Economics · Oct / Nov 2016 · Paper 23 · Question 4

Define ‘a mixed economy’. [2]

An economy with a private sector (1)

and a public sector (1). Some prices determined by market forces (1)

and some set by the government (1). Market based (1)

with some government intervention (1).

Explain why the growth of a firm as a goal may lead to profit maximisation in the long term. [4]

If a firm grows in size it may be able to take advantage of economies of scale (1)

this would reduce average cost of production (1). If prices are unchanged (1)

profits will be higher (1). A larger firm may have a larger share of the market / more customers (1)

this will increase the firm’s revenue (1). A larger firm may have more market power (1)

this may enable it to raise price (1).

Analyse how a country’s stock exchange can benefit an economy. [6]

It enables firms to raise finance (1)

as shares are sold on the stock exchange (1). It enables firms to merge with/take over other firms (1)

this enables them to grow in size (1)

leading to economic growth (1)

and increased employment (1). It enables the government to raise finance (1)

by selling government bonds (1)

example of government expenditure (1). It provides a destination for savings (1)

which may be used for investment (1)

or more disposable income (1). It may encourage more firms to set up in the country (1)

due to a strong financial sector (1).

Discuss the advantages and disadvantages of small firms. [8]

Up to 5 marks for advantages: Able to provide a personal / specialised service (1)

meet individual requirements / produce unique goods (1). May be quick to respond to changes in consumer demand (1)

as owner can make decisions without consulting anyone (1)

has greater flexibility than bigger firms (1). More personal contact with staff (1)

staff more motivated (1)

higher productivity (1). Easy to set up (1)

Able to cater for a small market (1)

demand for the product may be low (1). May be able to cater for a local market (1)

has greater knowledge of local market (1)

low transport costs (1). May receive subsidies from the government (1)

making it easier to compete with bigger firms (1). Up to 5 marks for disadvantages: May be too small to take advantage of economies of scale (1)

example (1)

as a result prices are higher than larger firms (1)

cannot compete on prices / profit margins are lower (1). May have some difficulty raising finance (1)

may not be able to sell shares (1)

banks may be reluctant to lend to them (1). Some small businesses may be sole proprietors and so may have unlimited liability (1)

may risk losing personal wealth (1). May lack a range of ideas (1)

which may reduce innovation (1)

may lack variety of goods compared to large firms (1). Small firms may not be well-known (1)

and so may find it difficult to attract consumers (1). Small firms may find it difficult to attract specialist staff (1)

less ability to pay high wages (1)

less opportunities for promotion (1).