Competition and customers

prices may be reduced to attract more consumers (1) making them more affordable to
consumers (1) • choice will be increased in terms of sellers (1) and possibly in terms of a greater
range of products (1) • quality may rise (1) with pressure being put on producers to produce
good products to attract consumers (1) • producers may respond more fully to changes in
consumer demand (1) Award up to 4 marks for logical reasons why it might not, which may
include: • firms may be smaller (1), less able to take advantage of economies of scale (1), so
prices may be higher (1) • firms may have less profit (1) and so spend less improving the quality
of the product (1) • some firms may be MNCs (1), less concerned about causing external costs
(1)

Vicious cycle of poverty

Likely to receive less education (1) likely to have lower quality healthcare (1) nutrition is likely to
be poor (1) likely to gain fewer qualifications/skills (1) be less productive (1) have fewer
employment opportunities (1) may be in low paid jobs (1) may be unemployed (1).

National minimum wage

• is set above the equilibrium level, will raise the pay of the low-paid • may reduce relative
poverty by reducing the gap between high and lowincome earners • may reduce absolute
poverty by enabling low paid workers greater access to basic necessities • may raise
employment, if it motivates workers and raises productivity • may raise employment if it
increases total (aggregate) demand. Why it might not: • may not have any impact if set below
the equilibrium level • unemployment may rise as it may increase firms’ costs of production • will
not help the poor who are unable to work • may not reduce relative poverty if it results in other
workers pressing for, and getting, wage rises to maintain their wage differentials • some
receiving it may not be in poor households.

Discuss whether or not a country will benefit from having a fixed foreign exchange rate system.
Why it might be an advantage • Certainty - with a fixed exchange rate, firms will always know
the exchange rate and this makes trade and investment less risky. • Absence of speculation -
with a fixed exchange rate, there will be no speculation if people believe that the rate will stay
fixed with no revaluation or devaluation. • Constraint on government policy - if the exchange rate
is fixed, then the government may be unable to pursue extreme or irresponsible macroeconomic
policies as these would cause a run on the foreign exchange reserves and this would be
unsustainable in the medium-term. • Keep inflation low. Firms have an incentive to keep cutting
costs to remain competitive. Governments who allow their exchange rate to depreciate may
cause inflationary pressures to occur. Depreciation can cause inflation because total demand
increases, import prices increase and firms have less incentive to cut costs. • Maintain
competitiveness - a fixed exchange rate can ensure that exports remain price competitive. A
rapid appreciation in a floating exchange rate system will badly affect manufacturing firms who
export; this may also cause a worsening of the current account.

Why it might be a disadvantage

 • The economy may be unable to respond to shocks - a fixed exchange rate means that there
may be no mechanism for the government to respond rapidly to balance of payments crises. •
Problems with reserves - fixed exchange rate systems require large foreign exchange reserves
and there can be international liquidity problems as a result.
• Speculation – if foreign exchange markets believe that there may be a revaluation or
devaluation, then there may be a run of speculation. Fighting this may cost the government
significantly in terms of their foreign exchange reserves. • Policy conflicts - the fixed exchange
rate may not be compatible with other economic targets for growth, inflation and unemployment
and this may cause conflicts of policies. This is especially true if the exchange rate is fixed at a
level that is either too high or too low.

Unemployment
Unemployment may be at a high level (1) unemployment is an inefficient use of resources /
waste of resources (1) not working at full capacity (1)

Discuss whether or not inflation will harm producers.

Why it might: may increase costs of production – cost-push inflation – reducing profit may
reduce international competitiveness may cause menu costs may cause shoe leather costs
may make it difficult to plan ahead.
Why it might not: may be demand-pull inflation, increasing firms’ revenue may be low and
stable may be lower than other countries’ inflation rates, increasing price competitiveness may
enable them to reduce real wages may increase tax revenue, some of which may be spent on
e.g. subsidies cost of debt may fall / may be cheaper to borrow (in real terms) some products
have inelastic demand

Define a production possibility curve.

A diagram showing maximum output / possible combinations (1) of two types of products / of
capital and consumer goods (1) with given resources / given technology / in a given time period
(1) shows opportunity cost (1).

Explain two reasons why a country’s foreign exchange rate may depreciate
Logical explanation which might include:
Inflation / fall in productivity (1) may make domestic products
less internationally competitive / reducing net exports /
reducing exports / increasing imports (1).
Income at home may rise (1) increasing demand for imports /
diverting products from the home market (1).
Incomes abroad may have fallen (1) reducing demand for
exports (1).
The rate of interest may have fallen (1) discouraging an inflow
of funds from other countries / encouraging an outflow of
funds to other countries (1).
There may be speculation that the currency will fall in value
(1) selling the currency before it falls in value (1)
Inward foreign direct investment may fall / outward fdi may
increase (1) due to changes in economic activity (1).
A central bank/government may sell the currency (1) to
increase exports / reduce imports / improve the balance of
payments (1).
Increase in supply of currency (could be shown by a diagram)
(1).
Decrease in demand for the currency (could be shown on a
diagram) (1).

Discuss whether or not a very low birth rate would be acause for concern for a government.

Why it might:
may create an ageing population
may reduce size of the labour force in the future
may increase dependency ratio
may reduce tax revenue
may take population below the optimum level.
Why it might not:
may maintain the size of the labour force in the short run
as parents do not have to leave the labour force
may reduce overcrowding
may reduce pollution
may reduce depletion of non-renewable resources.

Discuss whether or not supply-side policy measures encourage

firms to operate in an economy.
In assessing each answer, use the table opposite.
Why they might encourage firms:
• Makes it easier to hire and fire workers might lower costs of
employing workers to firms.
• Better skills could increase productivity.
• Encouraging more workers into the labour market could increase
the supply of workers.
• Reduction in trade union power can reduce cost / make it easier
to start a business.
• Lower direct taxes will encourage more firms to start up.
• Deregulation will reduce barriers to operate in an economy.
• Privatisation will allow private firms to invest in the economy.
• Subsidies will give firms an incentive to stay in the country.
Why they might not encourage firms:
• Less job security could decrease productivity, increasing cost of
production for firms.
• Costs of hiring workers might still be lower elsewhere.
• Supply side measures (e.g. labour market reforms) may take a
long time before the effects on the economy are apparent
• Lower direct taxes may reduce the government’s ability to spend
on education / training which will increase firms’ cost of production
• Deregulation may enable other firms to engage in unfair practices
• There may be a fear that subsidies might be withdrawn and if
there is a fall in demand MNCs will not want to stay in the country
anyway
• Other governments may be giving larger subsidies

Discuss whether or not the fall in the price of a product is a disadvantage to an economy
. In assessing each answer, use the table opposite. Why it might be a disadvantage: • It
depends on size of fall in price and elasticity of demand for the product • It depends upon the
importance of the product to the economy / how dependent on it • If demand is price inelastic,
decrease in total revenue e.g. basic items / necessity, cannot cover the costs, firms may go out
of business, less employment opportunities • Less profits, discourages investment, reduces
economic growth • Less export revenue, may increase current account deficit • Fall in price may
be due to cheaper imports, domestic firms lose out. • The product may be a demerit good which
previously was overconsumed. • If the product is part of a deflationary situation, there could be
recession / unemployment :

• Depends on size of fall and whether it is short or long term • If demand is elastic, increase in
total revenue e.g. luxury goods / many substitutes • Increase choices and affordability of product
– better living standards • Fall in the price of a raw material may lower cost of production,
reducing inflation and increasing economic growth • The product may be a merit good which
previously was underconsumed • It may make a basic necessity more affordable – low income
groups may be better off • It may be the result of an increase in productivity / a government
subsidy • It may make the product more internationally competitive, improving the current
account position.
Discuss whether or not high government spending can help a government achieve its
macroeconomic aims. In assessing each answer, use the table
opposite. Why high government spending can help a government achieve its macroeconomic
aims: • economic growth – increase total demand • full employment/low unemployment –
increase demand for workers through more government infrastructure projects • government
spending on education may raise workers’ skills and so lower unemployment • balance of
payments stability – through subsidies for producers • redistribution of income – through
spending on social welfare. Why high government spending cannot help a government achieve
its macroeconomic aims: • increased total demand could lead to increase demand-pull inflation •
too much government spending could lead to less private investments • overreliance of
government subsidies could lead to complacency • high spending on social welfare could
discourage the unemployed from trying to find jobs • may be accompanied by higher taxes
which could be a disincentive to effort and enterprise • may increase budget deficit which could
reduce confidence in the economy.