Edexcel A Level Economics B
Edexcel A Level Economics B Theme 4: Making Markets Work Exam Questions
Free Edexcel A Level Economics B exam questions for Theme 4: Making Markets Work, with a mark scheme for every pack. Covers competition and market power, market structures, regulation, market failure, macroeconomic policies, risk and the financial sector.
Theme 4: Making Markets Work exam questions
4 question packs of real past exam questions, each with its mark scheme. Do not stop after a few: answer as many as you can without notes, then mark every answer with the mark scheme. The more questions you do, the more quickly you will spot how examiners ask about each idea.
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About Edexcel A Level Economics B Theme 4: Making Markets Work
Theme 4 is the final theme of Edexcel A Level Economics B and asks how governments and regulators can make markets work better. It builds on Theme 1 by looking at market power, competition policy and the failures that arise when firms become dominant. It then moves to the macroeconomy, comparing fiscal, monetary and supply-side approaches, and ends with risk and the financial sector, including the causes of financial crises and the regulation of banks. Theme 4 is assessed in Paper 1 alongside Theme 1, and in Paper 3. Examiners look for clear market structure diagrams and balanced evaluation of whether intervention improves outcomes.
What you need to know
- 4.1 Competition and Market Power The spectrum of competition from perfect competition to monopoly, barriers to entry, concentration ratios, contestable markets and the effects of market power on prices, choice, innovation and efficiency.
- 4.2 Market Power and Market Failure How abuse of market power is a market failure. Government responses include competition policy, the role of the Competition and Markets Authority, merger control, regulation of natural monopolies, price caps and nationalisation or privatisation.
- 4.4 Macroeconomic Policies Fiscal policy (government spending and taxation), monetary policy (interest rates and quantitative easing) and supply-side policies. Understand their use to achieve growth, low inflation and low unemployment, and the trade-offs between objectives.
- 4.5 Risk and the Financial Sector The role of financial markets in channelling savings to borrowers, risk and reward, speculation, moral hazard and asymmetric information. Know the causes and impact of financial crises and how central banks and regulators reduce systemic risk.
- Efficiency Allocative efficiency (P = MC), productive efficiency (minimum average cost) and dynamic efficiency (investment and innovation over time). Use these to judge whether market power is harmful.
Common mistakes in Theme 4: Making Markets Work
- Assuming all big firms abuse market power. Large firms can benefit consumers through economies of scale and innovation, so judge each case on its effects.
- Describing regulation without explaining how it changes behaviour. Explain the mechanism, for example how a price cap limits the price a monopoly can charge and so reduces the transfer of consumer surplus.
- Mixing up fiscal and monetary policy. Fiscal policy is set by the government (spending and tax); monetary policy is set by the central bank (interest rates and quantitative easing).
- Ignoring moral hazard when discussing bank bailouts. If banks expect to be rescued, they may take on more risk in future.
- Treating contestability as the number of firms. Contestability depends on the ease of entry and exit, especially sunk costs.
Try three Theme 4: Making Markets Work exam-style questions
1. Define the term 'moral hazard' in the context of the financial sector. (2 marks)
Show the mark scheme answer
Moral hazard is when an individual or institution takes on more risk because it does not bear the full cost of that risk; for example, banks taking risks because they expect a government bailout.
2. Explain two possible consequences for consumers of a merger that creates a dominant firm. (4 marks)
Show the mark scheme answer
Higher prices as the firm gains price-setting power, reducing consumer surplus; reduced choice and quality as competition falls; possible lower prices if economies of scale are passed on; possible more innovation funded by supernormal profit; two consequences developed.
3. Evaluate the effectiveness of monetary policy in controlling inflation. (12 marks)
Show the mark scheme answer
Raising interest rates reduces consumption and investment, shifting AD left and reducing demand-pull inflation; a stronger currency lowers import prices; evaluation: less effective for cost-push inflation caused by energy prices; time lags of up to two years; may raise unemployment and slow growth; effect depends on the share of variable-rate borrowing and confidence; supported judgement.
Theme 4: Making Markets Work FAQs
What does Edexcel A Level Economics B Theme 4 cover?
It covers competition and market power, market power as a market failure, macroeconomic policies and the role of risk and regulation in the financial sector.
Which paper is Theme 4 examined in?
Theme 4 is examined in Paper 1, Markets and how they work, together with Theme 1, and is also drawn on in Paper 3.
How do I evaluate competition policy in Theme 4?
Weigh the benefits of intervention (lower prices, more choice) against the costs (regulatory capture, information gaps, loss of economies of scale), and use the case context to decide which effect is likely to be larger.
