Exam-style Questions: External Environment

1. "British sugar, Tate and Lyle which together hold more than 90 per cent of the British sugar market and two sugar distribution companies are likely to be fined by the European Commission for running a price fixing cartel."

(The Guardian - 4th October 1998)

a) What is the justification for action of this kind by the European Commission?

b) Outline other measures which might be taken to encourage competition.

c) Explain how small firms are able to exist alongside multinationals producing similar goods.

d) Why do most small firms remain firm?

(Marks available: 20)

Answer

Answer outline and marking scheme for question: 1

Give yourself marks for mentioning any of the points below:

a) To encourage competition in markets and to punish those companies who seek to reduce consumer choice.

(5 marks)

b) Government assistance for new businesses. Reduce restrictive practices to allow free entry into the marketplace. Investigate industries with few produces which make huge profits.

(5 marks)

c) Niche markets, market too small for multinational to invest in, local market.

(5 marks)

d) Owner desire control over business, lack of finance to invest, small demand, lack of knowledge.

(5 marks)

(Marks available: 20)

2. a) Why, at a time of impending recession, is there often a call for a reduction in interest rates.

b) How might a downturn in economic activity affect a business.

(Marks available: 10)

Answer

Answer outline and marking scheme for question: 2

Give yourself marks for mentioning any of the points below:

a) Interest rates can be reduced at the time of a recession to attempt to stimulate the economy.

Firms will find it cheaper to invest in new machinery and equipment, exports are encouraged and imports discouraged.

Consumers may buy more credit as it is cheaper, mortgages are also less expensive, giving consumers more discretionary income.

(5 marks)

b) A downturn in economic activity will affect a business as less demand for a product may be experienced. This may result in a cash flow problem.

Any change in demand for a firms product depend on the product itself, electricity would not be greatly affected by a downturn in economic activity.

(5 marks)

(Marks available: 10)

3. a) Explain briefly why governments might need to intervene in the market economy, what intervention methods could be used?

b) How might a bus service run by a local authority differ from one operated by a private company?

(Marks available: 10)

Answer

Answer outline and marking scheme for question: 3

Give yourself marks for mentioning any of the points below:

a) Governments may need to intervene in the market economy in order to provide public and merit goods.

Government watchdogs oversee privatised companies to prevent exploitation of the customers.

(5 marks)

b) A bus service run by a local authority may operate profitable and non-profitable routes and use cross subsidisation.

The private company will tend to operate on more profitable urban routes and regulate their service to customer demand.

The objective of the local authority is to provide a service, not necessarily to seek a profit to satisfy shareholders.

(5 marks)

(Marks available: 10)