Friday, May 31, 2013

The Most Likely Questions for Section B (Data Response) of Unit 3: Business Economics and Economics Efficiency (Edexcel)

Forecast questions for Section B (Data Response):

1. Identifying the market structure (4m)
Mention oligopoly/ monopoly (1m). Provide its definition (1m) and find evidence from the Extract/ Figure to support your answer (2m)

2. Identifying the form of integration (4m)
Mention horizontal/ backward vertical/ forward vertical/ conglomerate integration (1m). Provide its definition (1m) and quote evidence from the Extract (2m)

3. Why the price of a good (e.g. chocolate) is higher in one market (e.g. retails) than the other (e.g. online)? (8m)
Students can approach this question from both angles e.g. why the retail price is higher or/and why the online price is lower. Possible KAA answers (4m) will be in-store customers have readiness to pay or else they wouldn’t come in the first place (PED< 1), online customers are less willing to pay due to the ease of price comparisons across different websites (PED>1), online buying maybe a new experience (PED>1) and to undercut other competitors

4. Cost/ revenue diagram where MC and AC or MR and AR moves (8m)
If it involves MR and AR, please make sure that the new curves are drawn parallelly up or down. Likewise if it involves MC and AC, make sure that the new curves are drawn vertically up or down. The new MC = AC intersection must be vertically above or below of one another (2m). Explain the reason for such shift (2m)

5. Benefits of increased competition within the industry (8m)
Some standard KAA answers (4m) are like lower price for consumers and therefore higher consumer surplus, greater choices, better quality goods and good customer service

6. Effectiveness of regulators to reduce the incidence of collusion (8m)
Standard KAA answers (4m) e.g. the ability to force an oligopoly firm to sell off its assets/ subsidiaries outside any merger, able to block a merger from taking place if it will likely result in the formation of monopoly (more than 25% of market share), can imprison managers/ directors who involve in restrictive practices and fine a firm of up to 10% of its annual turnover/ TR. Standard evaluations e.g. investigation process can be very lengthy and can take up to three years and this may disrupt operations, OFT/ Competition Commission’s decision can be overturned in High Court and the power of European Commission supersedes the one possessed by Competition Commission

7. Contestability of a market (12m) (phrasing: some firms are big and others remain small)
The most typical approach to KAA (6m) will be mentioning that the industry is NOT CONTESTABLE. Some standard answers are like purchasing EOS, technical EOS, marketing EOS, managerial EOS, transport EOS, financial EOS, expensive specialist equipments, high advertisement budget, high cost of R&D, patents, difficulty to obtain license from the government, large firms having control over the raw materials (backward vertical)  and distribution network (forward vertical)

8. Pricing and non-pricing strategy (16m) (phrasing: how does competition change the behaviour of firms)
The most common pricing strategies are revenue maximisation, sales maximisation, predatory pricing, limit pricing, BOGOF (buy-one-get-one-free) and price discrimination. In some cases, profit maximisation, cost-plus pricing and price fixing can also be considered e.g. if the question asks how pricing strategies can be employed to increase profits. Non-pricing strategies will be advertisement to project the unique feature of a good, endorsement, good customer service, better design and quality, loyalty card, contests, free trial and others

9. Impact of takeover on economic efficiency (16m)
 Standard KAA answers would be the removal of wasteful competition e.g. excessive/ unnecessary advertisement, rationalisation programme e.g. removal of some workers in overlapping departments, purchasing EOS, managerial EOS, transport EOS, financial EOS, technical EOS, managerial EOS, allocative efficiency, productive efficiency, dynamic efficiency, cost reduction by offshoring, synergies etc

10. Impact of increased government interventions on economic efficiency (16m)
Candidates have to carefully approach such question. Must relate performance targeting e.g. number of customers served in an hour, price capping e.g. RPI-X, fines, competition authorities opening up the market for more foreign competition to productive efficiency, allocative efficiency, dynamic efficiency, social efficiency etc rather than a simple identification of regulations OR efficiencies

Special notes:

1. When a question mentions about the Game Theory, candidates MUST include the diagram in their explanations. If the question does not mention anything about the Game Theory, candidates are able to get full marks WITH OR WITHOUT the Game Theory diagram

2. Each Game Theory diagram carries 2m

3. A further 2m will be awarded if candidates explain about the pricing strategies e.g. predatory pricing, limit pricing, sales maximisation etc by relating it to the matrix

4. Time management is crucial. It is the simplest, oldest and yet the most effective strategy that is always not followed. Pricing and non-pricing strategies questions will always appear either as (c) or (d) and time indicated will be 12m and 16m respectively. Let’s just say that it is a 16m question. Popular KAA combination is (2+2+2+2) BUT the problem is candidates always treat it as (4+4+4+4) and instead of spending about 8-10 minutes, they spend 16-20 minutes. This explains why more than 50% of the candidates are unable to complete their paper on time

If time is running out for the last question, provide answers in key points. As for this case, I would write: The four strategies that could be employed are predatory pricing, sales maximisation, greater budget on advertisements and produce better quality products. That’s all for 4 marks. To make it 8 marks, then I would have to say, sell goods at a loss or to the extent of providing it free (1m), reduce the price significantly to boost sales but not to the extent of making losses (AC = AR) (1m), more adverts to promote the unique feature of the product e.g. rich in cocoa content and milkier (1m), increased durability to prevent frequent wasteful replacement (1m)

How long does it take to write out all these 4 points and its short explanations? Probably less than 3 minutes. It is true that the transmission mechanism is incomplete for all of them but what I am trying to say here is that if you are going for more points, then each point would require less elaborations

If you are going for (4+4) then of course a more detailed answer will be required, but just provide 2 will suffice


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