities and pays interest on those securities ​•​ will lend to
commercial banks that find themselves in difficulty ​•​ changes interest rates to
control the exchange rate ​•​ may adjust exchange rate to influence e.g. the
current account position.

(b) Explain two types of internal economy of scale that a growing bank can
enjoy. [4]
1 mark each for two types identified e.g.: ​•​ managerial ​•​ financial ​•​ technical
•​ risk bearing
1 mark each for explanations of the two types identified linked to banking e.g.
•​ a larger bank may be able to employ specialist workers such as accountants
•​ a larger bank may be able to sell its shares more easily and/or borrow more
easily from other banks ​•​ a larger bank may be able to use advanced
technology and large scale capital equipment ​•​ a larger bank may be able to
offer a range of financial services so if one is unsuccessful, it will not have a
significant impact on profits.

(c) Analyse how the spending pattern of high paid workers is likely to differ
from the spending pattern of low paid workers. [4]
1 mark for high paid workers are likely to spend more in total.
1 mark for high paid workers are likely to spend a lower proportion of their
income.
1 mark for high paid workers are likely to spend a higher proportion of their
income on luxuries/spend more on luxuries.
1 mark for high paid workers are likely to spend a lower proportion of their
income on necessities/less on necessities.
Note: accept an answer which is based on low paid workers e.g. low paid
workers spend less in total.

(d) Discuss whether workers employed in banking are likely to earn more than
workers employed in agriculture. [8]

Up to 6 marks for why they might earn more e.g.:

Up to 3 marks for: some bank workers are skilled workers [1] these are in low
supply [1] high demand [1].
Up to 3 marks for bank workers may be difficult to replace [1] may be very
productive [1] and so have inelastic demand [1].

Up to 2 marks for: bank workers may need high qualifications/better trained [1]
and so have inelastic supply [1].

May-June 2014 23

4. Nollywood, the Nigerian film (movie) industry, is growing in size. More

actors are being employed but their wages are currently still low. Wages and
other costs of production may alter as the firms in the industry increase further
in size. Consumers may also be affected by the growth in the size of the firms.

(a) Describe how fixed costs and variable costs are influenced by a rise in
output. [2]
Fixed costs will not change [1] in the short run [1].
Variable costs will rise [1]
(b) Explain two reasons why someone may be prepared to work for a low
wage. [4]
1 mark for each of two reasons identified: ​•​ hope of promotion ​•​ good working
conditions ​•​ fringe benefits ​•​ lack of skills/qualifications ​•​ job security ​•​ job
satisfaction ​•​ unemployment in the economy/lack of demand for labour.

1 mark for each of two explanations, e.g.: ​•​ a worker may be prepared to work
for low wages if s/he expects higher pay in the future ​•​ a worker may prefer
good working conditions to high wages ​•​ fringe benefits (e.g. company car)
may compensate for low wages ​•​ lack of skills/qualifications may mean
workers have no option but to work for low wages ​•​ job security may be a key
objective during a time of high unemployment ​•​ a number of people accept
low wages if they find a job rewarding/have a vocation ​•​ few jobs available
means supply of labour exceeds demand, forcing wages down.

(c) Analyse two ways a bank can help a firm increase in size. [4]
1 mark for each of two ways identified: ​•​ lending money ​•​ advice ​•​ help with
mergers ​•​ low interest rate.

1 mark for each of two analytical points: ​•​ providing finance to, e.g. buy new
capital equipment/may be in the form of overdrafts or loans ​•​ advice may be
given on, e.g. how to cut costs/raise revenue ​•​ a bank may help a firm to sell
shares to raise the finance to buy another firm/may draw up documents on a
merger ​•​ providing low interest keeps the cost of expansion down.

(d) Discuss, using the Nigerian film (movie) industry as an example, whether
consumers will benefit from larger firms.
to 7 marks for reasons why they might:
Up to 4 marks for: price may be lower [1] due to lower costs [1] because of
economies of scale [1], e.g. buying in bulk/borrowing more easily and cheaply
[1].

Up to 3 marks for: may innovate more [1] raising quality [1] bringing out new
products [1].
Up to 3 marks for: may produce a greater range of products [1] because of
greater availability of factors of production, e.g. labour [1] giving consumers
more choice [1].

Up to 7 marks for why they might not:

Up to 4 marks for: prices may be higher [1] due to higher costs [1] because of
diseconomies of scale [1], e.g. problems of control and co-ordination [1].

Up to 3 marks for: may exploit any monopoly power [1] to push up price [1]
due to lack of competition [1].
Up to 2 marks for: may not provide a personal service [1] may not respond to
individual needs [1].

Up to 2 marks for: may not be flexible [1] may not respond quickly to changes
in demand [1].

Up to 2 marks for: may put small independents out of business [1] restricting
the range (of films) available [1].

Oct-Nov 2014 21
4. Different workers can be paid vastly different amounts of money.
Sometimes this can be due to the level of skill that different workers have, and
sometimes it can be influenced by whether a worker is in a trade union or not.

(a) Describe three factors that can influence an individual’s choice of

occupation. [6]
1 mark for each of up to three factors identified e.g.: • wage/salary/overtime
payments • working hours • bonus/commission/profit-sharing • job security •
skills/training/qualifications needed • proximity to home/travelling distance •
availability of overtime work • promotion/career enhancement prospects • job
satisfaction • social/welfare/sport facilities • fringe benefits • pension scheme •
holiday entitlement
1 mark for each related description e.g.: • skills/training/qualifications needed:
means that some workers cannot apply / and others will take a long time to
train/study first • travelling distance: if close to home, saves time/reduces
costs • job security: reduces risk of unemployment/provides
continuity/certainty of income for the future

(b) Explain two reasons why an unskilled worker is usually paid less than a
skilled worker. [4]

Up to 2 marks for reasons identified: • a lower level of demand for an unskilled

worker (1) • a relatively high supply of unskilled workers (1)

Up to 2 marks for explanations: • lower demand because of lower

efficiency/productivity/value added of the unskilled worker (1) • higher supply
because little time needed to train/study to gain the requirements needed for
the job (1)

(c) Describe what is meant by a trade union. [4]

Candidates could refer to:
• an association of workers (1)
• it engages in collective wage/salary bargaining with employers (1)
• protects and promotes other interests of its members e.g. in relation to
working conditions, health and safety (1)
• will often negotiate with governments on behalf of workers (1)
• may promote training for its members (1) • may provide help for unemployed
members (1)
• may provide other benefit schemes for its members (1)

(d) Discuss whether membership of a trade union will always be beneficial for
a worker. [6]
Up to 4 marks for benefits of membership of a trade union for a worker:
Up to 4 marks: better basic pay/overtime (1), a union will bargain collectively
for pay/overtime (1), a union will have more power than one individual worker
(1), a union can use threat of industrial action to support wage demands (1).
Up to 4 marks: better working conditions (1), e.g. better working hours/better
health and safety/sick pay/pensions (1), resulting from negotiation from trade
unions (1), a union will have more power than one individual worker (1), a
union can use threat of industrial action to support improved working
conditions (1).

Up to 4 marks for disadvantages of membership of a trade union for a worker:

Up to 2 marks: worker will have to pay a fee to be a member (1), which
reduces their take-home pay/spending power (1).

Up to 3 marks: union might bring workers out on strike (1), leading to them
losing potential earnings (1), and the firm may take retaliatory action, e.g. loss
of benefits/restricted promotion/redundancy (1).

Up to 3 marks: prolonged strike action could force a firm to go out of business

(1), leading to unemployment of workers (1), and so lower living standards of
former workers (1).

Up to 2 marks: union might be closely linked with a particular political party

(1), which some workers may not choose to vote for (1).

5 In Pakistan, some businesses, especially sole proprietorships and

partnerships, are perfectly competitive and other businesses are monopolies.

(a) Distinguish between a sole proprietor and a partnership. [4]

One mark for each characteristic and one mark for the comparison:
Sole proprietor is ownership by one person (1), whereas partnerships involve
a number of owners (1). Sole proprietor receives all the profits (1), whereas
partnership divides profits between partners (1). Sole proprietor has complete
control (1), whereas in partnership control is shared between partners (1).
Difficult for sole proprietor to raise finance (1), but in a partnership it is easier
to raise finance from partners (1).
(b) Explain how some large firms can experience economies of scale, while
others face diseconomies of scale. [6]

One mark for a definition of economies of scale and/or diseconomies of scale:

• as a firm grows in size, lead to reductions/increases in average total cost in
the long run (1)

Up to 4 marks for why large firms may experience economies of scale:

Up to 3 marks: for explaining how up to two individual economies of scale may
arise, e.g. technical (1) large firms can employ large-scale capital equipment
(1), financial (1) large firms could raise finance more easily/more cheaply (1),
marketing (1) a large firm is able to have a wider marketing campaign (1),
buying (1) large firms can buy in bulk to reduce costs (1), managerial (1) a
large firm can employ specialised staff (1), risk-spreading (1) diversification
into different markets (1)

Up to 3 marks: for explaining how up to two external economies of scale may

arise, e.g. ancillary services/industries (1), industries may develop to support
the large firms (1), specialised labour (1), firms can recruit staff from other
firms in the industry (1), infrastructure (1), firms can benefit from
transport/communication links provided to support the industry (1)

Up to 2 marks: for explaining that large firms can spread fixed costs (1) over a
greater amount of output (1)

Up to 4 marks for why large firms may experience diseconomies of scale:

Up to 3 marks: for explaining how up to two individual diseconomies of scale
may arise, e.g. ineffective management (1), firm becomes too large to control
and coordinate activities (1), poor industrial relations (1), greater likelihood of
industrial action e.g. strikes (1)

Up to 3 marks: for explaining how up to two external diseconomies of scale

may arise, e.g. pressure on infrastructure (1), causing congestion (1), pollution
(1), if heavy industry is concentrated in one area (1), increase in cost of
production (1) because of increased competition from other firms in the
industry (1)

(c) Discuss whether a monopoly is always in the public interest. [10]

Up to 7 marks for why a monopoly may be in the public interest:

Up to 5 marks: avoids wasteful duplication of resources (1), resulting in lower
costs (1), lower prices (1), significant in the case of a natural monopoly (1),
e.g. water supply (1).

Up to 4 marks: a monopoly may be more likely to earn high profits (1), and
may invest these (1), in research and development/advances in technology
(1), resulting in new/improved products (1).

Up to 3 marks: there can be advantages of economies of scale (1), lower

costs (1) could lead to lower prices (1).

Up to 2 marks: a monopoly may seek to innovate (1), in order to keep out

potential rivals (1).

Up to 2 marks: monopolies are more likely to be listed on the stock exchange

(1), shareholders will receive dividends from the profits (1).

Up to 7 marks for why a monopoly may not be in the public interest:

Up to 4 marks: quantity is likely to be less than in perfect competition (1),
because a monopoly is likely to restrict output (1), and push up the price (1),
in order to get high profit (1).

Up to 3 marks: there could be diseconomies of scale (1), higher costs (1),

could lead to higher prices (1).

Up to 3 marks: because of a lack of competition (1), costs may be higher/may

be more inefficient (1), and so prices may be higher (1).
Up to 2 marks: a monopoly may be less likely to innovate/invest (1), due to
lack of competition (1).

Up to 2 marks: quality may suffer (1) because of a lack of competitors (1)

Maximum of five marks for a list or list-like response.

Oct-Nov 2014 22
4. Money, central banks and commercial banks all play a key role in
economies.

(a) Explain how well money performs its function as a medium of exchange.
[5]
Up to 3 marks on general performance:
Up to 2 marks:the advantage of money over barter (1), such as it does not
require a double coincidence of wants (1). Up to 2 marks: this function will
depend on the degree of scarcity/portability/durability/ divisibility of money (1 ​+
1).

Up to 2 marks on ‘how well’ it performs this function:

Up to 2 marks: e.g. money performs this function very well because it is so
advantageous, compared to barter (1), that there is universal acceptability in
all parts of the country/ money is generally acceptable (1).

Up to 2 marks: a high rate of inflation will affect its purchasing power (1) and
this could contribute to making it less acceptable (1).

(b) Analyse the importance of a central bank in an economy. [7]

Up to 7 marks for analysis:
Up to 5 marks: operates monetary policy (1), issues notes and coins/controls
the money supply (1), sets interest rates (1), seeks to maintain price
stability/control inflation (1), influencing saving/spending (1), controlling total
demand (1), keeping inflation low is important in terms of e.g. maintaining
competitiveness (1).
Up to 5 marks: regulates the banking sector (1), seeks to ensure commercial
banks will pursue sound policies (1), acts as a lender of last resort (1) to
prevent banks going out of business (1), a strong banking sector is important
for e.g. promoting investment (1).

Up to 4 marks: acts as banker to the commercial banks (1), commercial banks

can hold accounts at the central bank (1), these can be used to draw out cash
when needed and to settle debts with other banks (1).

Up to 5 marks: acts as banker to the government (1), operates accounts

which receive government tax revenue and from which the government can
make payments (1), manages the national debt (1) by issuing government
securities/bonds (1), paying interest on government securities (1).

(c) Discuss whether a country’s largest commercial banks should be

nationalised and so become public corporations, and taken under government
control. [8]
to 6 marks for stating that they should be nationalised: Up to 2 marks: the
government would be able to provide financial support (1) and so there would
be less risk of the banks collapsing (1).

Up to 3 marks: the government should do this because a collapse of some

banks would undermine confidence in the whole financial system (1) and this
could have damaging effects on the wider economy (1), e.g. making it difficult
to obtain funds to finance investment (1).

Up to 3 marks: the government would reassure customers (1) by guaranteeing

that a bank would be safe and that nobody would lose any money (1), which
would make customers more willing to deposit funds in a bank, which could
then be lent out to people, increasing the level of demand in the economy (1).

Up to 3 marks: the government may be more concerned with social costs and
benefits/less motivated by profit (1), may provide banking services to the poor
(1), protect jobs (1), charge borrowers a lower rate of interest and pay savers
a higher rate of interest (1).

Up to 6 marks for stating that they should not be nationalised:

Up to 2 marks: banks should be allowed to remain in the private sector (1) so
that they are run in the most effective way possible (1).
Up to 2 marks: the private sector will provide for more competition (1) and this
should encourage them to aim to maximise profits (1).
Up to 2 marks: it is logical in a market economy that an inefficient bank should
be allowed to collapse (1) and then the scarce resources can be reallocated to
a more productive use (1).

5. There are many large firms in most economies, but this does not mean that
all small firms will become large.

(a) Explain two reasons why a decision might be taken to change a private
limited company into a public limited company. [4]
Up to 2 marks: the ability to raise more finance by selling shares on a stock
exchange/to the general public (1). This would enable a firm to finance
expansion; this is different to a private limited company which cannot sell
shares on a stock exchange (1).

Up to 2 marks: some public limited companies are listed on the stock

exchange/several stock exchanges around the world (1) and this would
enable them to raise funds from a large number of sources/become better
known (1). Up to 2 marks: there is no maximum number of shareholders in a
public limited company (1); a private limited company is likely to have a lower
maximum number of shareholders, which limits the potential for growth (1),
necessary to get other shareholders’ permission to sell shares in a private
limited company (1).

(b) Explain two reasons why production by a firm might be changed from
capital-intensive to labour-intensive. [5]
1 mark for definition of capital-intensive and labour-intensive production.
Up to 2 marks: labour has become relatively less expensive (1); this could be
because of an increase in supply forcing wages down (1).
Up to 2 marks: the company could be moving away from mass production (1)
towards more specialised production (1).
Up to 2 marks: the capital equipment could have become less reliable (1) and,
therefore, more expensive to maintain (1).
Up to 2 marks: the power of the trade unions could be less than it was in the
past (1), making it more difficult for them to have a significant effect on wages
(1).
Up to 2 marks: disposal of capital equipment (1) due to financial problems (1).

(c) Using examples, distinguish between vertical, horizontal and conglomerate

integration. [5]
Up to 2 marks: vertical integration is the joining of two firms at different stages
of production in the same industry (1) e.g. a tea company taking over a tea
plantation (1), or forward vertical integration, forwards towards consumers
(later stage of production), e.g. a brewery taking over a public house (1).
Up to 2 marks: horizontal integration joins together firms at the same stage of
production, e.g. two banks (1).
Up to 2 marks: conglomerate integration joins together firms in different areas
of activity to spread interests and risks over different industries (1), e.g. the
Indian company Tata which produces motor vehicles and tea (1).

(d) Discuss whether it is likely that the majority of small firms in an economy
will remain small.[6]
Up to 4 marks for stating that it is likely that the majority of small firms in an
economy will remain small:
Up to 2 marks: the small size of a market (1) will keep the level of demand
low, so that firms will necessarily need to be small (1).
Up to 2 marks: small firms can provide components for larger businesses (1),
such as in the car industry, where small firms can be more flexible (1).
Up to 2 marks: the owners may prefer to run a small firm (1) because they
fear they do not have the expertise to run a large firm and do not wish to
share decision-making (1).
Up to 2 marks: some firms specialise in different forms of personal services
(1) and it is much better if this personal attention to detail is dealt with by a
small firm (1).
Up to 2 marks: it may be difficult for a small firm to raise the necessary funds
(1) to finance expansion (1).
Up to 2 marks: small firms may receive support by the government (1), firms
may be dependent on subsidies etc. (1).
Up to 2 marks: to avoid diseconomies of scale (1), wishing to keep average
costs of production low/examples (1).

Up to 4 marks for stating that it is unlikely that the majority of small firms in an
economy will remain small:
Up to 2 marks: small firms may benefit from becoming larger (1), such as
benefiting from such economies of scale as technical and administrative
economies (1).
Up to 2 marks: if a small firm grew very large and became a multinational
company, it could benefit from lower costs (1) in different parts of the world
(1).
Up to 2 marks: it might make sense if there was just one firm in a market to
avoid wasteful competition and duplication (1), such as with the existence of a
natural monopoly (1).
Up to 2 marks: the market may be extremely large (1), meaning that a large
firm might benefit from marketing economies of scale (1).
Up to 2 marks: if there are mergers and acquisitions, this will enable larger
firms to be created (1) and smaller firms will then be squeezed out (1).

Oct-Nov 2014 23

3. A government decides to increase the number of schools it operates,

leading to an increase in the demand for teachers. At the same time, the
government decides to increase the qualifications that a person needs to have
to become a teacher.
(a) Using a demand and supply diagram,analyse the effect of these two
decisions on the equilibrium wage rate and the equilibrium quantity of
teachers. [6]

(b) Describe why the earnings of teachers can change over a period of time.
[4]
(c) Consider whether teachers working in the private sector and in the public
sector are likely to receive different earnings. [4]

(d) Discuss whether highly-paid teachers are likely to spend more and borrow
more than less well-paid teachers. [6]
4 Car production is an important economic activity in many countries. Much of
this production is undertaken by large multinational companies. These firms
aim to increase both productivity and production.

(a) Describe two reasons why car production is usually undertaken by large
multinational companies. [4]

(b) Distinguish between productivity and production. [4]

(c) Using an example of each, explain the difference between fixed costs and
variable costs in car production. [4]

(d) Discuss whether the establishment of a multinational company in a country

will always be beneficial for all the workers it employs.
2017 + 2018 -
May/June 2012

0455/22

Questions:

1 China decides to move towards a more flexible exchange rate

In the past, the Chinese Government kept an exchange rate of 6.8 yuan to
US$1. However, a spokesperson for the People’s Bank of China, the country’s
central bank, said that it would begin to allow the market to play a much greater
role in determining the exchange rate. It is expected that a more flexible rate
will result in an increase in the value of the Chinese currency.

China has had a surplus on the current account of its balance of payments in
recent years. Economists believe that an appreciation of its currency should
help to reduce the size of the surplus.

The decision by China will please the United States (US) and many other
countries which have a large trade deficit with China. The President of the US
has said that “market-determined exchange rates are essential to global
 economic vitality.” If the Chinese Government had not decided to allow its
exchange rate to be determined by market forces, many American companies
would have demanded tough protectionist measures to reduce the number of
Chinese imports coming into the US. They had criticised the Chinese
Government for keeping its currency artificially weak which gave Chinese
exporters an unfair advantage.

​(a) ​What evidence is there in the extract to suggest that China is planning to move
from a fixed to a floating exchange rate? [2]

​(b) ​Analyse how a rise in the external value of the yuan might affect China’s current
account balance. [6]

​(c) ​Explain why a large surplus for China over many years in the current account of
the balance of payments could be a problem for other countries, such as
the US. [4]

​(d) ​Discuss the extent to which trade protection could correct a balance of trade in
goods and services deficit. [8]

Answers:

a) “in the past, the Chinese Government kept an exchange rate of 6.8 yuan to
US$ 1. However. A spokesperson for the People’s Bank of Chana, the country’s
central bank, said that it would begin to allow the market to play a much greater
role in determining the exchange rate.”

“economists believe that an appreciation of its currency should help to reduce the
size of the surplus”

b) a rise in the external value of the yuan, can lead to the depreciation of the
currency in other countries. As a result, China will earn more export revenue
through increased exports. Because of the cost of importing Chinese goods will
be cheaper, the other countries (such as the USA) will face trade deficit. A trade
deficit can have a negative impact on the economic growth of the USA, because
of which they will impose a protection policy; specifically, a quota, in order to limit
the amount of the goods imported and reduce the deficit on their current account
of their balance of payments. Because of a limit in the amount of goods imported
by the USA, china will have an increased deficit on their current account.

c) A large surplus for china, can lead to the US having a trade deficit. This means
that their import expenditure is greater than their export revenue. Due to a trade
deficit, there will be a decline in USA’s economic growth. As a result of this, the
rate of unemployment in the USA increases, which leads to lower standards of
living. A trade deficit can also lead to a deficit in the current account balance of
payments in the case of USA>

d) There are multiple forms of trade protection policies. This includes a quota, an
embargo, a tariff and subsidies. A quota is a limit set by the government on the
amount of imported goods. An embargo on the other hand, is a complete ban on
the goods and services imported from another country. A tariff is a tax set by the
government on goods imported into the country. Finally, subsidies are grants
provided to the domestic firms in the economy by the government. A government
imposes such protection policies in order to prevent the closure of the domestic
industries. An increase in demand for imported goods can lead to a decrease in
production of domestic goods. This can lead to closure of domestic industries,
which can lead to an increase in the unemployment rate. As a result of this, the
country’s standard of living is reduced. In order to prevent all this, the
government can provide subsidies to boost the domestic industries and increase
consumer demand for domestic goods and services. The government can also
impose a quota on the imported goods. This can encourage more export of
goods and services in order to achieve more economic growth.
2015 saw more than US$4000 billion-worth of mergers worldwide, many in the
USA and the UK.

Some mergers occur between firms in different countries. These are influenced
by a number of

factors, including the size and structure of the markets in the countries and their
exchange rates.

Mergers influence the level of competition in markets.

(a) Define ‘conglomerate integration’. [2]

(b) Explain why firms in a perfectly competitive market are price-takers. [4]

(c) Analyse the causes of an increase in a country’s exchange rate. [6]

(d) Discuss whether a large firm will always have lower average costs of
production than a small firm. [8]