Key term
Edexcel A-Level Economics B 9EB0
Scarcity, Choice and Potential Conflicts
Enterprise, Business and the Economy
Introducing the Market
Topic overviewConsumer objectives and the demand curveMovements along and shifts of the demand curveProducer objectives and the supply curveMovements along and shifts of the supply curveEquilibrium price and quantityExcess demand, excess supply and market forcesShifts in demand and supply in real marketsLimitations of the supply and demand modelFunctions of the price mechanismMass markets, niche markets and market growthMarket research and consumer insightMarket segmentationMarket mapping and competitive advantageAdding value, pricing decisions and dynamic markets
The Role of Credit in the Economy
Topic overviewBanks and the channelling of savings into investmentBank lending, interest rates and collateralRisk in business decision-makingLimited and unlimited liabilityLoans, overdrafts and trade creditVenture capital, share capital and leasingOwner's capital, retained profit and other sources of financeChallenges in obtaining credit and the impact of credit on the economy
Market Failure and Government Intervention
Revenue, Costs, Profits and Cash
Topic overviewSales volume and sales revenueFixed, variable, total and average costsPercentage change in revenue, costs and profitContribution and the break-even pointMargin of safety and the limitations of break-even analysisProfit as an incentive: market entry and exitGross, operating and net profitProfit margins and how firms increase profitCash flow, cash-flow forecasting and business survival
Business Growth and Competitive Advantage
Topic overviewObjectives of business growthInternal and external economies of scaleDiseconomies of scale and the problems of growthCorporate culture in a growing businessOrganic and inorganic growthHorizontal, vertical and conglomerate integrationInnovation, research and development and competitive advantageState funding for research and developmentThe product life cycle and extension strategiesMarket information in the digital economyDigital technology and the supply side of businessThe long tail and wider geographical marketsCosts, prices and firm survival in a digital marketHow small firms compete
Firms, Consumers and Elasticities of Demand
Topic overviewCalculating and interpreting price elasticity of demandFactors influencing price elasticity of demandPrice elasticity of demand and total revenuePrice elasticity of demand in niche and mass marketsPricing strategiesChoosing the right pricing strategyOnline sales, price comparison and pricing decisionsNon-price competition and the demand curveDevising a marketing approachIncome elasticity of demand
Productive Efficiency
Life in a Global Economy
Topic overviewCharacteristics of globalisationCauses of globalisation over the last fifty yearsGrowth in the UK and the BRIC economiesIndicators of growth and developmentDeveloped, emerging and developing economiesMean and median incomesSpecialisation and the gains from international tradeTrading blocsVisible and invisible trade and the impact of cheap importsExchange rate changes and their impact on firmsReading exchange rate and effective exchange rate data
The Economic Cycle
Topic overviewThe economic cycle: boom, slowdown, recession and recoveryImplications of the economic cycle for firmsThe circular flow of income, injections and withdrawalsAggregate demand and its componentsAggregate supply, input costs and productivityInflation, deflation and disinflationPrice indices and the rate of inflationReal and nominal values, constant and current pricesDemand-pull and cost-push inflationThe impact of inflation on firms and individualsEmployment, underemployment and the measurement of unemploymentThe causes of unemploymentThe impact of unemployment on firms and individuals
Introduction to Macroeconomic Policy
Globalisation
Topic overviewThe growing economic power of China and IndiaAfrica and other emerging marketsRising incomes, firms and shifting employment patternsNominal and real valuesIndex numbersTrade liberalisation and economic growthSpecialisation and comparative advantageForeign direct investment and growthTrade creation and trade diversionTrading blocs and the single marketTrading blocs, firms and growing interdependenceProtectionism: tariffs, quotas and other trade barriersTrade negotiations and international institutionsExchange rate changes and the Eurozone
Economic Factors in Business Expansion
Topic overviewPush factors: saturated markets and competitionPull factors: economies of scale and risk spreadingOffshoring and outsourcingExtending the product life cycle through overseas marketsRaising capacity utilisationAssessing a market: disposable income and exchange ratesEase of doing business, infrastructure and political stabilityLocation of production: costs, labour and natural resourcesLocation of production: trade blocs, incentives and return on investment
Impact of Globalisation on Global Companies
Topic overviewGlobalisation and glocalisationEthnocentric, polycentric and geocentric approaches to global marketsPrice and non-price competition in global marketsBranding and differentiation in global marketsCultural and language barriers in global marketsAdapting marketing strategy for niche and mass markets
Impact of Globalisation on Local and National Economies
Topic overviewMultinational corporations and local labour marketsMultinational corporations and local firmsMultinationals, the local community and the environmentForeign direct investment, growth and the balance of paymentsTechnology transfer, skills and business cultureMultinationals and consumersTax revenues and transfer pricingStakeholder conflicts, pay and working conditionsEmissions, waste disposal and supply chain ethicsEthical marketing: labelling and promotionControlling multinational corporations
Global Labour Markets
Inequality and Re-Distribution
Topic overviewAbsolute and relative poverty and how they are measuredMeasuring inequality: the Lorenz curve and the Gini coefficientReducing poverty: growth, development and international aidThe impact of inequality on individuals, firms and the economyRe-distribution of income and wealth through taxation and services
Competition and Market Power
Topic overviewMarket structures across the spectrum of competitionPerfect competition and what the model explainsMarket structure, pricing strategies and consumersNon-price competition and the limitations of perfect competitionContestability, ease of entry and barriers to entryBarriers to entry, market structure and economies of scaleConcentration ratios, interdependence and tacit agreementPrice discriminationAverage and marginal cost, revenue and profitContribution, business objectives and pricing strategiesProductive and allocative efficiencyProductivity, market orientation and interrelated markets
Market Power and Market Failure
Topic overviewCartels, collusion and restrictive practicesMonopsony, natural monopoly and power in the labour marketThe implications of market failure for firms, consumers and governmentPromoting competition: anti-competitive practices, mergers and privatisationRegulating natural monopolies and protecting consumers and employeesThe Competition and Markets Authority and EU competition policyThe benefits and costs of regulation
Market Failure Across the Economy
Macroeconomic Policies and Impact on Firms and Individuals
Topic overviewAggregate demand and its componentsAggregate supply, full capacity output and the output gapThe multiplier effectShifts in AD and AS: inflation, unemployment and growthFiscal policy: government spending and taxationMonetary policy: the Bank of England, interest rates and quantitative easingDemand-side policies on the AD/AS diagram: investment, jobs and pricesTime lags, policy conflicts and the limits of demand-side policyMarket-based supply-side policiesInterventionist supply-side policiesSupply-side policies on the AD/AS diagram: strengths and weaknessesComparing macroeconomic policies and judging their success
Risk and the Financial Sector
Topic overviewRisk and uncertainty in business decisionsEconomic shocks and their impact on firmsExchange rate risk and forward marketsInsurance and the management of business riskMobilising savings and lending for business investmentAssessing creditor risk and lending to individualsPayments, equity markets and the exchange of goods and servicesThe central bank: the MPC, monetary policy and financial regulationThe Global Financial Crisis and banking regulation
The Role of Credit in the Economy
- 8 subtopics
- 24 things to know
- Papers 1 and 3
What The Role of Credit in the Economy covers
The Role of Credit in the Economy is examined in Paper 1, Markets and how they work, and in Paper 3, The economic environment and business. It covers banks and the channelling of savings into investment, bank lending, interest rates and collateral, risk in business decision-making, limited and unlimited liability, loans, overdrafts and trade credit, venture capital, share capital and leasing, owner's capital, retained profit and other sources of finance and challenges in obtaining credit and the impact of credit on the economy.
Where it is assessed
Papers 1 and 3
Markets and how they work, then the synoptic paper on the pre-released context.
Check the Pearson Edexcel specification ↗The 8 subtopics
Each one has its own page.
- Banks and the channelling of savings into investmentBanks as financial intermediaries, investment as economists define it, maturity and risk transformation, lending larger sums than any saver deposits, the interest rate spread, saving against investment, lending and productive capacity, liquid assets, bank runs, long-run growth, and other institutions that channel savings.Open →
- Bank lending, interest rates and collateralCredit and interest rates, higher rates for new businesses, collateral and its effect on rates, calculating interest bills and maximum loans, the base rate and the Bank of England, interest rates and investment, indebted firms, secured against unsecured loans, default, cash-flow forecasts and credit ratings.Open →
- Risk in business decision-makingRisk in business and how it differs from uncertainty, why entrepreneurs accept it, the risks of a new product, financial risk and borrowing, diversification, insurance, market research, risk and expected return, lender and borrower views of risk, moral hazard, and risk over the economic cycle.Open →
- Limited and unlimited liabilityUnlimited and limited liability, which business forms carry each, the separate legal entity, what creditors and shareholders can lose, how limited liability encourages investment, personal guarantees, private against public limited companies, the costs of limited liability, trade credit, partly paid shares, firm size and insolvency.Open →
- Loans, overdrafts and trade creditBank loans and overdrafts and their advantages and disadvantages, trade credit and why suppliers grant it, calculating early-payment discounts and overdraft interest, matching finance to a machine purchase, revolving credit facilities, loan term and total interest, the main sources of credit, and the supplier's risk.Open →
- Venture capital, share capital and leasingVenture capital, why it takes equity, calculating an implied business value, its non-financial benefits and cost to founders, share capital and calculating it, permanent capital, dividends and dilution, public share issues, and leasing with its advantages and main disadvantage.Open →
- Owner's capital, retained profit and other sources of financeOwner's capital and personal savings, retained profit as the cheapest source of finance and its opportunity cost, why new firms cannot rely on it, sale of assets and sale and leaseback, business angels against venture capital, and crowdfunding, its two forms, its advantages and its drawbacks.Open →
- Challenges in obtaining credit and the impact of credit on the economyWhy banks refuse loans, asymmetric information and credit rationing, higher borrowing costs for small firms and start-ups, credit crunches and their effect on investment and output, consumer credit and aggregate demand, household debt, credit and the economic cycle and multiplier, seasonal trade, and financial exclusion.Open →
What you need to know
Answer each one before you reveal it.
Your recallNot started
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Why may a lender and a borrower judge the same project's risk differently?
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What is one drawback of raising finance by crowdfunding?
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How does a credit crunch affect investment and output?
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Why would investment in an economy be much lower without banks?
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Define unlimited liability.
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Define a bank loan.
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Define venture capital.
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Define investment as an economist uses the term.
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Define credit.
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What is the difference between risk and uncertainty?
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Define limited liability.
Evaluation
What is one disadvantage of relying on an overdraft?
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Why do venture capitalists take equity rather than lend money?
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Define owner's capital.
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Why may a bank refuse a loan to a firm with a profitable idea?
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What is meant by risk transformation by a bank?
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What is an interest rate?
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Why does an entrepreneur accept risk?
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Which two forms of business organisation carry unlimited liability?
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Define trade credit.
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A venture capitalist invests £500,000 for a 25% stake. State the implied value of the whole business.
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What is the main drawback of using personal savings to fund a business?
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What is asymmetric information in lending?
Take The Role of Credit in the Economy further
The same content, four other ways.
Commonly confused
Pairs that lose marks when they are blurred together.
Loan vs Overdraft
Loan: a fixed sum borrowed for a fixed term and repaid in instalments, with interest charged on the whole balance from the start. Overdraft: an arrangement allowing a current account to run below zero up to an agreed limit, with interest charged only on the amount actually used and only for the days it is used.
Unlimited liability vs Limited liability
Unlimited liability: the owner is personally answerable for every debt of the business, so a creditor can pursue their house and savings. Limited liability: the most an investor can lose is the sum they put in, because the company is a separate legal person that owes its own debts.
Share capital vs Loan capital
Share capital: finance raised by selling part-ownership of a company, never repaid, and rewarded only by dividends the directors choose to pay. Loan capital: finance borrowed from a lender that must be repaid by an agreed date and carries interest whether or not the firm is making money.
Questions from this topic
Each one with the model answer underneath.
- 1
What does it mean to say that banks act as financial intermediaries?
Model answer
They stand between savers and borrowers, taking in deposits from those with surplus funds and lending them on to those who want to spend or invest more than they hold.
- 2
Why would investment in an economy be much lower without banks?
Model answer
Savers and borrowers would have to find each other directly, and the cost and difficulty of matching them would leave much saving idle rather than funding productive investment.
- 3
Define investment as an economist uses the term.
Model answer
Investment is spending by firms on capital goods such as machinery, buildings and vehicles that will be used to produce output in the future.
- 4
How does a bank solve the problem that savers want their money back quickly while borrowers want it for years?
Model answer
Through maturity transformation: the bank pools many short-term deposits and lends them long-term, relying on the fact that only a small fraction of depositors withdraw at any one time.
- 5
What is meant by risk transformation by a bank?
Model answer
The bank absorbs the risk of individual loans by spreading its lending across many borrowers, so a saver's deposit is far safer than any single loan would be.
- 6
Why can a bank lend in far larger amounts than any one of its savers deposits?
Model answer
It aggregates many small deposits into a single pool, so it can advance a sum much larger than an individual saver could provide.
What is inside Levo
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The Role of Credit in the Economy revision questions
- What does The Role of Credit in the Economy cover in Edexcel A-Level Economics B?
- 8 subtopics: banks and the channelling of savings into investment, bank lending, interest rates and collateral, risk in business decision-making, limited and unlimited liability, loans, overdrafts and trade credit, venture capital, share capital and leasing, owner's capital, retained profit and other sources of finance and challenges in obtaining credit and the impact of credit on the economy. Each one has its own page with questions and model answers.
- How is The Role of Credit in the Economy organised?
- By the Edexcel 9EB0 specification, subtopic by subtopic, so it matches the order you are taught it in.
Every question in The Role of Credit in the Economy, on a schedule.
Attempt a question from memory, write the correct version, then attempt it again. Levo records the jump between your first attempt and your last, and brings each question back on the day you are due to forget it.
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