Edexcel A Level Economics A Theme 3: Business Behaviour and the Labour Market Exam Questions

About Edexcel A Level Economics A Theme 3: Business Behaviour and the Labour Market

Theme 3 is the second microeconomic theme in Edexcel A Level Economics A. It looks inside firms: why they grow, what they aim to achieve, how their costs and revenues behave, and how the structure of the market they sit in shapes their prices, output and efficiency. It ends with the labour market and with how governments control mergers, monopolies and wages. Theme 3 is assessed in Paper 1 with Theme 1 and is also used in Paper 3. Examiners expect accurate cost and revenue diagrams, especially for monopoly, monopolistic competition and oligopoly, together with evaluation of efficiency and competition policy.

What you need to know

• 3.1 Business Growth Reasons why some firms stay small and others grow, including the principal-agent problem when ownership and control are separated. Know organic growth, forward and backward vertical integration, horizontal integration and conglomerate integration, plus demergers.
• 3.2 Business Objectives Profit maximisation where MC = MR, revenue maximisation where MR = 0, sales maximisation where AC = AR, and satisficing. Know why firms may pursue different objectives.
• 3.3 Revenues, Costs and Profits Total, average and marginal revenue; short-run costs and the law of diminishing returns; long-run average cost, economies and diseconomies of scale and minimum efficient scale. Normal, supernormal and losses, plus the short-run and long-run shutdown points.
• 3.4 Market Structures Allocative, productive, dynamic and X efficiency. Perfect competition, monopolistic competition, oligopoly (concentration ratios, collusion, game theory, price wars), monopoly, monopsony and contestable markets with sunk costs and barriers to entry.
• 3.5 Labour Market Labour demand is a derived demand, influenced by marginal revenue product. Labour supply and wage elasticities, wage determination in competitive and non-competitive markets, and the effects of trade unions, monopsony employers and labour immobility.
• 3.6 Government Intervention Control of mergers, monopolies and prices (for example RPI minus X regulation), promotion of competition through deregulation and competitive tendering, protection of suppliers and employees (minimum wage), and the limits to intervention such as regulatory capture.

Common mistakes in Theme 3: Business Behaviour and the Labour Market

• Placing the profit maximising output where MC crosses AC. Profit maximisation is where MC = MR; MC crosses AC at the minimum point of AC, which is productive efficiency.
• Assuming a monopoly is always inefficient. A monopoly may gain economies of scale and use supernormal profit for investment, giving dynamic efficiency, so evaluation should weigh this against allocative inefficiency.
• Forgetting that oligopoly has no single diagram. Use the kinked demand curve with care and support analysis with game theory, interdependence and concentration ratios.
• Treating a national minimum wage as always causing unemployment. In a monopsony labour market, a minimum wage set at the right level can increase both wages and employment.
• Mixing up contestability and competition. A contestable market has low sunk costs and low barriers to entry and exit, so even one incumbent firm may price close to normal profit because of the threat of entry.

Try three Theme 3: Business Behaviour and the Labour Market exam-style questions