Cambridge IGCSE Economics: Classification, growth and size of firms (0455) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover section 3.5 (Firms) of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026: classification, small firms, growth, mergers, and economies and diseconomies of scale. The course is not tiered. All businesses, countries and figures are invented and illustrative. Read the study guide or the revision notes first. The course hub, the checklist and the free diagnostics are also useful.

Questions

1. Classify each business by sector (primary, secondary or tertiary) and by ownership (private or public): (a) a gold-mining company owned by shareholders, (b) a state-run railway, (c) a furniture factory owned by a family, (d) a private dental clinic. [4]

2. A firm in a country called Country D sold 3.6 million in a market worth 24 million in year 1. In year 2 it sold 5.1 million in a market worth 30 million.

(a) Calculate the firm’s market share in year 1. [2] (b) Calculate its market share in year 2 and explain whether this is internal growth. [2]

3. Explain two reasons why a small firm may survive in a market where large firms operate. [4]

4. Distinguish between internal growth and external growth, giving one example of each. [4]

5. Identify the type of merger in each case: (a) a paper mill buys a forest company, (b) two airlines join, (c) a shoe maker buys a software company. [3]

6. The table shows costs for a firm in an illustrative market.

Output	Total cost
500	12,500
1,000	20,000
1,500	27,000
2,000	36,000
2,500	50,000

(a) Calculate average cost at each level of output. [2] (b) State the range of output over which the firm enjoys economies of scale. [1] (c) At what output do diseconomies of scale begin? Explain one possible cause. [2]

7. Firm A makes 20,000 units at a total cost of 120,000. Firm B makes 10,000 units at a total cost of 90,000. They merge and cut total costs by 15,000.

(a) Calculate the average cost of each firm before the merger. [1] (b) Calculate the average cost of the merged firm. [2] (c) Compare it with the combined average cost before the merger. [1]

8. State whether each is an internal economy, an external economy or an internal diseconomy of scale, and name its type: (a) a large firm gets a discount for buying in bulk, (b) a training college opens near a cluster of firms in the industry, (c) a large firm can borrow at a lower rate of interest, (d) messages between twelve departments are slow and often misunderstood. [4]

9. The table shows illustrative data for Country D, with each column adding to 100%.

Sector	Share of employment, year 1	Share of employment, year 2	Share of output, year 2
Primary	30%	20%	6%
Secondary	30%	31%	31%
Tertiary	40%	49%	63%

(a) Which sector’s employment share fell by the most? [1] (b) For each sector, divide the share of output in year 2 by the share of employment in year 2. Which sector has the lowest value, and what does it suggest? [2] (c) Explain one reason why the tertiary sector’s share of employment may rise as incomes grow. [3]

10. A bakery chain with 30% of a market proposes a horizontal merger with a rival that holds 12%. Evaluate whether the merger is likely to benefit the chain. [8]

11. Discuss whether small firms will disappear in an industry where large firms enjoy economies of scale. [8]

Answers

1. (a) Primary, private [1]. (b) Tertiary, public [1]. (c) Secondary, private [1]. (d) Tertiary, private [1]. [4] Examiner insight: Give both parts for each business; an answer that names the sector only is likely to miss half of what the question asks for.

2. (a) Market share = firm’s sales / market sales x 100 [1] = 3.6 / 24 x 100 = 15% [1]. (b) Year 2 share = 5.1 / 30 x 100 = 17% [1]. Sales grew by 41.7% while the market grew by 25%, so the firm gained share through its own selling, which is internal growth [1]. [4] Examiner insight: Use the market total, not the firm’s own sales, as the denominator, and support a comment on growth with figures from the question.

3. Any two, each as a reason plus an explanation: the market is small or local [1], so a large firm cannot make enough sales to cover its costs [1]; customers want personal or specialised service [1], which a small owner-run firm can provide [1]. Other valid pairs: little scope for scale economies in the industry; owner prefers control; niche market. [4] Examiner insight: A reason alone (“niche market”) gains less than a reason developed into an effect on the firm; add the “because” link.

4. Internal growth is when a firm expands by its own efforts, such as selling more or opening new branches [1]; example: a rise in market share [1]. External growth is when a firm grows by joining with another firm [1]; example: a merger [1]. [4] Examiner insight: Both a definition and an example are needed for each type; an example that really belongs to the other type weakens the answer.

5. (a) Backward vertical merger [1]. (b) Horizontal merger [1]. (c) Conglomerate merger [1]. [3] Examiner insight: Say which direction a vertical merger moves along the supply chain if the question gives you the chance; “vertical” alone may not be enough.

6. (a) Average cost = total cost / output [1]: 25, 20, 18, 18, 20 respectively [1]. (b) Economies of scale occur as output rises up to 1,500 (average cost falls from 25 to 18) [1]. (c) Diseconomies begin beyond 2,000, where average cost rises to 20 [1]. A cause is poor communication in a larger firm [1]. [5] Examiner insight: Show the division for at least one row; the lowest average cost covers both 1,500 and 2,000, so a range is better than a single point.

7. (a) Firm A: 120,000 / 20,000 = 6.00; Firm B: 90,000 / 10,000 = 9.00 [1]. (b) Merged total cost = 120,000 + 90,000 - 15,000 = 195,000 [1]. Output = 30,000, so average cost = 195,000 / 30,000 = 6.50 [1]. (c) The combined average cost before was 210,000 / 30,000 = 7.00, so average cost falls by 0.50 a unit [1]. [4] Examiner insight: A comparison needs both figures in the same units; quote 7.00 and 6.50, not just “it is lower”.

8. (a) Internal economy, purchasing (bulk buying) [1]. (b) External economy, such as a pool of trained workers [1]. (c) Internal economy, financial [1]. (d) Internal diseconomy, communication [1]. [4] Examiner insight: Naming the type matters as much as the label “internal” or “external”; both are needed when the question asks for each.

9. (a) Primary, down 10 percentage points (30% to 20%) [1]. (b) Primary 6 / 20 = 0.30, secondary 31 / 31 = 1.00, tertiary 63 / 49 = 1.29 [1]. Primary is lowest, so each worker produces comparatively little output relative to the share of workers, which suggests lower output per worker [1]. (c) As incomes rise, people spend more on services such as health care and travel [1]. This raises demand for tertiary firms [1], so they hire more workers and take a larger share of employment [1]. [6] Examiner insight: Build the answer as a chain of linked steps; a statement that “services grow” with no cause scores less than one with an explained cause.

10. Combined share = 30% + 12% = 42% [1]. Benefits: a larger firm may gain bulk-buying and other economies of scale [1], lowering average cost and allowing lower prices or higher profit [1]. Fewer rivals give more market power [1]. Drawbacks: managing two businesses may bring diseconomies of scale or culture clashes [1], and some staff may lose jobs, while customers could face higher prices if competition falls [1]. Judgement: the merger is likely to help if the two bakeries can combine operations smoothly and the larger share is not offset by lost customers, but the benefit is smaller if integration is poor [1], with a reason linked to the case [1]. [8] Examiner insight: Use the figures in the question (42%) and reach a reasoned judgement; two benefits without any drawback usually falls short of an evaluation.

11. Large firms with economies of scale can set lower prices [1] and may undercut small rivals [1]. However, small firms can survive where the market is local or niche [1], where customers value personal service [1], or where scale economies are small, as in craft work [1]. Small firms still face challenges, such as finance and weak bargaining power [1]. Judgement: small firms are unlikely to disappear in all industries, but in industries with large scale gains they may be pushed into specialist niches [1], depending on how much customers value what the small firm offers [1]. [8] Examiner insight: Take a side after weighing both views, and tie the final judgement to a feature of the industry; a list of small firm advantages with no link to the question is a descriptive answer.

Where marks are usually lost

• Giving a sector or ownership label without the other when both are asked for.
• Using the wrong total when working out market share.
• Quoting a percentage rise without saying whether it is bigger than the market’s rise.
• Confusing horizontal and vertical mergers when a scenario describes suppliers or customers.
• Naming an internal economy when asked for an external one, or the reverse.
• Defining economies of scale as higher profit rather than lower average cost.
• Giving only benefits of a merger, with no drawback or judgement.
• Failing to use the figures in the question in an evaluation answer.
• Listing small firm features without linking them to survival.

Next steps

• Return to the revision notes and the study guide.
• Visit the course hub and the checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, Cambridge Assessment International Education, section 3.5 (Firms).