WORKBOOK ANSWERS
Edexcel A-level Economics A
Theme 3 Business behaviour and the labour market
This Answers document provides suggestions for some of the possible answers that might be given for the questions asked in the workbook. They are not exhaustive and other answers may be acceptable, but they are intended as a guide to give teachers and students feedback.
The student responses (green text) for the longer essay-style questions are intended to give some idea about how the exam questions might be answered. The examiner comments (blue text) have been added to give you some sense of what is rewarded in the exam and which areas can be developed. Again, these are not the only ways to answer such questions but they can be treated as one way of approaching questions of these types.
The abbreviation KAA stands for Knowledge, Analysis and Application.
Topic 1
Business objectives and growth
Sizes and types of firms
1 Possible answers include the following, up to 2 marks:
· Where the owners of a company are unable to control the business directly (1 mark).
· For example, shareholders own the company but appoint directors/managers to run the business on a day-to-day basis (1 mark).
· This is an example of the principal–agent problem (1 mark).
2 Possible answers include the following, up to 2 marks for a developed point:
· A public sector organisation is owned and run by the government (or state) (1 mark), whereas a private sector organisation is not/is run by individuals (1 mark).
· A public sector organisation often provides services for the public, such as the NHS, that are free at the point of use (1 mark), whereas the private sector will provide goods and services, including for-profit businesses (1 mark).
3
a 2 marks for the following:
· Economies of scale are a reason for companies to grow (1 mark).
· Any reason for gaining economies of scale (1 mark):
e.g. by growing a firm can increase quantity and gain lower long-run average costs
e.g. operating on a larger scale can provide a barrier to entry/allow limit pricing
b 2 marks for the following:
· Targeting niche markets is a reason why firms stay small (1 mark)
· Any reason for targeting niche markets (1 mark):
e.g. a business may still be able to be profitable on a small scale by targeting a small market (possibly unreached by larger rivals)
e.g. example of niche markets, such as fairtrade chocolate
4 Possible answers include the following, up to 3 marks:
· Oxfam is a not-for profit organisation (or charity) (1 mark) and is part of the voluntary sector of the economy (1 mark).
· This means Oxfam does not earn profits for its owners (1 mark).
· All of the money earned by or donated to Oxfam is used in pursuing the organisation’s (social/ethical) objectives (1 mark).
· Any examples of Oxfam’s use of funds (1 mark), e.g. fighting poverty, providing clean water in LEDCs, etc.
Business growth
5 1 mark for correct type of growth and 1 mark for brief explanation.
a
· Conglomerate integration (1 mark)
· This is because Google and YouTube are in totally different industries (1 mark)
NB Accept clear explanation of external growth up to 2 marks
b
· Organic growth (1 mark) or internal growth (1 mark)
· This is because Aldi is expanding itself (via more stores) rather than taking over another firm (1 mark)
c
· Vertical backwards integration (1 mark)
· This is because Amazon is taking over publishers which are in the same industry but at a previous stage of the chain of production (1 mark)
NB Accept clear explanation of external growth up to 2 marks
6 2 marks for identifying two points and 2 marks for development:
a
· Lack of synergy (1 mark): firms do not gain the expected benefits from working as a larger company (1 mark)
· Diseconomies of scale (1 mark): if the firm has grown too large, the long-run average costs may rise, such as due to poor communication/coordination (1 mark)
· Loss of focus (1 mark): some businesses may be focused on too many markets and become less focused on their core business, which they predominantly get profits from (1 mark)
· Selling off unprofitable businesses (1 mark): this could be to cut the losses of that business or in order to boost the share price of the remaining firm(s)
· To raise finance (1 mark): this could then be used to re-invest into the remaining part of the business, such as product development (1 mark)
b
· Improved product quality (1 mark):
e.g. due to improved focus/re-investing funds from the demerger (1 mark)
e.g. due to greater competition as more firms in the market (1 mark)
· Lower prices/increased consumer surplus (1 mark):
e.g. due to cost savings from greater efficiency/fewer diseconomies of scale
(1 mark)
e.g. due to greater competition driving down prices (1 mark)
· Greater choice of products (1 mark):
e.g. as more firms in the market after the demerger (1 mark)
e.g. due to greater levels of competition/funds available to widen product range
(1 mark)
7 2 marks for correct type of integration and accurate definition:
· Identification of horizontal integration (1 mark)
· This is where a firm takes over/merges with a firm in the same industry and at the same stage of production (1 mark)
8 Benefits for Rank (up to 6 marks for up to three points developed):
· Less competition/more market power (1 mark):
e.g. Rank has one fewer rival now which increases its market power (1 mark) and therefore it may be able to raise prices (1 mark)
· Higher market share/higher profit (1 mark):
e.g. Rank will directly gain the sales revenue gained from Gala (1 mark) and therefore will be gaining more profit too (1 mark)
· Economies of scale (1 mark):
e.g. ability to gain better deals from the bank (1 mark) due to lower risk as the casino is likely to be more profitable/is larger (1 mark)
NB Economies of scale can count as more than one point if different types are explained
Evaluation (4 marks for up to two developed evaluation points):
· Possibility of diseconomies of scale increasing long-run average costs due to large-scale operation of the new casino company
· Higher scrutiny by Competition Commission in future due to market dominance
· Job losses/fear of job losses could impact on productivity and morale
· Will the merger be successful or a clash of cultures?
· Rank may be over-dependent on the casino market/higher risk
· Magnitude of benefits depends on how many casinos Rank is allowed to take over by the Competition Commission
· Cost of the merger or takeover
· Prioritisation/significance of arguments (with justification)
· Conclusion: will it be beneficial for Rank overall (with justification)
9 4 marks for two negative impacts on consumers:
· Higher prices (1 mark), e.g. on entry to the casino/on drinks/collusion possible
(1 mark)
· Less choice (1 mark), e.g. fewer casino chains to choose to go to (1 mark)
· Inefficiency (1 mark), e.g. worse customer service/queues (1 mark)
· Lower quality (1 mark), e.g. less innovation/new games introduced (1 mark)
4 marks for evaluation, for two developed points. Possible answers include:
· Possibility of lower prices due to Rank-Gala being able to gain larger economies of scale
· Potential dynamic efficiency gains/expenditure on R&D due to larger profits:
e.g. more games being developed/better facilities at the casinos
· Extent of exploitation depends on: local monopoly power/whether rivals compete or collude/strength of competitive pressure from remaining rivals
· Long-term vs short-term arguments:
e.g. greater dynamic benefits for consumers in the long term?
e.g. greater chance of collusion in the long term with fewer firms in the market?
10 Analysis of two constraints on growth (6 marks for two developed points):
· Size of market (1 mark): Rank is limited by the number of consumers in the UK casino market and this will limit how much its total revenue can grow (1 mark), e.g. there may be only a certain number of customers who wish to gamble in a casino (1 mark).
· Access to finance (1 mark): access to finance may be lower since the financial crisis with banks less willing to lend (1 mark) and therefore Rank cannot fund future expansions/mergers to grow the firm (1 mark).
· Owner objectives (1 mark): the owners may not be looking to pursue a growth/revenue maximisation strategy (1 mark) and therefore even if there were market opportunities they may not be targeted by the owners, if for example they do not maximise short-term profits (1 mark).
Evaluation (2 marks for one developed evaluation point):
· Counter-points:
o Could the size of the market be grown, such as through advertising?
o External finance may be less of an issue if there are retained profits that can be used to fund expansion
o Banks may still be willing to lend to larger companies such as Rank due to their reputation
o A strategy of growth could be consistent with long-run profit maximisation and therefore consistent with owner objectives to maximise dividends
· Long-term vs short-term arguments:
o In the long term banks may again gain greater confidence/have more willingness to lend
o Will the size of the casino market be a constraint in the long term or will it grow in size?
· Prioritisation of arguments with justification
· Magnitude of arguments
Business objectives
11 2 marks for the following:
· Profit satisficing is making sufficient profits to satisfy the demands of shareholders
(1 mark)
· Profit maximisation is trying to gain the largest difference between total revenue and total cost or setting marginal cost equal to marginal revenue (1 mark)
12 Possible answers include the following, up to 3 marks:
· Explanation of the principal–agent problem (up to 2 marks):
o Definition: the conflict of interest that arises when a principal hires an agent to perform duties for them that are in the interest of the principal but not the agent (1 mark)
o Application: here the principal is the shareholders and the manager is the agent (1 mark)
· Reason why managers can pursue alternative objectives (up to 2 marks):
o This is due to shareholders not being able to observe perfectly whether managers are profit maximising (1 mark) and therefore can pursue objectives that maximise their welfare, such as reduced effort (1 mark)
o This is an example of information failure/moral hazard (1 mark)
13 1 mark for identifying correct quantity and 3 marks for one reason explained, such as:
a
· Q4 (1 mark)
· Higher growth (1 mark): by increasing sales revenue the firm should increase market share (1 mark) and this could improve the status/prestige/perceived success of managers (1 mark)
· Sales-related pay (1 mark): some managers may be paid on commission (1 mark), therefore by increasing total revenue they will increase their own financial remuneration (1 mark)
b
· Q5 (1 mark)
· Entry deterrence (1 mark): by only making normal profits (1 mark) there is less incentive for other firms to enter the market/may limit potential competition
(1 mark)
· Social/ethical reasons (1 mark): managers may wish to sell as much as they can of the product to benefit society/local community (1 mark) such as charities or goods with external benefits (1 mark)
Exam-style questions (multiple choice and short answer)
1
a
Knowledge (2 marks):
· Diseconomies of scale definition (1 mark)
· Identification that the demerger would reduce size of the firms and reduce diseconomies of scale/lower LRAC (1 mark)
or
· Diagram showing diseconomies of scale on LRAC (1 mark) and a reduction in quantity reducing LRAC shown (1 mark)
Application (1 mark):
· Application to eBay/PayPal (1 mark) (e.g. types of diseconomies of scale)
Analysis (1 mark):
· Linked development, i.e. benefit of demerger or explaining type of diseconomies of scale (1 mark)
o Further development of reduced diseconomies of scale
o Greater ability to compete on price (linked to lower LRAC)
o Higher profitability (linked to lower LRAC)
Diseconomies of scale are the factors causing long-run average cost to rise as output increases (1 mark). It would be beneficial to demerge as by operating on a smaller scale the two separate firms could reduce diseconomies of scale
(1 mark). For example, eBay and PayPal may have found it difficult to communicate between so many departments in such a large online business
(1 mark). By demerging they could benefit from easier communication, lower long-run average cost and greater profitability (1 mark).
Here the student gains 4/4. There is clear knowledge of diseconomies of scale and the link between demerging and reduced diseconomies of scale. Application is clearly evident along with analysis of the benefit of demerging (i.e. link to profit).
b B (1 mark)
2
a D (1 mark)
b
Knowledge (2 marks), analysis (1 mark):
· Definition/understanding of organic growth (1 mark)
· Identification of one constraint on growth (1 mark) and linked development
(1 mark):
o Size of market (i.e. not enough customers to grow)
o Access to finance (i.e. can’t access funds to finance expansion)
o Owner objectives (i.e. owners’ objectives may not be revenue/growth maximisation)
o Regulation (i.e. more scrutiny from competition authorities)
Application (1 mark):
· Application to a high-street book store (1 mark):
o Application of organic growth to a high-street book store
o Application of constraint of growth to a book store
Organic growth is where a firm achieves by increasing output of the firm via internal growth rather than mergers and takeovers (1 mark). For example, this would mean the high-street book store opening more stores, possibly in new towns, rather than taking over a firm like Waterstone’s (1 mark). One constraint on this growth could be access to finance (1 mark) this may be true as high-street book retailers may seem a risky option given competition from online retailers and with bank lending still affected by the financial crisis (1 mark). Therefore the high-street book store may not be able to gain a loan in order to finance buying more stores, books and sales staff needed to expand (1 mark).