Exercise 4.

3
1. In the same industry there are often firms of different sizes. Sometimes a firm integrates with
another firm.
(a) What is the difference between horizontal and vertical integration?

[4]

(b) Discuss whether the growth of a firm is advantageous for both the firm and consumers. [10]

2 Firms employ factors of production to produce goods and services in order to make profits.
(a) What is meant by the term factors of production?

[4]

(b) How do the characteristics of a monopoly differ from those of perfect competition?

[6]

(c) Discuss how firms might become large and evaluate whether monopolies are necessarily
advantageous.

3(a) Explain what is meant by a recession.

(b) What is meant by productivity?

[2]

[2]

(c) Describe the main features of public limited companies.

[3]

(d) Explain three possible reasons that could influence a workers decision to move from one
job to another. [6]

Answer exercise 4.3

1 (a) Definition of terms (2), explanation and examples (2)
OR vertical back (1), vertical forward (1), horizontal (1) with application (1).
(b) Discussion of benefits of firm in terms of economies of scale contrasted with possible
diseconomies of scale (drawbacks).
Also, discussion for consumer on possible effect on prices, choice, limitation of other
possible competitors.
2(a) 1 mark for an explanation of each factor of production:
land
labour
capital
enterprise.
(b) Candidates can comment on:
the size of firms
the number of sellers
availability of knowledge
level of price
level of output
type of product
level of profit
barriers to entry.
A maximum of 3 marks if only describe the characteristics of a monopoly or perfect
competition. [6]
(c) Discussion of how firms might become large.
Internal expansion:
increased sales
greater market dominance
pricing policy
increased demand for product
effect of advertising/promotion campaign.
External acquisition:
horizontal integration
vertical integration (both backward and forward)
conglomerate integration
mergers, takeovers and acquisitions.
Evaluation of whether monopolies are necessarily advantageous:
economies of scale can exist
these will lead to lower costs and this could lead to lower prices
high profits can be used to finance research and development
but prices are likely to be higher than in perfect competition
output is likely to be lower than in perfect competition

[4]

 abnormal/supernormal profits can exist in the long run

consumers can be denied choice.
A maximum of 6 marks for an answer that has no evaluation.
3 (a)
downswing/downturn in a business or trade cycle.
Economic growth will be negative.
Rising unemployment/job losses.
Idea of a period of time (technically two successive quarters of negative growth)

[2]

(b) Productivity refers to output per factor or input, such as output per worker (1), per period of
time (1).
(c) They have a separate legal existence from their owners.
They are owned by shareholders.
The owners have limited liability.
They have plc after their names.
Shares can be traded on a stock exchange.
The directors must report on the progress of the company to the shareholders at an AGM.
(d) Possible reasons:
wages/salaries
other financial factors, e.g. bonus, commission, profit sharing
hours of work/flexitime
location (possibly reducing travel time/cost)
working conditions
holiday provision
promotion prospects
fringe benefits, e.g. company car
pension arrangements
social/leisure/canteen facilities.
Up to 3 marks for identification of reasons.
Up to 3 marks for explanation of these reasons. [6]
(e) General understanding of what a trade union is (2) (this can be implied throughout the
answer).
Discussion of role in relation to:
better pay
improved working conditions
putting pressure on individual firms to maintain jobs
putting pressure on government to maintain jobs
threat/different types of industrial action (5).
The question does refer to how effective trade unions may be in their influence; answers
which fail to address this can gain no more than 4 marks.
Answers which only deal with firms or the government can get a maximum of 4 marks.