International General Certificate of Secondary Education (IGCSE)

Economics
Mistakes Bank

Rudraksh Agarwal
2024 Session O/N
Chapter 1

Explain how the economic problem results in consumers having to make choices.

- “Limited income” not may not have “enough money”.

- Also mention opportunity cost.

Explain the economic problem and why it is always likely to exist.

- Mention how there will never be enough resources.

- Mention that population is increasing (1) and so more resources are needed (1) / some resources are being
depleted (1)

Chapter 2

Define a capital good.

- Say “Human-made” not “man-made”

Identify two examples of capital goods that may be used by a farm.

- Tractors, farm buildings.

Identify two reasons why people become entrepreneurs.

- To make money / earn a profit (1) to be independent / not having to be told what to do (1) to follow an interest
/ be innovative / to run / own business (1) willingness to take risks (1) possess good leadership skills (1) easier
to set up a firm / lower barriers to entry (1) for self-esteem / status / become well-known (1) flexible working
hours (1) unable to find a job (1).

Explain whether land is mobile.

- No need to write that some form of land may be occupationally immobile.

Identify one difference between land and labour.

- Write that labour is a human resource / people, do not write workers.

Analyse the influences on the mobility of two factors of production.

- Coherent analysis which might include: Availability of proper infrastructure (1) to move from place to place
(1) e.g. trains / roads (1) whether it is affordable or not (1). Cost of living differences (1) whether workers can
afford to move to another place (1) e.g. housing costs, cost of education (1). Availability of information (1) on
jobs elsewhere (1). Tax rate changes (1) lower tax rates could encourage workers to move to another country
to take advantage of lower taxes (1) / entrepreneurs could be encouraged to move to a lower tax economy (1).
Regulation changes (1) could limit movement of labour or capital (1). Level of education (1) could make
labour more occupationally mobile (1). No reward for only identifying the factors of production. Accept other
relevant factors e.g. cultural differences (up to 3 marks each).

Chapter 4

Explain the significance of a production point inside a PPC and a production point on its PPC.
 - Mention output on both sides
- Give definition

Analyse, using a production possibility curve diagram (PPC), the effect of increased investment in both education and
the health sector.

- Its not effect on education and healthcare, its effect on PPC

- Education and healthcare will increase skill / health / productivity etc.

Analyse, using a production possibility curve (PPC) diagram, the impact of higher labour productivity on an economy.

- Mention that output per worker will increase

Analyse, using a production possibility curve (PPC) diagram, the beneficial effects for a country of the growth of its
small and medium-sized firms.

- Up to 2 marks for coherent analysis which might include: The growth of its small and medium-sized firms will
lead to an increase in the number of firms in the economy (1) this will increase productive potential / increase
productive capacity / cause economic growth (1).

Analyse, using a production possibility curve (PPC) diagram, the effect of reallocating resources from kerosene to LPG.
[6]

- Draw all these arrows and label like this.

Chapter 6

Analyse how the price mechanism influences the allocation of resources in a market economy.

- An increase in demand (1) will increase price (1) this will provide a financial incentive (1) profit motive (1) to
supply more of the product (1) resources will move away from less popular products (1). An increase in supply
(1) will reduce price (1) this will lead to a rise in demand (1) resulting in more resources being devoted to the
product (1). Makes use of demand and supply (1) consumers make the decisions/consumer sovereignty (1).
Will encourage firms to use the most cost-efficient methods of production (1) e.g. will use labour intensive
method of production (1) if ready supply of labour (1). Award up to 3 marks for a correctly labelled demand
 & supply diagram, showing 3 elements of the above e.g. shift (1) change in price (1) and new equilibrium
quantity (1).
- See for how to produce, for whom to produce.

Chapter 7

Analyse two causes of a fall in demand for a product such as Chinese food.

- When mentioning fall in price of substitutes, say increase in demand for substitutes and not that consumers
will switch to it.
- Decrease in income (1) decreasing demand for Chinese food as people eat out less (1) as eating out is seen as
luxury goods (1). (See explanation)
- For similar types of questions, whenever mentioning income, don’t write less / more affordability but
purchasing power. (Although both the points I have mentioned here vary with mark schemes so its all probably
correct)
- In one mark scheme, population wasn’t there, but substitutes, complements, advertising and income are in
every mark scheme so first write those.
- In 8 markers, if it says why demand for x may rise in the future, you can still mention price and quality.

Define a substitute and give an example.

- It is a rival product / one that can be used in place of another. Don’t just write alternate good.

Identify the difference between individual supply and market supply.

- Individual supply is the amount that a single firm is willing and able to supply at a specific price (1) while
market supply is the total of all individual supply / the amount that all the firms in the market is willing and
able to supply at a specific price (1).
(Make sure to mention “Amount / Number of products” for individual supply and learn definition for market
supply)

Analyse the causes of a shift to the right in the supply curve of chocolate.

- Coherent analysis which might include: A shift to the right of the supply curve means that more will be
supplied at each and every price / supply has increased due to a non-price factor/influence (1). Lower costs of
production (1) due to any cause (other than tax or subsidy) e.g. lower wages / higher productivity / lower
transport costs (1). Subsidy (1) providing an additional income / effectively lowering costs / providing a
financial incentive (1). Advances in technology (1) increasing output per unit of resource / increase efficiency
/ raise productivity of capital (1) Good harvest of cocoa / raw material (1) perhaps due to improvement in
weather conditions / improvements in fertilisers (1) reducing price of raw material (1) increasing supply of raw
material (1). Lower tax on chocolate / lower indirect tax / lower corporate tax (1) making it more profitable to
produce (1). Fall in price/rise in cost of production/ fall in profitability of another product produced by
chocolate firms (1) encouraging the switch of some resources to chocolate production (1).
(Pay attention to links, don’t just connect everything to costs of production)

Chapter 10

- In demand and supply diagrams, always write about price and quantity also because very rarely in some mark
schemes, it is there.
Define a market.

- An arrangement that brings buyers and sellers into contact / products are bought and sold (2).

Explain two reasons why the supply of a raw material such as oil may rise in the future.

- • New supplies may be discovered (1) after investment searching for them (1) • Price may rise (1) giving
suppliers a profit incentive to supply more (1) • Advances in technology / cuts in wages (1) may reduce costs
of obtaining the raw material (1) • Government subsidies (1) providing finance to search for oil / greater
incentive to increase output (1)

Analyse, using a demand and supply diagram, the effect of falling steel prices on the market for cars.

- • Steel prices decreasing will lead to a decrease in car manufacturers’ costs (1) • This may be passed on in lower
price of cars (1) • The extent of the change might be influenced by PED/PES (1)

Explain how market forces would respond to a shortage of drinking water.

- A shortage means demand exceeds supply (1) price would rise (1) more would be supplied (1) due to the profit
motive (1) price signal sent to producers (1) demand would also contract (1). Demand likely to be price inelastic
(1) leading to large rise in price (1).
(See explanation)

Chapter 11

Analyse the reasons why the price elasticity of demand for one brand of luxury chocolates is likely to be different from
that of salt.

- You can give mirror points, and there is not much explanation. Mark scheme for reference –
One brand of chocolates is likely to have substitutes / other brands to switch to (1) is narrowly defined (1) it is
not a necessity / is a want (1) the purchase can be postponed (1) it takes up a large proportion of income (1)
demand is likely to be price elastic (1) a rise in price will cause a greater percentage change in quantity demand
(1). Salt does not have substitutes (1) is widely defined (1) it takes up a small proportion of income / is likely to
be cheap (so price change less noticeable) (1) people become addicted to the taste (1) may be seen as a necessity
(1) demand is likely to be price inelastic (1) a rise in price will cause a smaller percentage change in quantity
demanded (1).
- In a general sense, when you state a point for this chapter, first give explanation and then also give effect, ex. If
lot of close substitutes, then price elasticity of demand is likely to be inelastic, vice versa.

Analyse the advantages of selling a product which is price - inelastic in demand.

- Coherent analysis which might include: Price-inelastic demand means when price increases, quantity
demanded falls by a less than proportionate amount or vice versa (1). Relevant example (1). When demand is
price-inelastic, price and revenue move in the same direction (1). PED of less than one (1) may indicate lack of
competition / substitutes (1) necessities often have inelastic demand (1) Firms can increase prices (1) total
revenue increases (1) may increase in profits (1) if revenue rises faster than cost (1). Less market volatility (1)
stability of income/revenue (1) making it easier to plan (1).
(Need to provide proper explanation of features)

Analyse how information on changes in a firm’s revenue can be obtained from price elasticity of demand calculations.
 - PED definition or formula (1) PED provides information on how consumers react to a change in price (1). If
PED is elastic / PED > 1, a fall in price will raise revenue (1) as quantity demanded will increase more (1) than
proportionately/percentage (1). A rise in price will decrease revenue (1) as quantity demanded will decrease
more than proportionately (1). If PED is inelastic / PED < 1, a rise in price will raise revenue (1) as quantity
demanded will decrease less (1) than proportionately / percentage (1). A fall in price will decrease revenue (1)
as quantity demanded will increase less than proportionately (1). If PED is perfectly elastic, a rise in price will
cause revenue to fall to 0 (1) as consumers will stop buying completely (1) If PED is perfectly inelastic / PED
= 0, a rise in price will raise revenue (1) as consumers will continue to buy the same amount (1) If PED has unit
elasticity / PED = 1, a change in price will keep revenue unchanged (1) as quantity demanded will change by
the same proportion (1).

(Please learn proper explanation, need to mention all degrees. Also, can give examples for elastic and inelastic
demand as can be given marks in some mark schemes)

Chapter 12

Analyse the key determinants of price elasticity of supply of a product.

- Coherent analysis which might include: • availability of stocks (1) finished goods which are unsold (1) with a
high level of stocks, supply will be elastic (1) • level of spare capacity (1) factors of production available but
unused (1) e.g. workers not working full time (1) supply will be more elastic if levels of spare capacity are high
(1) • time period under consideration (1) short run / long run (1) short run has inelastic supply (1) with at least
one fixed factor of production (1) which makes it more difficult to produce (1) long run has elastic supply (1)
when all factors of production are variable (1) making it easier to produce more (1) • difficulty of production
process / length of production time (1) produce that is easy to produce will be more elastic (1) e.g. bread is
easier to produce compared to a smartphone (1).
(Memorize this completely)

Chapter 13

Explain why public goods would not be supplied in a market economic system.

- Logical explanation which might include: Public goods are non-excludable (1) it is not possible to stop people
who are not prepared to pay for them, from consuming them (1) free rider problem (1). Public goods are non-
rival (1) if supplied for one, supplied for everyone and so cannot charge additional consumers (1). Private sector
firms are profit motivated (1) they will not produce products if they cannot get revenue from them (1) would
make a loss (1).
(Need to explain the functions properly so learn that)

Explain two benefits consumers may gain from a market economic system.

- Logical explanation which might include: Sovereignty (1) consumers decide what will be produced (1). Choice
(1) there may be a number of firms producing a product (1). Low prices (1) competition may mean that firms
have to charge low prices to keep their customers (1). High quality (1) the profit incentive may encourage firms
to raise quality to attract more consumers (1).
(Need to learn proper keywords)

Discuss whether or not a tax on a product can reduce external costs.

 - In assessing each answer, use the table opposite. Why it might: • tax will increase price, reducing the quantity
demanded • if demand for the product is elastic, quantity demanded will be responsive to the price increase,
quantity demanded will change significantly • tax will increase the cost of production, therefore decreasing
supply • tax will decrease the profits of firms • tax will provide governments additional revenue to help with
subsidising less-polluting products. Why it might not: • tax is insignificant compared to the final price of the
product • tax avoidance / evasion / unofficial or illegal markets • if demand for the product is inelastic, quantity
demanded will be unresponsive to the price increase, quantity demanded will not change significantly, e.g.
addictive products.
(Just need to differentiate points)

Discuss whether or not a market economy allocates resources in the best possible way.

- Need to be specific in detail – ( price moves to reflect changes in demand and supply  resources move from
products falling in demand towards those rising in demand)

Analyse how a government could encourage the consumption of merit goods.

- Coherent analysis which might include: Provide a subsidy (1) reduce any indirect tax (1) lower price (1) make
the goods more affordable (1) raise quality (1). Provide information about the benefits of consuming the goods
(1) e.g. health campaigns / advertisements (1) overcome information failure (1). Use regulation (1) make
consumption compulsory / impose fines for non-consumption (1) e.g. school attendance (1). Provide services
such as education / healthcare (1) free to consumers (1). Set maximum price (1) to make the goods more
affordable (1) but may create a shortage (1). Measures to reduce demerit goods clearly linked to idea of
encouraging substitution of merit goods (1) relevant example (1).
(Good points you can learn)

Analyse how cleaning up pollution could benefit an economy.

- Coherent analysis which might include: • Will reduce external costs (1) improve health / less sickness (1) raise
quality of life / standard of living (1). • Less (government) spending on healthcare (1) more can be spent on
other priorities e.g., education (1). • Cleaning up pollution may create jobs / employment (1) reduce
unemployment (1) may attract MNCs (1) increase in incomes (1) reduction in poverty (1). • Recycling of some
of the material collected (1) could increase the country’s output (1) less use of nonrenewable resources (1). •
Better working conditions (1) productivity of labour could increase (1) reduce costs of production (1) increase
output (1) reduce unemployment (1) reduce inflation (1). • Improve the environment (1) Increase tourism (1)
increase exports of services (1) improve the current account position (1). • Reduction in ocean pollution (1)
will improve fish stock (1) improve quality of fish (1) greater catches of fish (1) leading to rise in incomes /
revenue / GDP (1).
(Many points missed)

Define market failure.

- Market failure is when the market mechanism / price mechanism / demand and supply (1) does not lead to an
efficient allocation of resources (1).
(Demand and supply)

Explain two advantages of conserving natural resources.

 - • resources will last longer / decrease rate of depletion (1) future generations will be able to benefit from the
resources (1) • economic growth / development may be more sustainable (1) income may be generated over
time / value may rise in the future (1) • over use of natural resources (1) may cause external costs (1) • tourism
may increase (1) increase export revenue / employment (1).
(Memorise)

Explain one market failure that may occur in the salmon market.

- Market mechanism fails to allocate resources efficiently / not all costs are considered (1). Social cost is greater
than private cost (1) as there are external costs / negative externalities (1) consumption at the current rate may
lead to depletion of stock (1) consumption becomes unsustainable (1) overconsumption / resources are
overused (1) these resources could be conserved for future generations (1) cost to future generations who will
not be able to enjoy the product (1) pollution may occur e.g. water pollution (1). Monopoly / one large
producer (1) no competition (1) can charge high prices / exploit consumers (1) excess profits of producers (1).
Inequality (1) high price (1) poor cannot afford the product (1) and will not be able to attain any health benefits
of consuming the product (1).
(Wrong, also, you can write monopoly for any industry so that is a key point)

Analyse the external costs that can be caused by the building and expansion of an airport.

- External costs are harmful effects on third parties / social costs minus private costs (1). Building and operating
an airport will cause noise pollution (1) air pollution (1) which will be experienced by those living near the
airport (1) reducing their health (1). Traffic congestion may be caused (1) delaying people’s journeys (1). The
prices of houses close to the airport may fall (1) reducing local residents’ wealth (1) local residents may be
displaced (1). Train companies may lose revenue (1) as people switch from train travel to air travel (1).
Environmental damage / global warming (1) e.g. loss of wildlife habitats (1).
(Missed many points)

Explain why the social benefit of healthcare is greater than the private benefit.

- Social benefit includes both private and external benefits (1). Healthcare also provides external benefits (1).
Example of private benefits identified as a private benefit e.g. profits of provider, wages of doctors, higher life
expectancy of consumer (max 2). Examples of external benefits identified as external benefits/recognised as 3rd
party impacts e.g. higher labour productivity, higher output, reduction in spread of diseases (max 2).
(Misunderstood question)

Explain why traffic congestion is an external cost.

- An external cost is a harmful effect imposed on a third party/those not involved in the decision-making
process/social cost minus private cost (1). Traffic congestion causes journeys to take longer than they should
(1) opportunity cost of lost time (1) higher costs for transport firms (1) cause pollution (1) cause health
problems (1).

Chapter 15

Explain two reasons why a government may subsidise food production.

- Logical explanation which might include: Increase output (1) overcome a shortage (1). Reduce price / cost (1)
help consumers / reduce poverty / give access to a basic necessity / make food more affordable (1). Increase
 quality (1) improve nutrition / increase health of population / raise life expectancy (1). Increase incomes of
farmers / farm workers (1) raise their living standards of farmers / stop farmers going out of business (1).
Reduce imports of food / increase exports of food (1) improve the current account of the balance of payments
/ agriculture is a strategic industry / reduce dependency on other countries for an essential good (1). Increase
employment / reduce unemployment (1) help in rural areas (1).
(Wrote wrong point – food is not a merit good.)

Discuss whether a government should provide subsidies to families to spend on housing.

- In assessing each answer, use the table opposite. Why it might: • will increase the spending power of families
who receive it • may increase quantity supplied • may give low-income families access to a basic necessity,
reducing poverty • may enable families to spend more on e.g. education • may increase employment / reduce
unemployment, creating jobs building housing / increase labour mobility • may increase quality of housing
and so improve health Why it might not: • rich can already afford housing • some families may not spend it on
housing • may be inflationary, demand increasing for housing and e.g. furniture, carpets • opportunity cost •
taxes may be raised to finance subsidy • building more houses may result in environmental damage

Discuss whether or not moving firms from the public sector to the private sector will benefit an economy.

- Up to 5 marks for positive effects: Private sector firms have the profit motive (1) and so the efficiency (1) and
quality of their output may be good (1) and so may enable them to pay higher wages (1). The threat of closing
down (1) will force firms to provide a good service to stay in business (1). Competition between private firms
(1) leads to better response to consumer demand (1) keeping costs (1) and prices low (1). Private firms are
accountable to shareholders (1) who want high dividends (1) therefore firms need to be efficient/profitable
(1). Investment in the private sector will not be disrupted by fluctuations in government tax revenue (1). May
attract financial investment from abroad (1). Up to 5 marks for negative effects: Investment funds may be more
available to the public sector than the private sector (1) to provide a quality service (1). A public sector firm
can be prevented from going of business (1) guaranteeing the provision of certain products e.g. water (1)
maintaining employment (1) Public sector firms are not always motivated by profit (1) the government is more
likely to base its decisions on social/external costs and benefits (1) e.g. the environment (1) rather than just
private costs and benefits (1). Public sector firms may provide essential services (1) which the private sector is
not willing to provide (1) will be more inclined to keep prices low (1) the poor will be able to afford essential
products (1).
(Skipped this question, thought it was similar to other QS but MS is different.)

Discuss whether or not government subsidies are always beneficial to producers.

- Competition is a good thing not bad.

Chapter 16

Explain two benefits that consumers may gain from having more commercial banks.

- When writing greater range of financial services (1), write it is due to more choice. (1)

Explain two functions of money.

- Store of value means that it allows people to save.

Explain two reasons why commercial banks may want to merge.

 - In case of banks, never write lower prices, write greater range of services.

Explain two advantages banknotes have as a form of money.

- Banknotes are not durable. Also, here as explanation for limited supply you can write that only print a set
number of notes so both is correct.

Chapter 18

Analyse why women may be paid less than men.

- Coherent analysis which might include: Women may be less skilled (1) have fewer qualifications (1) and so be
less productive (1) if they have received less education / training (1) may have less bargaining strength than men
(1). Fewer women may be in promoted posts (1) if they have taken time off to raise children / maternity leave
/ may have less experience (1). Women may be concentrated in low paying occupations / industries (1) example
e.g. clothes manufacture (1) may only want part-time jobs (1) because of family commitments (1).
Discrimination (1) some employers may underestimate / undervalue the productivity of women (1) there may
be no law or an ineffective law against discrimination (1) example e.g. tv presenters / football (1). Lower
demand / higher supply in some occupations (1) due to lower revenue / value of product (1).
(Not good analysis)

Explain two reasons why someone may choose to become a doctor.

- Logical explanation which might include: High pay (1) resulting in high living standards / caused by low supply
/ high demand / high number of job vacancies / strong bargaining power / high qualifications / high skills (1).
Vocation (1) wanting to help people (1). Interest / job satisfaction (1) enjoying the challenges involved (1).
Status (1) doctors are highly regarded (1). Family tradition (1) parents may have been doctors (1). High
pensions (1) enabling high living standards during retirement (1). May be good working conditions (1)
working inside (1). Job security (1) difficult to replace / essential service (1). (Fringe / non-wage) benefits (1)
e.g. pension schemes (1).
(Learn analysis)

Analyse why the wages of all teachers may increase.

- For questions like these, also mention the reason for the reason. Ex. Demand for teachers is derives, so if
demand for education increase – this may be due to a rise in population size.

Explain two influences on the mobility of labour.

- Logical explanation which might include: Good transport links (1) such as public transport / highways (1) ease
of workers moving from one place to another to take up a job (1). Cheap cost of living / relocation (1) such as
good access to affordable homes in different places (1). Similar culture (1) such as similar languages / work
culture (1). Ease of workers moving from one job to another job (1) lots of re-training opportunities (1) good
quality education (1) skills/qualification needed between different jobs are similar (1).

Discuss whether or not competition between firms in the same industry is always a disadvantage to workers.

- Why it might be an advantage • more competition between firms would lead to firms training workers to be
more productive • increased productivity leads to higher wages • increased productivity could lead to more
investments – leading to more demand for workers • more competition between firms could lead to lower
 prices, which benefits workers who are also consumers • lower prices could lead to more demand, which
increases the demand for workers as well • more competition between firms gives more opportunities for
workers to switch jobs.

Analyse the advantages for firms of using division of labour.

- Coherent analysis which might include: Division of labour involves workers specialising (1) this can increase
output / increase productivity (1) costs of production may be reduced (1) e.g. lower costs of training (1) e.g.
less equipment needed (1). Specialisation can increase quality (1) lower costs can enable to charge lower prices
(1) demand may rise (1) revenue/profits may increase (1).

Analyse how firms can benefit from specialisation.

- Coherent analysis which might include: Improve skills of workers (1) save time (1) lead to invention of new
technology (1) increase productivity (1) raise quality (1) decrease average cost of production (1) decrease prices
(1) increase demand (1) enable advantage to be taken of economies of scale (1) increase profits (1).

Explain two reasons for wage differentials amongst different economies.

- Difference in demand for labour (1) difference in supply of labour (1). Whether or not an economy is in
recession (1) economies in decline will have a low demand for labour / expanding economies will have a high
demand (1). Difference in population affecting the supply of labour (1) net migration rates / birth rates / death
rates (1) more supply would decrease wages / lower supply would increase wages (1). Difference in demand for
goods and services (1) affecting the demand for workers as demand for workers are derived demand (1).
Difference in government spending on e.g. education (1) affects wage of pubic sector (1). Difference in
productivity affecting the demand (1) high productivity leads to higher output (1) leads to higher wages (1).
Difference in trade union and collective bargaining power (1) countries with stronger trade unions will push
wages up (1). Difference in living costs / inflation (1) e.g. food prices (1) wage demands increase (1).
(Misunderstood question)

Chapter 19

Identify two influences on the strength of a trade union’s collective bargaining power.

- • size of membership • financial position • level of employment • government legislation • willingness to take
industrial action (NOT demand)

Analyse why a trade union may oppose a rise in working hours.

- A rise in working hours may reduce working conditions/quality of the job (1) working more hours may result
in workers being more stressed/less healthy/having more accidents (1) reduce less leisure time/trade unions
usually seek to increase workers’ leisure time (1). A rise in working hours may mean that firms need fewer
workers (1) increasing unemployment (1) reducing trade union membership (1). Workers may not be
compensated by higher wages (1).

Chapter 20

Explain two advantages of a large firm.

- Logical explanation which might include: economies of scale (1) (average) cost lower than smaller firms (1)
finance / capital available (1) ease of getting loans from banks (1) technological development (1) high
 productivity (1) large customer base (1) high revenue / profits (1) may be well-known (1) increase brand loyalty
(1).
(High quality is not given.)

Explain two reasons why a merger may result in higher prices for consumers.

- Logical explanation which might include: More market power / less competition / monopoly power / may
become a monopoly (1) can raise price as consumers will not be able to switch to other firms / demand may
become more inelastic / can control price / become a price maker (1). May experience diseconomies of scale /
example of a diseconomy of scale that may be experienced (1) raise prices due to higher (average) costs (1).
Carrying out the merger may be expensive (1) price raised to cover the cost of e.g. retraining staff / making
some staff redundant (1).
(Write about higher market power rather than less competition.)

Discuss whether or not a merger can help a firm survive. In assessing each answer, use the table opposite.

- Why merger can help a firm survive: • Merger may enable a firm to take greater advantage of economies of scale
• Merger will enable struggling firm to get more capital injection to enable more production / cover debts •
Merger will enable transfer of technology from other firms which could lead to increase efficiency and
productivity • Merger will increase awareness of struggling firm and could increase demand. Why merger
cannot help a firm survive: • Mergers could lead to diseconomies of scale which will increase the average cost •
Mergers that lacks synergy will make it more difficult for the firm to operate • Mergers may eliminate the brand
name of the struggling company altogether • Merger will close parts of the firm.

Analyse the reasons for the existence of small firms

- Coherent analysis which might include: Barriers to entry may be low (1) easy for firms to enter (1) e.g. low
capital start-up cost / low government regulations (1). Small firms can be monopolist (1) small / niche market
(1). Lots of government support for small firms (1) e.g. subsidies to SME (1) to maintain competition (1).
Firms desire to remain small (1) keep it within family members (1) easy to control (1) satisfied with amount of
profit (1). Difficult for firm to grow (1) as there are dominant firms in the market (1) or difficult to get enough
capital to grow large (1). Economies of scale may be very small (1) low long average costs at low levels of output
(1) e.g. not much bulk discount, not much expensive equipment (1). Diseconomies of scale may be achieved
at low levels of output (1) due to the productive inefficiency (1).

Discuss whether or not it is an advantage to keep a firm small.

- In assessing each answer, use the table opposite. Why it might: • flexible, less people to consult, more in touch
with consumers • may be able to provide more personal attention • may receive government subsidies • may be
able to concentrate on a niche market • may have good labour relations • may avoid diseconomies of scale Why
it might not: • may not be able to take advantage of economies of scale • may be driven out of business by larger
competitors • may be difficult to raise finance • risk of being taken over by a larger firm • may have difficulty
recruiting highly skilled workers • may not have the resources to survive a fall in demand

Chapter 21

Explain two advantages of capital-intensive production.

- Logical explanation which might include: Lower costs of production (1) can produce on a large scale / may
result in lower prices / higher profits (1). Raise productivity / efficiency (1) higher output / can produce faster
 (1). Quality may increase / consistency of quality may be greater (1) may increase demand (1). Absence of
human error (1) less wastage (1). Capital goods can work long hours (1) need few breaks / no need for holidays
(1). Capital goods will not take industrial action (1) will not disrupt production (1). Can eliminate boring /
repetitive / physically demanding tasks (1) increase workers’ job satisfaction (1).

(Check analysis, make sure you don’t mix it up)

Explain two causes of low productivity.

- Here, do not write about industrial action. Just write normally about labour.

Analyse why a firm may become more capital-intensive.

- Coherent analysis which might include: The cost of capital may fall / the price of labour may rise (1) lowering
costs of production (1) making the firm more price-competitive (1) may increase profits (1). Advances in
technology (1) may improve the quality of capital (1) making it more productive / efficient (1) may increase
the quality of products produced (1) raise demand for the products produced (1). Firms may want to reduce
human error / more consistent quality / uniform products (1) reduce wastage (1). Firms may want to avoid
disruption to production (1) caused by industrial action / strikes / sickness (1) capital equipment does not need
to take breaks / can work 24 hours a day (1). There may be a shortage of labour (1) making it difficult to recruit
workers (1). A government may reduce taxes on capital goods (1) provide subsidies (1) the rate of interest may
be reduced (1) making capital goods more affordable (1). The firm’s output may rise (1) reducing the average
fixed cost of capital / benefiting from economies of scale (1).
(Do not write cost of labour and capital as separate points, check analysis)

Chapter 21

Identify two examples of social welfare objectives of firms.

- Environmental protection (1) Provide jobs to disabled / ex-convicts / minorities (1) Promoting healthy
lifestyle (1) Provide basic necessities to local communities (1) Good working conditions (1)
(Decreasing price is not a point, atleast not listed in this mark scheme)

Analyse, using a diagram, the effect of an increase in output on average fixed cost (AFC) and total fixed cost
(TFC).
Explain TWO reasons why a firm may NOT aim to earn maximum profit.

- A firm may be trying to grow (1) to capture a larger share of the market/to increase pay and status of
managers (1). A firm may be trying to maximise sales revenue (1) to make it easier to grow/gain market
share (1). A firm may be aiming for a reasonable but not maximum profit/profit satisficing (1) in order
to pursue other goals (1). e.g. raising wages to keep workers happy (1). A firm may not know what
output will maximise profit (1) due to lack of information about costs/demand (1). A firm may be trying
to survive (1) in difficult situations (1). May be in public sector/charity (1) and thus have goals related
to social welfare/reducing inequalities (1).

Chapter 23

Discuss whether or not competition is harmful to a firm.

- In assessing each answer, use the table opposite. Why it might be:  may be difficult to enter or stay in
an industry if there are large firms with low average costs Why it might not be:  more innovation 
increase quality of goods and services produced  domestic competition leads to international
competitiveness

Discuss whether all monopolies have low costs of production. In assessing each answer, use the table opposite.
Why some have:

- • may earn high profits and so may have incentive to reinvest • may be small e.g. a local monopoly /
low total costs Why some do not: • lack of competition may reduce pressure to keep costs low • may
be small so do not benefit from economies of scale • may be producing in a country with a high inflation
rate

Chapter 24

Discuss whether or not government intervention is beneficial for firms.

- In assessing each answer, use the table opposite. Why it might: • government could provide subsidies
to reduce firms' costs / help boost output / help during natural disasters / help firms survive •
government could reduce taxes to reduce cost of production • minimum prices could increase revenues
of firms • government spending on education could increase skills of workers • government spending
on benefits could increase demand for products • regulations controlling monopolies could promote
competition. Why it might not: • government regulations could increase cost of production • minimum
wage could add to firms' costs, reducing profits • indirect taxes or direct taxes could reduce firms’
profits • maximum prices could reduce firms’ revenues • trade restrictions could limit competition.
(Idea was correct, not execution)

Explain two ways a government could decrease the consumption of demerit goods.

- Logical explanation which might include: Impose an (indirect) tax / tariff on goods (1) raise the price (1).
Provide information (1) about harmful effects (1). Ban / regulate (1) to stop or reduce the availability
of the product (1). Set minimum price above market price (1) raise prices (1). Import quota (1) restricts
availability for purchase (1).
(CONSUMPTION not PRODUCTION)

Analyse how a government could encourage the consumption of merit goods.

- Coherent analysis which might include: Provide a subsidy (1) reduce any indirect tax (1) lower price (1)
make the goods more affordable (1) raise quality (1). Provide information about the benefits of
 consuming the goods (1) e.g. health campaigns / advertisements (1) overcome information failure (1).
Use regulation (1) make consumption compulsory / impose fines for non-consumption (1) e.g. school
attendance (1). Provide services such as education / healthcare (1) free to consumers (1). Set maximum
price (1) to make the goods more affordable (1) but may create a shortage (1). Measures to reduce
demerit goods clearly linked to idea of encouraging substitution of merit goods (1) relevant example
(1).

State two functions of local government.

- • providing public goods • providing street lights • local recreation activities • cleaning • waste
collection and management • infrastructure investment • providing tax incentive • zoning • provision
of low income housing • supporting local businesses

Analyse how economic growth conflicts with balance of payments stability.

- Coherent analysis which might include: Economic growth may benefit from higher spending (1) whereas
balance of payments stability does not (1). Less balance of payment stability because economic growth
leads to higher income (1) higher employment (1) increases spending/consumption (1) increase the
demand for goods and services (1) including imported goods (1) reducing net exports (1) increase trade
deficit / reduce trade surplus (1). Economic growth could increase demand for imported raw materials
(1) imported capital goods (1). Economic growth could lead to demand-pull inflation (1) wage rises (1)
increase price of exports (1) reduce competitiveness of exports (1).
(Do not write about current account surplus being a bad thing)

Discuss whether or not a government can reduce unemployment without increasing inflation.

- In assessing each answer, use the table opposite. Why it might: • workers who have been unemployed
for some time may accept jobs without a rise in wages • government spending on education and
training may increase both total (aggregate) demand and total (aggregate) supply / may reduce costs
of production • government subsidies may encourage firms to produce more and take on more workers
and lower prices • tax revenue may be raised to finance any increase in government spending •
government may reduce trade union power which could encourage employers to take on more workers
Why it might not: • may increase total (aggregate) demand causing demand-pull inflation • inflation
more likely to occur if economy is initially close to full employment • may increase wages and costs of
production, causing cost-push inflation • cuts in taxes may not lead to higher consumer expenditure
and investment if there is a lack of confidence • government may instruct central bank to lower foreign
exchange rate which could increase price of imports.

(Just didn’t know many points)