Edexcel A-Level Economics A2 3.3.2 Revenue Costs and Profits Questions

C

D

C

B

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

QS4: Construct and interpret a range of standard graphical forms.

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

- Larger businesses, such as Nestlé, might be more productively efficient than smaller businesses (producing at the MES)

- Nestlé has access to more resources and economies of scale, which can lead to increased efficiency compared to smaller food-producing businesses

- Large production runs in producing food and beverages will lower unit costs, and will enable fixed costs to be spread over a larger output. This may enable the business to produce at the productively efficient level of output

Average Cost

- The large businesses produce at $\mathrm{Q}_{2}$ compared to Q and is able to produce at a lower cost $\mathrm{C}_{1}$

- Large businesses, such as Nestlé, have specialised division of labour or capital equipment e.g. specialist packaging machines. These might improve efficiency in production, lowering average cost when producing at a higher level of output

- Large businesses might be more dynamically efficient

- The large business likely to have more price setting ability in the market allowing them to set higher prices and make supernormal profits. The supernormal profits can be reinvested into improving production or better-quality capital, investing in research and development

- Small businesses in perfect competition/monopolistic competition are unable to make supernormal profits in the long-run and are therefore unable to invest in improving dynamic efficiency

- Large businesses that are cross-subsidising might be more allocatively efficient than smaller firms as they can reallocate profits to lower the prices of essential goods

NB: award a maximum of level 3 if no appropriate diagram is drawn
Accept reverse argument as KAA

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Limited application of knowledge and understanding to economic problems in context.

A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.

Level 3

7-9

Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.

Level 4

10-12

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (8 marks) - indicative content

- A large business may suffer from diseconomies of scale making them less productively efficient

- If suffering from x-inefficiency, the large firms' average costs will rise increasing productive inefficiency

- Small businesses may operate in a niche market where they are able to set high prices and make super normal profits that can be reinvested back into dynamic efficiency

- Large businesses may have less incentive to innovate and find more efficient ways of doing things because of their dominant market position and economies of scale

- A large business may suffer from inertia and be slow to respond to changes in the market or to new opportunities because of their size and investments in their existing operations

- A small business can be more productively and dynamically efficient than large firms because they are often more flexible and responsive to market changes. They have lower overhead costs, less bureaucratic decision-making processes, and can quickly change their production processes to meet the needs of customers

- A smaller business might be more allocatively efficient ( P=MC ). A business in perfect competition has to take the market price where P=MC=AC=AR=MR therefore are allocatively efficient because of their lack of price setting ability. A larger business has price setting ability and can set at a price above MC

Level

Mark

Descriptor

0

No evaluative comments.

Level 1

1-3

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

4-6

Evidence of evaluation of alternative approaches.

Some supporting evidence/reference to context.

Evaluation is supported by a partially-developed chain of reasoning.

Level 3

7-8

Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.

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D

Knowledge 2 Application 2 Analysis 2 Evaluation 2

Quantitative skills assessed:

QS4: Construct and interpret a range of standard graphical forms

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Decreasing costs

Costs,
revenues

Knowledge

Up to 2 marks for drawing a diagram that shows knowledge of:

- Original AR, MR, AC1, MC1 and profit-maximising equilibrium (1)

- Original supernormal profit area P1FGC1 (1)

Analysis

Up to 2 marks for linked explanation of impact on Tesla's profits e.g.:

- Decrease in AC causes a downward shift in MC and AC curves to MC2 and AC2 (1)

- Area of new supernormal profit identified $\mathrm{P}_{2} \mathrm{HJC}_{2}$ (1)

Application

Up to two marks for reference to Extract B:

- Tesla was able to take advantage of government subsidies aimed at promoting the domestic electric vehicle industry lowering their costs (1) Tesla benefited from low-cost labour (1)

- China has become a key manufacturing centre for Tesla, with the Shanghai factory producing over 710000 vehicles in 2022 (1)

- Tesla improved its efficiency from producing in Shanghai (1)

Evaluation

Up to 2 marks for evaluative comments, e.g.:

- Costs may have risen (1) as production has been difficult in China/ Tesla faced supply chain disruptions due to the global health crisis/ Tesla's costs of production have risen/Tesla had to pay taxes on imported components and finished vehicles (1)

- When the subsidies end costs will rise again reducing profit (1+1)

- As averages incomes in China rise the wages will rise reducing the costs advantages (1+1)

Increasing costs

Knowledge

Up to 2 marks for drawing a diagram that shows knowledge of:

- Original $\mathrm{AR}, \mathrm{MR}, \mathrm{AC}_{1}, \mathrm{MC}_{1}$ and profit-maximising equilibrium (1)

- Original profit area $\mathrm{P}_{1} \mathrm{FGC}_{1}$ (1)

Analysis

Up to 2 marks for linked explanation of impact on Tesla's profits e.g.:

- Increase in MC and AC causes an upward shift in MC and AC curves to $\mathrm{MC}_{2}$ and $\mathrm{AC}_{2}$ (1)

- Area of new supernormal profit $\mathrm{P}_{2} \mathrm{HIC}_{2}$ (1)

Application

Up to 2 marks for application to Extract B

- Production has been difficult in China (1)

- Tesla faced supply chain disruptions due to the global health crisis (1)

- Tesla's costs of production have risen (1)

- Tesla had to pay taxes on imported components and finished vehicles (1)

Evaluation

- Costs may in fact have fallen (1) as Tesla was able to take advantage of government subsidies aimed at promoting the domestic electric vehicle industry lowering their costs /Tesla benefited from low-cost labour/ China has become a key manufacturing centre for Tesla, with the Shanghai factory producing over 710000 vehicles in 2022/ Tesla improved its efficiency from producing in Shanghai (1)

- Depends on the proportion of total costs labour makes up if it is capital intensive it will be less important (1+1)

- In the long run the supply chain problems will reduce helping to lower costs and increasing profits (1+1)

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

QS4: Construct and interpret a range of standard graphical forms.

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Knowledge, Application, Analysis (8 marks) - indicative content

- Definition of shut-down point.

- In the short-run a firm may shut down if the price it receives does not cover its average variable costs of production.

- In the long-run firms will shut down as they cannot afford to produce more output therefore cannot make enough revenue to cover average total costs.

- Reasons for shut down:

- Fall in demand decreasing TR and AR

- Increasing costs- ATC and AVC

- Difficulties specific to SME- e.g. lack of retained profit

Costs and revenues
$\mathrm{P}_{2}$$\mathrm{P}_{1}$

0
$\mathrm{Q}_{1} \mathrm{Q}_{2}$ Output
- Many SMEs are not receiving enough revenue to cover their variable costs. If this happens the firms will need to shut down in the short-run
- Diagram showing short-run price below AVC curve $0-P_{1}$ and shut down output 0-Q1
- The survey showed that small enterprises were 26 times more likely to close than larger enterprises
- SMEs required R1.1 trillion of government financial support if they were to have any chance of not shutting down in 2021

- When price is below P (ATC) the business would shut down in the long run
- Reward diagrams that shift AR/MR appropriately

NB A diagram is required to achieve Level 3

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Chains of reasoning in terms of cause and/or consequence are evident, but they may not be developed fully, or some stages are omitted.

Level 3

7-8

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to link knowledge and understanding in context using relevant examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (6 marks) - indicative content

- Not all firms were negatively impacted, essential services either increased profits or profits stayed the same

- 64% of the enterprises that were closed indicated that they expected to reopen

- If the R1.1 trillion of government financial support by the government is provided, enterprises would survive

- 70% of enterprises reported that they cut back on business spending and possibly were able to survive by lowering costs

- Half of medium-size enterprises were able to either close parts of their business or reduce capacity to decrease costs and prevent having to shut down

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-2

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

3-4

Evidence of evaluation of alternative approaches

Some supporting evidence/reference to context.

Evaluation is supported by a partially developed chain of reasoning.

Level 3

5-6

Evaluation recognises different viewpoints and/or is critical of the evidence.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.