Economics · May / June 2021 · Paper 22 · Question 3

0455

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Consumers in Uruguay are eating more processed foods. Factors of production, including enterprise, have responded to this change. Firms in the processed food industry have become more capital-intensive. All of Uruguay’s industries were affected by the rise in its inflation rate, from 6.2% in 2017 to 7.7% in 2018.

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3(a)[2]
Define enterprise. Risk bearing (1)
setting up / owning a business (1)
key decision making / organisation of the other factors of production (1)
profit incentive / profit is the reward (1).
3(b)[4]
Explain the influence of opportunity cost on consumers’ decisions. Logical explanation which might include: Opportunity cost is the (next) best alternative (1)
forgone / sacrificed (1). Consumers have limited income / time (1)
have to make choices (1)
cannot have everything they want (1)
if buy more of one product may have to buy less of another / example of what product may be given up to buy another product (1).
3(c)[6]
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).
3(d)[8]
Discuss whether inflation harms a country’s industries. In assessing each answer, use the table opposite. Why it might:
may increase costs of production
may reduce competitiveness, lowering sales at home and abroad
may upset industrial relations, workers pressing for wage rises
may make it difficult to plan
may discourage savings which can reduce funds available for investment
corporation tax may be moved into a higher tax bracket
may be menu costs / shoe leather costs Why it might not:
may be demand-pull inflation with demand for the firm’s products increasing
may be low and stable
may enable a firm to reduce the real cost of any debt
may enable the firm to cut the real cost of wages
may be lower than other countries’ inflation rates
may not be foreign substitutes
some industries may have inelastic demand Level Description A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other, but overall both sided of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 A mark of zero should be awarded for no creditable content.

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