Section A: Key terms and recall
Define the term 'fixed costs'. [2 marks]
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Fixed costs are costs that do not change with the level of output. Examples include rent and salaries of permanent staff. [1 mark for the definition, 1 mark for an example]
What are variable costs? Provide one example. [2 marks]
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Variable costs are costs that change with the level of output. An example is the cost of raw materials. [1 mark for the definition, 1 mark for an example]
What is total cost? [1 mark]
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Total cost is the sum of fixed costs and variable costs. [1 mark]
Define the term 'revenue'. [1 mark]
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Revenue is the total income a firm receives from the sale of its goods or services. [1 mark]
List two possible objectives of a firm. [2 marks]
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Possible objectives include: - Maximising profit - Increasing market share - Achieving growth - Improving product quality [1 mark for each valid objective]
Section B: Applying your knowledge
A local bakery has fixed costs of £500 per month. In a given month, the bakery uses £300 worth of flour and pays £200 in wages to part-time staff. Calculate the total cost of production for the bakery that month. [2 marks]
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Total cost = Fixed costs + Variable costs Total cost = £500 + (£300 + £200) = £1000 [1 mark for identifying fixed and variable costs, 1 mark for the correct calculation]
A small retail shop sells 100 units of a product at £10 each. Calculate the total revenue for the shop. [2 marks]
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Total revenue = Price per unit × Quantity sold Total revenue = £10 × 100 = £1000 [1 mark for the formula, 1 mark for the correct calculation]
Explain how a firm might balance the objective of maximising profit with the objective of increasing market share. [3 marks]
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A firm might balance these objectives by: - Investing in marketing to increase market share, which could lead to higher sales and profits in the long run. - Offering discounts or promotions to attract new customers, which might temporarily reduce profit margins but increase overall sales volume. - Innovating and improving product quality to differentiate from competitors, potentially allowing for higher prices and increased market share. [1 mark for each valid point, up to 3 marks]
A manufacturer produces 500 units of a product. The fixed costs are £2000, and the variable costs are £5 per unit. Calculate the total cost of production. [2 marks]
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Total cost = Fixed costs + (Variable cost per unit × Quantity produced) Total cost = £2000 + (£5 × 500) = £4500 [1 mark for the formula, 1 mark for the correct calculation]
A firm sells 200 units of a product at £15 each. Calculate the total revenue. [2 marks]
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Total revenue = Price per unit × Quantity sold Total revenue = £15 × 200 = £3000 [1 mark for the formula, 1 mark for the correct calculation]
Section C: Explain and analyse
Explain the difference between fixed costs and variable costs. Provide examples of each. [4 marks]
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Fixed costs are costs that do not change with the level of output, such as rent and salaries of permanent staff. Variable costs are costs that change with the level of output, such as the cost of raw materials and part-time wages. [2 marks for explaining the difference, 1 mark for each example, up to 4 marks]
Analyse how changes in fixed costs and variable costs can affect a firm's decision to produce more or less. [5 marks]
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Changes in fixed costs and variable costs can affect a firm's decision to produce more or less in several ways: - An increase in fixed costs, such as rent, might make it more expensive for a firm to operate, potentially leading to a decrease in production. - A decrease in variable costs, such as the cost of raw materials, might make it cheaper to produce each unit, encouraging the firm to increase production. - An increase in variable costs might reduce the firm's profit margin, making it less likely to produce more. - A firm might invest in new technology to reduce variable costs, allowing for increased production and potentially higher profits. - The firm's price elasticity of demand and the competitive environment will also influence its production decisions. [1 mark for each valid point, up to 5 marks]
Discuss the potential conflicts between different objectives a firm might have. Use examples to illustrate your points. [6 marks]
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Firms often have multiple objectives, which can sometimes conflict: - Maximising profit might conflict with achieving growth, as investing in growth (e.g., marketing or new products) can initially reduce profits. - Increasing market share might require lowering prices, which could reduce profit margins. - Improving product quality might increase costs, affecting profit margins unless the firm can charge a higher price. - Balancing the interests of different stakeholders, such as shareholders (who want high profits) and employees (who want job security and good wages), can be challenging. - A firm might prioritise social responsibility, such as reducing its environmental impact, which could increase costs and potentially reduce profits in the short term. [1 mark for each valid point and example, up to 6 marks]
Section D: Challenge
A firm has the following costs:
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Break-even point (in units) = Fixed costs / (Selling price per unit - Variable cost per unit) Break-even point = £1000 / (£15 - £8) = £1000 / £7 ≈ 143 units [1 mark for the formula, 1 mark for substituting the values, 1 mark for the calculation, 1 mark for the final answer]