Economic issues · IGCSE Business

Identify two benefits to a business of having a well-motivated workforce. Award 1 mark for each relevant benefit (max 2). Points might include:

• Quicker production / high(er) levels of productivity / improved efficiency
• Increased output
• Low(er) labour turnover
• Low(er) rates of absenteeism
• Better/high quality goods and services
• Fewer mistakes / less waste
• Workers more willing to accept change/new methods of working
• Low(er) rates of strike action. Other appropriate responses should be credited.

Define ‘economic growth’. Award 2 marks for a full definition. Award 1 mark for a partial definition.

• A country’s GDP increases – more goods and services are produced than in the previous year/given time period. [2]
• The increase in a country’s (real) output of goods and services over time. [2]
• Rise in GDP for 2 consecutive quarters. [2] Partial definition, e.g.
• Increase in GDP [1]
• More goods and services are produced in the country/economy [1]
• Increase in a country’s spending/income/output. [1]

Explain two ways ASW could be affected by an increase in taxes. Award 1 mark for each relevant way (max 2). Award 1 mark for each relevant reference to this business (max 2). Award 1 mark for each relevant explanation (max 2). Points might include:

• Reduced/lower demand [k] from the 25 business customers [app] which reduces revenue [an]
• Less (retained) profit [k] so less funds to reinvest back into the business [an] to achieve business objectives [app]
• Increased costs/expenses [k] which may lead to an increase in prices / increase cash outflows [an] when setting up/managing websites [app]
• May delay any expansion plans [k] as the business is continuing to grow [app] so may miss out on sales [an]
• May have to increase prices [k] so may lose customers / lower demand [an]
• Decrease profit margin [k]. Other appropriate responses should be credited.

Explain two possible effects of an economic recession on Vicki’s business. Award 1 mark for identification of each relevant method (max 2). Award 1 mark for each relevant reference to this business (max 2). Award 1 mark for each relevant explanation (max 2). Points might include:

• Lower/fewer sales [k] leading to lower revenue [an] from selling burgers [app]
• May need to lower costs [k] as revenue is likely to be falling [an] for the restaurant [app]
• More workers available to select from [k] so may be able to lower labour costs [an] of the 14 employees [app]
• Workers may be made redundant / reduce workforce / downsize [k] which could demotivate other workers [an]
• Low business confidence [k] so less willing/likely to invest [an]
• The business may fail / hard to survive [k] so may lose their investment [an]
• May have cash flow problems [k] so cannot pay day-to- day costs [an]
• May have to lower prices [k]
• May delay any expansion plans [k]
• Banks may not be willing to lend [k]
• May change objective to survival [k]
• Lower profit [k] so less funds to invest [an] Other appropriate responses should be credited.

Outline two ways lower interest rates might affect DJU. Award 1 mark for each relevant way (max 2). Award 1 mark for each relevant reference to this business (max 2). Points might include:

• Increased demand/sales [k] for its clothing [app]
• Lower costs / cheaper to borrow money [k] for the factory [app]
• Encourage DJU to invest (more) in the business / more likely to apply for a loan [k] as the business is considering ways to grow [app] Other appropriate responses should be credited.

Outline two ways economic growth might affect STB. Award 1 mark for each relevant way (max 2). Award 1 mark for each relevant reference to this business (max 2). Points might include:

• High demand/sales [k] for houses [app]
• More difficult to recruit/find suitable employees [k] for job production [app]
• High(er) business profits likely [k] for this public limited company [app]
• Can increase output [k] above 13 500 (houses) [app]
• Increase in/high level of business confidence for STB [k]
• STB may consider more investment [k]
• Employees may ask for higher wages [k]
• Increased rent costs / less choice of location [k] Other appropriate responses should be credited.

Outline two ways an economic boom might affect Brendan’s business. Award 1 mark for each relevant way (max 2). Award 1 mark for each relevant reference to this business (max 2). Points might include:

• High level of demand/sales/revenue [k] for flowers [app]
• May be difficult to find employees [k] for the shop [app]
• He can increase his prices [k] which will increase added value [app]
• Higher costs / wages might increase [k] so may need more government support [app]
• High business confidence [k] for this entrepreneur [app]
• Increased competition [k]
• Harder to access materials [k]
• Harder to find a location [k] Other appropriate responses should be credited.

Explain two ways the business cycle in country X going into the boom 8 stage is likely to affect YC. Award 1 mark for each way (max 2). Award a maximum of 3 additional marks for each explanation of the way a boom stage is likely to affect YC – one of which must be applied to this context. Relevant ways might include:

• May lead to higher demand / higher sales / higher revenue for YC’s products – consumer spending is higher – as many people have gained jobs so incomes are high
• Makes it harder for YC to recruit new employees – smaller pool of unemployed to choose from – may be fewer skilled/experienced people available for work
• May make it harder to resist paying higher wages / pay high wages to new employees as level of unemployment is falling – less competition amongst workers for jobs – so less willing to accept lower wages
• Lower priced products sold by YC may see a decrease in demand - as consumers have more income available to spend on luxury high priced items – less likely to buy cheaper substitutes
• Ashanti may be more confident when investing in the shop – as future sales may increase for some time – making it more likely she will gain a return on her investment Notes:
• This question is about how YC is affected/impacted by country X going into the boom stage of the business cycle.
• Increasing interest rates is APP unless linked to the impact of a boom on this business e.g. the government may need to increase interest rates due to economic growth meaning that a loan would become more expensive for the business. For example: A boom makes it harder for YC to recruit new employees (1) as there will be a smaller pool of unemployed people to choose from (1) and may be fewer experienced people available to recruit (1) to work in the clothes shop (app). Application could include: clothes; clothes shop; sole trader; target market aged 16–30; $20 000; 3/4 employees; 40% are in age group 16–30; use competitive pricing method; economic growth predicted to be 4%; interest rates 2%/5%; information from Appendix 3.

Explain two possible effects on CTD of higher interest rates. 8 Award 1 mark for each effect (max 4). Award a maximum of 3 additional marks for each explanation of the effect – one of which must be applied to this context. Effects might include:

• Decreasing sales and revenue – as higher interest rates will make any loans / borrowing more expensive – customers are less likely to visit the café for a treat
• May be of little impact if customers view the visit as a treat / small proportion of spending – may not be willing to give up visits even if they have less money to spend due to higher interest payment on borrowing – so little effect on CTD revenue
• Make it harder for CTD to expand – as higher interest rates will increase costs of borrowing which will increase expenses – possibly leading to lower profit
• Cash outflows will be higher from borrowing – making any cash flow problem worse – especially if an overdraft is taken out to help solve a cash flow problem at certain times of the year. For example: It may make it harder for CTD to expand (1) as the higher interest rate of 6% (app) will make borrowing more expensive (1) and interest costs will increase expenses. (1) Application could include: café; 8 production employees; work in the kitchen; desserts; high-quality products; good reputation; food and drinks; set-up 4 years ago; tea / coffee; sole trader; 3 employees serving customers; cost-plus pricing; expand to a second café; interest rates increasing from 2% to 6%; create brand loyalty.

Explain one effect on PF of the increase in each of the two taxes 8 outlined in Appendix 2.

• Tax on people’s income
• Tax on profit made by businesses Award 1 mark for each effect (max 2). Award a maximum of 3 additional marks for each explanation of the effect of the increase in each tax – one of which must be applied to this context. Relevant effects of the increase in tax on people’s income might include:
• Consumers will have less income to spend – may reduce demand for products – leads to lower sales and revenue
• Little effect on sales of non-luxury products – as consumers may still make purchases of lower priced goods – so output remains at a similar level
• If seen as a lower priced alternative product – then may even see sales increase – as customers switch from higher priced competing products
• Employees may ask for a wage increase to return their take home pay to what it was before the increase in tax level – if successful then wage costs will increase
• Employees may not be as motivated as now lower pay after tax – may reduce output/efficiency Relevant effects of the increase in tax on profit made by businesses might include:
• May leave less profit to be retained for future investment in the business – reduces investment in the business – may become less competitive in the future leading to lower sales
• Owner will be left with less profit to be received in dividends – less incentive to carry on with the risks of owning a business
• Discourages existing/new shareholders from investing in the business – so will have to look for other ways to obtain funds For example: Consumers will have less income available to spend (1) as the increase in tax will reduce their take-home pay (1) may reduce demand for PF’s shoes (app) which will lead to lower sales and revenue (1). Application could include: rubber shoes; natural rubber raw material; build a new factory; 20 workers; paid a weekly wage; selling in a mass market; bank loan for new factory; sister wants to invest in the business; $100 000; 2% rise tax on incomes; 4% rise in tax on profits; information from Appendix 3.

Explain two possible effects on TSE of the business cycle in country P 8 moving into the recession stage. Award 1 mark for each relevant effect (max 2). Award a maximum of 3 additional marks for each explanation of the effects on TSE of the business cycle moving into the recession phase – one of which must be applied to this context. Relevant effects might include:

• Makes it easier for TSE to recruit new employees – larger pool of unemployed people to choose from – may be more skilled people available for work
• May make it easier to resist demand for higher wages from employees – with a high level of unemployment – there will be more competition amongst workers for jobs so willing to accept lower wages
• May lead to lower demand for TSE’s products – consumer spending is lower – as many people have lost their jobs – so incomes are lower
• Lower priced products produced by TSE may see an increase in demand – as consumers have less income available to spend on luxury high priced items – buy cheaper substitutes
• TSE may be less willing to invest – as future sales and therefore profit may not increase for some time in country P – making it more difficult to gain a return on investment
• TSE may focus more on the export of its products to make up for the lower sales in country P
• Lower revenue – may lead to lower profits For example: Makes it easier for TSE to recruit new employees (1) as there is a larger pool of unemployed people to choose from (1) and there may be more skilled people available to work for TSE (1) leading to an increase in the output of sports equipment (app). Application could include: sports equipment; skilled and full-time workers; plastic raw materials; sells in more than 30 countries; factories in 10 countries; want to increase market share; a well-motivated workforce is important; uses new technology and automation for flow production; unemployment is increasing.

Explain two ways the information in the government report outlined in 8 Appendix 3 might affect Jemi’s restaurant. Award 1 mark for each way (max 2). Award a maximum of 3 additional marks for each explanation of the way the information in the government report might affect Jemi’s restaurant – one of which must be applied to this context. Relevant ways it could affect the restaurant might include:

• Increase in number of families demanding vegan meals – because the report suggests that eating more fruit and vegetables is healthy – especially for children and therefore may attract more families to the restaurant
• Increase in demand for vegan food from the general population – as increased from 10% to 25% of the population eating only vegan meals – trend forecast to increase in the future so likely for demand to keep increasing leading to growth in the market
• May increase competition with other restaurants adding vegan meals to their menus / new restaurants opening up – which may lead to fewer sales for Jemi’s restaurant
• Finding suppliers of fruit and vegetables may become more difficult – increased transport costs from buying from suppliers further away – more time taken to fetch deliveries
• Increased demand from more restaurants serving vegan meals increased demand for ingredients – possibly higher prices for ingredients – higher costs / higher prices For example: Increase in the number of customers (1) as there is likely to be an increase in demand for vegan meals (app) because the government report suggests that eating more fruit and vegetables is healthy (1) especially for children and therefore may attract more families to the restaurant resulting in an increase in revenue (1). Application could include: vegan target market; plant-based ingredients; meals; fruit and vegetables; $50 000; chefs; working 40 hours a week; 12 employees; increasing trend for people eating vegan meals; good for the environment; menus; recipes.

Using Appendix 3 and other information, consider the effects on CR of 12 the decrease in taxes and the increase in interest rates in country P. Which change is likely to have the greatest effect on CR’s profit in its first year? Justify your answer. Level Description Marks Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of both changes. 3 9–12 Well-justified conclusion. Candidates discussing both changes in detail, in context and with a well-justified conclusion, including why the alternative change is rejected, should be rewarded with the top marks in the band. Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one change. 2 5–8 Judgement with some justification/some evaluation of choices made. Candidates discussing both changes in detail and applying them to the case should be rewarded with the top marks in the band. Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the changes with little/no explanation. 1 1–4 Simple judgement with limited justification/limited evaluation of choices made. Candidates outlining both changes in context should be rewarded with the top marks in the band. 0 No creditable response. 0 Relevant points might include: Decrease in taxes • Reduction in tax on people’s income by 5% – leading to higher income available for spending by consumers – may lead to more spending by consumers on luxury rugs – increasing CR’s sales and revenue

• A decrease in tax on profits by 2% may leave more for investment at the end of the first year – more retained profit and more investment into the new factory in its second year
• Decrease in tax on spending – may lead to price of rugs being lower – decrease prices in shops – increases demand and sales
• May reduce grants to businesses – if a decrease in government spending because of lower tax revenue Increase in • Increase the interest costs of the new bank loan interest rates – Charly may be less likely to invest in the rug making factory – may buy less new equipment – higher interest rates increase expenses
• Increases the cost if overdraft needed – increases interest payments – higher costs is likely to result in a lower profit
• May reduce the available income consumers can spend – if they have a mortgage or loan to repay – higher repayments – may decrease demand for rugs
• Decreased demand for luxury rugs – as increase in interest rates may lead to lower economic growth in country P – leading to higher unemployment and lower incomes for consumers – lower revenue for CR Conclusion Justification could include:
• A decrease in taxes will have the biggest effect on CR’s profit as consumers will have more income after tax to spend. Therefore, revenue from the sale of rugs may increase, and if costs do not also increase, then profit will increase. The increase in interest rates will only affect CR’s profit if the bank loan of $20 000 is definitely taken out.
• An increase in interest rates will have the biggest effect on CR’s profit as lower taxes may not affect demand for luxury rugs because only high-income people will purchase luxury rugs. An increase in interest rates may discourage Charly from building a larger factory and she may choose to start-up on a smaller scale at location A. This will lower the output from the factory and is likely to decrease future profit from the lower sales of rugs.