Edexcel A Level Economics B Theme 1: Markets, Consumers and Firms Exam Questions

About Edexcel A Level Economics B Theme 1: Markets, Consumers and Firms

Theme 1 of Edexcel A Level Economics B introduces the economic problem through the eyes of consumers, entrepreneurs and firms. Economics B has a strong business context, so alongside demand, supply and elasticity you study enterprise, the role of credit and interest rates, and how firms manage revenue, costs, profit and cash flow. Behavioural economics is woven in to explain why consumers do not always act rationally. Theme 1 is assessed in Paper 1 (Markets and how they work) with Theme 4, and in Paper 3, which uses a pre-released context. Examiners want you to apply theory to the case material and evaluate the choices of firms and consumers.

What you need to know

• 1.1 Scarcity, Choice and Potential Conflicts The basic economic problem, opportunity cost, PPFs and trade-offs. Conflicts between stakeholders such as shareholders, workers, customers and communities, and the difference between positive and normative statements.
• 1.2 Enterprise, Business and the Economy The role of the entrepreneur in organising factors of production and taking risks, business objectives, and the contribution of enterprise to the economy, including innovation and job creation.
• 1.3 Introducing the Market Demand and supply, equilibrium, and price, income and cross elasticities of demand. Behavioural economics: why consumers are not always rational, including heuristics, anchoring and social influences, and how firms and governments use nudges.
• 1.4 The Role of Credit in the Economy Why individuals and firms borrow and save, the role of banks and other lenders, and how interest rates affect borrowing, spending and saving. Know the risks of debt and the consequences of too much or too little credit.
• 1.5 Market Failure and Government Intervention Externalities, public goods and information gaps, and government responses including taxes, subsidies, regulation and provision of information. Recognise that intervention can lead to government failure.
• 1.6 Revenue, Costs, Profits and Cash Total revenue = price x quantity, fixed and variable costs, profit = total revenue - total costs, and break-even. Cash flow is different from profit, and a profitable firm can still fail if it runs out of cash.

Common mistakes in Theme 1: Markets, Consumers and Firms

• Treating profit and cash as the same. Profit is revenue minus costs over a period; cash flow is the timing of money coming in and out, so a profitable firm can still have a cash flow problem.
• Writing answers that ignore the business context. Economics B questions are set in a case, so use the firm's figures and situation in every point.
• Describing behavioural biases without linking them to choices. Explain how a bias such as anchoring changes what a consumer buys and how firms exploit it.
• Calculating income elasticity with the wrong sign. YED is positive for normal goods and negative for inferior goods; a value above 1 indicates a luxury good.
• Assuming lower interest rates always lead to more borrowing. Confidence, existing debt levels and banks' willingness to lend also matter.

Try three Theme 1: Markets, Consumers and Firms exam-style questions