Economics · May / June 2025 · Paper 21 · Question 3
0455
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In recent years, the quantity of Latvia’s factors of production has changed. Since 2008, its capital has increased and its land has not changed significantly, but its labour force and its enterprise have decreased. Enterprise and conditions of supply can affect firms’ prices. In 2022, the Latvian Government increased the country’s national minimum wage (NMW). Its NMW did, however, remain one of the lowest in the European Union.
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3(a)[2]
Identify the rewards to capital and land.
Interest (1)rent (1)2 If just names the two rewards, they can be in any order.
3(b)[4]
Explain two causes of a decrease in enterprise in an economy. Logical explanation which might include:
Decrease in profit / increase in corporate income (corporation) tax (1)increase in interest rates for borrowing (1)
reduce financial incentive to become an entrepreneur (1).
Reduction in education (1)reduce those with the skills to become entrepreneurs (1).
Reduction in immigration / reduction in population (1)reduce the number of people who can become entrepreneurs (1).
Entrepreneurs move abroad (1)better prospects / less tax (1).
Reduction in the retirement age (1)reduces supply of potential entrepreneurs (1).
Recession / war (1)firms may go out of business / reduces willingness to take risks / reduces confidence / certainty (1).
Increased government regulation (1)excessive rules may discourage entrepreneurs (1).
Nationalisation of an industry / growth of monopolies (1)removal of entrepreneurs (1). 4 One mark each for each of two causes identified and one mark each for each of two explanations. If more than two causes given, consider the first three. MAX of two marks if not identifying what changes.
3(c)[6]
Analyse how changes in conditions of supply can affect a firm’s prices. Coherent analysis which might include:
Increase in costs of production (1)due to rise in wages / raw material costs / capital goods costs / tariffs (1)
raise price (1)
to maintain profit (1).
Natural disasters (1)can create a shortage (1)
raise price (1).
Changes in weather (1)good weather can create a surplus in supply e.g. agriculture (1)
prices fall (1)
or poor weather can create a shortage (1)
prices rise (1)
Increase in indirect tax / corporate income (corporation) tax (1)a firm may pass this onto consumers as higher prices (1)
especially if demand is inelastic (1).
Government subsidies to firms (1)reduce the cost of production (1)
the firm may be able to gain the same revenue and profit (1)
with a lower price (1).
Discovery of new source of raw materials (1)enabling the firm to supply (1)
more at a lower price (1).
Advances in technology (1)example (1)
could lower costs of production (1)
reducing price (1).
Improvements in education and training (1)raise productivity (1)
lower prices (1). 6 Only allow one mark for reference to a rise in price and one mark for reference to a fall in price. MAX 4 marks if not identifying change in conditions of supply.
3(d)[8]
Discuss whether or not a rise in a national minimum wage will harm an economy. In assessing each answer, use the table opposite. Why it might:
increase unemployment if firms cannot afford to pay higher wageshigher unemployment would reduce total demandlower total demand would reduce outputtax revenue may fall, and expenditure on state benefits may riseif higher wages are paid, there may be inflation. Why it might not:reduce poverty as raise the income of the low-paidencourage more people to enter the labour forceincrease productivity as workers may be more motivatedencourage firms to train workers to gain better returnmay be set below the existing equilibrium wage level. 8 Accurate diagram can achieve Level 1. 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 sides 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 Guidance Level Description 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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