Edexcel A Level Economics B Theme 2: The Wider Economic Environment Exam Questions

About Edexcel A Level Economics B Theme 2: The Wider Economic Environment

Theme 2 of Edexcel A Level Economics B looks at how firms are affected by the wider economy. You study how businesses grow and gain competitive advantage, how elasticities shape pricing decisions, and why productivity and efficiency matter for firms and for the whole economy. The theme then widens to life in a global economy, the economic cycle and an introduction to macroeconomic policy. It is assessed in Paper 2 (Competing in the global economy) with Theme 3, and in Paper 3. Examiners often give business data and ask how changes in the economy, such as a recession or a change in exchange rates, will affect a firm.

What you need to know

• 2.1 Business Growth and Competitive Advantage Organic and external growth (mergers and takeovers), economies and diseconomies of scale and sources of competitive advantage such as cost leadership and differentiation.
• 2.2 Firms, Consumers and Elasticities of Demand Price, income and cross elasticities of demand and how firms use them in pricing and product decisions, including the relationship between PED and total revenue.
• 2.3 Productivity and Efficiency Labour productivity = output per worker or per hour. Factors that improve productivity (training, technology, capital investment) and why productivity growth raises competitiveness and living standards.
• 2.4 Life in a Global Economy International trade, exchange rates and how a change in the value of the currency affects exporters, importers and the competitiveness of firms.
• 2.5 The Economic Cycle Boom, downturn, recession and recovery; the output gap; indicators such as GDP, unemployment and inflation; and the effect of each phase on firms and households.
• 2.6 Introduction to Macroeconomic Policy The main objectives (growth, low inflation, low unemployment, current account balance) and the main tools: fiscal, monetary and supply-side policies, and how these affect business.

Common mistakes in Theme 2: The Wider Economic Environment

• Saying a weaker currency is always good for a firm. It helps exporters but raises the cost of imported raw materials, so the effect depends on how much the firm imports.
• Confusing productivity with production. Productivity is output per input, such as output per worker, not total output.
• Linking PED and revenue the wrong way round. If demand is price elastic, cutting price raises total revenue; if inelastic, raising price raises total revenue.
• Describing the economic cycle without linking it to the firm in the case. Explain how a recession affects demand for that firm's products, using income elasticity.
• Assuming economies of scale continue forever. Beyond a point diseconomies of scale, such as communication and coordination problems, raise average costs.

Try three Theme 2: The Wider Economic Environment exam-style questions