Business Costs, Revenues & Profit (Edexcel IGCSE Economics): Exam Questions

On the diagram below, draw and label economies of scale, diseconomies of scale and the point at which the firm is most efficient.

Sky Team is a group of 19 airlines, including Delta Airlines, KLM, Air France and China Airlines that share operating facilities and cooperate when setting flight routes. This allows more choice for passengers. Vietnam Airlines is a small airline that became a member of Sky Team in 2010. It was the first Southeast Asian airline to join Sky Team and has become more well-known to air passengers as a result of the group’s advertising campaigns.

With reference to the data above and your knowledge of economics, analyse how a smaller airline may benefit from internal economies of scale by joining a group such as Sky Team.

The music entertainment industry is dominated by a few main firms. These are BMG, EMI Group, Sony, Universal Music Group and Warner.

Explain one possible barrier to entry a new firm might face when trying to enter this industry.

Five years ago Ben Hogan began working for a large firm based in London. He was originally happy with his role but is now thinking about leaving. He is frustrated with how long it takes for even straight-forward decisions to be made.

The firm has grown considerably in the last two years and there are many more employees as a result. There is an increasing number of checklists about how to carry out tasks. Ben finds this time‐consuming and feels his ideas are no longer listened to.

With reference to the data above and your knowledge of economics, analyse why Ben’s employer might be experiencing diseconomies of scale.

A small manufacturing firm's average total cost falls as it increases its output, but a much larger rival firm in the same industry has a higher average total cost than the small firm. Explain one reason why increasing output does not always lower a firm's average total cost.

Many software companies have chosen to set up offices in the same city, close to several major universities that produce computer science graduates. Explain one reason why this clustering might lower costs for each software company.

A retail chain expands from 10 stores to over 500 stores across the country. Senior managers at head office increasingly struggle to get accurate, up-to-date information from individual stores. Explain one way this might raise the retail chain's average costs.

A furniture manufacturer increases its output from 1,000 to 5,000 units a month. Over this range, its average total cost falls from $40 to $25 per unit.

Beyond 5,000 units a month, the manufacturer's average total cost begins to rise again, reaching $30 per unit at an output of 8,000 units.

With reference to the data above and your knowledge of economics, analyse why the manufacturer's average total cost falls and then rises as its output increases.

A shipbuilding company is based in a coastal town where several other shipbuilding firms are also located.

Specialist steel suppliers and marine engineering training colleges have opened in the town specifically to serve the shipbuilding industry there.

With reference to the data above and your knowledge of economics, analyse how the growth of the shipbuilding industry in this town might lower costs for the shipbuilding company.

The diagram below shows two of a firm's cost curves.

On the diagram above, draw and label the firm's total cost (TC) curve.

Twitter, one of the most popular social media platforms, was bought for $44bn by entrepreneur Elon Musk in 2022.

The aims of Elon Musk include the creation of an ‘everything app’ – a platform that includes messaging, payments, ridesharing, food delivery and more. To support this, Elon Musk introduced major changes to Twitter, including renaming it ‘X’.

The number of X users increased to a new high of 530 million by 2023, following an increase in publicity about the change of name. This meant X did not need to pay high advertising costs to promote the platform.

Advanced technology will be introduced by X to enable users to operate multiple functions on the new platform. This research and development is likely to lead to a significant cost for the firm.

The platform has experienced a decrease of 65% in advertising revenue. Thousands of workers have already lost their jobs, including those in managerial roles.

With reference to the data above and your knowledge of economics, evaluate whether X is likely to benefit from economies of scale.

Instagram, WhatsApp and Facebook Messenger are social network messaging services, taken over and owned by Facebook. Between them, they have more than 2.6 billion users. Although they currently operate as stand-alone apps, Facebook’s chief executive, Mark Zuckerberg, has now taken greater control of all three. He has plans to combine the services, allowing messages to be sent between the different apps.

Both Instagram and WhatsApp have grown considerably since the takeover but their original founders have left due to the increased control from Facebook. Some employees are unhappy and do not understand the planned changes to the services. However, Zuckerberg thinks there will be long-term benefits including reduced costs. He says that less software will be needed once the system is in place and consumers will be less likely to use competitors’ apps.

(Source adapted from: Link (opens in a new tab))

With reference to the data above and your knowledge of economics, evaluate whether Zuckerberg’s decision to combine all three services is likely to lead to economies of scale.

Istanbul’s new airport will be huge in size and capacity when construction is finished. It will have the ability to handle around 200 million passengers annually. This is double the number of the world’s current busiest airport in Atlanta, USA. The airport will cost $11.7bn to build. It will have four terminals, six runways and cover an area of 29.5 square miles, making it larger than the island of Manhattan in New York.

(Source adapted from: https://matadornetwork.com/read/istanbul-new-airport-biggest-world/ (opens in a new tab))

With reference to the data above and your knowledge of economics, assess whether Istanbul’s new airport is likely to benefit from internal economies of scale.

Tesla built its first "Gigafactory" battery plant in Nevada at a cost of around $5 billion, aiming to produce batteries at a much larger scale than before.

Producing batteries at this scale was projected to cut battery costs by around 30% in the Gigafactory's first year of production, with industry analysts predicting a fall of more than 50% over time as output increased further.

With reference to the data above and your knowledge of economics, assess whether building a large-scale factory like Tesla's Gigafactory is an effective way to reduce a firm's average costs.

Silicon Valley in California has become the world's leading cluster of technology companies, with thousands of firms, from small start-ups to giants such as Google and Apple, based in the same relatively small area.

Firms in Silicon Valley benefit from a highly skilled local workforce, specialist suppliers, and easy access to venture capital investors, all attracted to the area by the concentration of technology firms already there.

However, the high concentration of technology firms has also driven up local wages and property prices to among the highest in the United States.

With reference to the data above and your knowledge of economics, assess whether locating in a cluster like Silicon Valley is an effective way for a technology firm to reduce its costs.

Boeing, one of the world's largest aircraft manufacturers, employs thousands of staff spread across many offices and suppliers worldwide who work on developing each new aircraft model.

An investigation into problems with Boeing's 737 MAX aircraft found that important safety concerns raised by employees were not always communicated effectively up to senior management or reported to the company's board of directors.

Boeing's then chief executive later admitted the company had made mistakes in how it communicated about the aircraft, both internally and with external safety regulators.

With reference to the data above and your knowledge of economics, assess whether Boeing's size contributed to the internal diseconomies of scale it experienced with the 737 MAX.

Walmart is the world's largest retailer, operating more than 10,500 stores in 19 countries, employing around 2.1 million people worldwide, and generating revenue of around $648 billion in its 2024 financial year.

Walmart's huge scale allows it to negotiate very low prices from suppliers and spread costs such as warehousing and distribution across a vast number of stores.

However, Walmart has also faced criticism over the years for slow decision-making at head office and difficulty maintaining consistent standards of customer service across so many stores.

With reference to the data above and your knowledge of economics, evaluate whether continuing to grow to a very large scale, like Walmart, is the best strategy for a retailer aiming to minimise its average costs.

Silicon Valley in California is the world's leading technology cluster, home to thousands of firms including Google and Apple, built up over more than 60 years.

Several governments around the world have since tried to create their own "Silicon Valleys" by investing in local infrastructure, offering tax incentives to technology firms, and funding partnerships with universities, hoping to attract a similar cluster of technology companies.

However, most of these attempts have so far failed to attract anywhere near the scale of investment, skilled workers or venture capital that Silicon Valley has.

With reference to the data above and your knowledge of economics, evaluate whether government attempts to create technology clusters similar to Silicon Valley are likely to succeed.