OxfordAQA A-Level Business: The external environment (9625/9725) – 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.

Practice for section 3.1.1.3, The external environment, in the OxfordAQA International AS and A-level Business specification (9625 for current cohorts; the 9725 document was used for the wording). All businesses and figures are invented, and money is in currency units (cu). Revise first with the study guide and revision notes. Other pages: topic practice paper, course hub, checklist and free diagnostics.

Questions

1. Define the term “barrier to entry”. [2]

2. Dellwick Dairy sells in a regional milk market. In Year 1 the market sold 8.0 million litres at an average price of 1.20 cu. In Year 2 it sold 7.6 million litres at an average price of 1.35 cu.

(a) Calculate the value of the market in each year. [2] (b) Calculate the percentage change in market volume and in market value. [3] (c) Explain what these results suggest about the average price. [2]

3. The biscuit market in one country is worth 110 million cu. The four largest firms have sales of 33.0m, 24.2m, 16.5m and 11.0m cu. Harcombe Biscuits is the third largest.

(a) Calculate Harcombe’s market share. [2] (b) Calculate the four firm concentration ratio. [3] (c) Explain what the ratio suggests about competition in this market. [2]

4. Explain two barriers that a new firm might face when trying to enter the market for private dental clinics. [4]

5. Analyse how high barriers to entry might affect existing businesses and customers in a market. [6]

6. Explain how a saturated market might affect the decisions and profits of a business selling phone cases. [4]

7. Wolsingham Sofas records that when average income rose 6%, sales of its mid-range sofa rose from 12,500 to 13,625 units.

(a) Calculate the income elasticity of demand. [3] (b) State whether this is a normal or inferior good, and whether demand is income elastic or inelastic. [2] (c) Income is forecast to fall by 5%. Sales are currently 12,000 units and the elasticity is the same. Calculate the expected sales. [3]

8. A discount grocer sells a store brand of rice with income elasticity of demand of -0.5. Incomes fall by 6% and sales are currently 40,000 packs. Calculate the expected sales and explain why the result is useful to the grocer. [4]

9. Ostrenby Print borrows 450,000 cu at a variable interest rate of 4.0%. The rate rises to 5.5%. Its customers often buy new presses on credit. Calculate the extra annual interest and analyse two ways the rise affects Ostrenby. [6]

10. Wolsingham Textiles imports yarn costing 90,000 foreign currency units (FC) per order and exports shirts priced at 40 cu. The exchange rate changes from 1 cu = 3.0 FC to 1 cu = 2.5 FC. Calculate the cost of an order in cu before and after, and the price of a shirt in FC before and after. Analyse the effect on the business. [6]

11. Harcombe Furniture sells 20,000 chairs a year at 60 cu. Unit cost is 42 cu, of which 20 cu is timber. Timber prices rise 15%. A new rival has started selling a similar chair at 58 cu. Harcombe’s owner is considering raising price by 5% and expects sales to fall by 10%. Evaluate whether Harcombe should raise its price. [9]

12. Penhallow Pet Foods is considering entering the premium cat food market. The market was worth 40m cu last year and 44m cu this year. The four largest firms hold 28%, 20%, 14% and 10% of the market. Entry would cost about 3m cu and customers show strong loyalty to existing brands. Justify whether Penhallow should enter. [9]

Answers

1. Anything that makes it difficult or costly for a new firm to enter a market [1], such as high start-up costs or customer loyalty to existing brands [1]. [2] Examiner insight: a definition gains more credit when it says what the barrier does (restricts new entrants) rather than only listing examples.

2. (a) Year 1: 8.0 × 1.20 = 9.6m cu [1]. Year 2: 7.6 × 1.35 = 10.26m cu [1]. [2] (b) Volume: (7.6 - 8.0) / 8.0 × 100 = -5.0% [1]. Value: (10.26 - 9.6) / 9.6 × 100 = 6.875, so +6.9% [1]. Both use the old figure as the divisor and keep the sign [1]. [3] (c) Volume fell but value rose, so the average price must have risen [1] by more than enough to offset the fall in litres sold (1.20 to 1.35, a rise of 12.5%) [1]. [2] Examiner insight: percentage change answers usually need the correct sign, so write the minus for a decline.

3. (a) 16.5 / 110 × 100 = 15.0% [1][1]. [2] (b) (33.0 + 24.2 + 16.5 + 11.0) / 110 [1] = 84.7 / 110 [1] = 77.0% [1]. [3] (c) A ratio of 77% means a few large firms hold most of the market [1], so a new or small firm faces strong rivals and competition is concentrated among those few [1]. [2] Examiner insight: give the ratio as a percentage, and make the interpretation specific to the figure rather than stating the formula again.

4. Any two, 2 marks each: specialist knowledge, as clinics need qualified dentists, which takes years and money to acquire [1], so few can set up quickly [1]; legal requirements, as registration and safety rules must be met before trading [1], which adds cost and delay [1]. (Entry costs for equipment, or patient loyalty, also gain credit.) [4] Examiner insight: name the barrier, then say why it blocks entry in this market; a list of labels alone earns less.

5. Existing businesses: new rivals are kept out [1], so they keep a stable share and profit [1], and feel less pressure to cut prices or innovate [1]. Customers: fewer suppliers means less choice [1], prices may be higher [1], and weaker pressure to improve quality [1]. [6] Examiner insight: analysis improves when each effect is developed in a chain (cause, effect, consequence), covering both groups asked about.

6. Total demand barely grows, so a gain in sales must come from rivals [1]. The business may respond with differentiation or promotion, or look for new customer segments [1]. Price competition may squeeze margins [1], so profit is under pressure unless costs are cut or the product is distinctive [1]. [4] Examiner insight: tie the answer to the product named in the question, such as phone cases, rather than writing a general definition.

7. (a) Quantity change: (13,625 - 12,500) / 12,500 × 100 = 9% [1]. YED = 9 / 6 [1] = +1.5 [1]. [3] (b) Positive, so a normal good [1]; greater than 1, so income elastic [1]. [2] (c) % change in quantity = 1.5 × -5 = -7.5% [1]. 12,000 × 0.925 [1] = 11,100 units [1]. [3] Examiner insight: show the sign of YED, since the sign decides normal against inferior.

8. % change in quantity = -0.5 × -6 = +3% [1]. 40,000 × 1.03 = 41,200 packs [1]. Rice is an inferior good, so demand rises when income falls [1], and the grocer can plan stock and promotion for a downturn [1]. [4] Examiner insight: a negative times a negative gives a rise, so check the direction of your final figure.

9. Interest before: 450,000 × 4.0% = 18,000; after: 450,000 × 5.5% = 24,750 [1]; extra = 6,750 cu a year [1]. Costs: higher repayments cut profit unless prices rise [1], and may delay planned investment [1]. Demand: customers buying presses on credit face dearer loans, so orders may fall [1], reducing sales revenue and profit [1]. [6] Examiner insight: apply the effect to this business, here both its own loan and its customers’ credit.

10. Before: 90,000 / 3.0 = 30,000 cu [1]; after: 90,000 / 2.5 = 36,000 cu [1], a rise of 20%. Shirt: 40 × 3.0 = 120 FC before; 40 × 2.5 = 100 FC after [1], about 17% cheaper abroad [1]. The home currency has weakened. Higher input costs squeeze margins [1], but cheaper exports may lift overseas demand [1]. [6] Examiner insight: name which direction the currency moved before explaining effects, and consider both imports and exports.

11. Costs: timber 20 × 1.15 = 23 cu, so unit cost 45 cu [1]. Margin falls from 18 cu to 15 cu per chair [1]; contribution from 360,000 to 300,000 cu [1]. For raising: new price 63 cu gives margin 18 cu; with sales down 10% to 18,000, contribution = 324,000 cu, above 300,000 [1][1]. Against: the rival’s chair is 58 cu, so a 63 cu price widens the gap and sales may fall by more than 10% [1]; loyalty and quality may protect demand [1]. Judgement: raise, but only if the sales loss stays below about 16.7%, because contribution at 63 cu equals 300,000 at 16,667 chairs [1]; the reasoned recommendation should state this limit and monitor sales [1]. [9] Examiner insight: evaluation answers gain from a clear judgement supported by the calculation, and by a condition (how far sales can fall) rather than a one-line opinion.

12. For entering: the market grew (44 - 40) / 40 × 100 = 10% [1], so demand is rising [1]. Against: the four firm concentration ratio is 28 + 20 + 14 + 10 = 72% [1], so a few firms dominate [1]; loyalty to existing brands [1] and 3m cu entry costs are barriers [1]. Judgement, weighing growth against barriers [1]: entry is justified only if Penhallow can fund the entry costs and win loyalty through a clearly different product or lower price [1]; otherwise the risk is high despite growth [1]. [9] Examiner insight: justify means a decision with reasons on both sides, and the data (10% growth, 72% ratio) should be used rather than only mentioned.

Where marks are usually lost

• Dividing a percentage change by the new figure rather than the old.
• Leaving out the minus sign for a decline or a negative YED.
• Giving the concentration ratio as a sum of sales rather than a percentage.
• Listing barriers to entry with no explanation of why they block entry.
• Writing about high barriers from one side only, existing businesses or customers.
• Writing “profit falls” with no chain from the external change.
• Mixing up a strong and a weak currency, especially for exporters.
• Giving a conclusion in an evaluation question with no reasons or numbers behind it.

Frequently asked questions

How do you write a good chain of analysis for an external change? Name the change and who it affects, say whether it acts on costs or demand, then follow it through to the business’s decisions and profit. Writing “profit falls” with no chain from the change earns little credit.

How should you answer a question about barriers to entry? Explain why each barrier blocks entry rather than just listing it, and consider effects on both existing businesses and customers when asked. Writing from one side only limits the marks.

Which OxfordAQA section do these questions cover? They cover section 3.1.1.3, The external environment, of OxfordAQA International AS and A-level Business, written for both 9625 and 9725.

Next steps

• Revision notes
• Study guide
• Course hub and checklist
• All free 10-minute diagnostics
• Book a free trial class: /trial/

Official syllabus

OxfordAQA International AS and A-level Business (9725), specification Version 1.1, section 3.1.1.3, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards. The 9625 specification (Version 3.1, first teaching September 2018) also has a section 3.1.1.3, checked against its text: it lists the degree of competition (number of businesses), the extent of barriers to entry, and calculating and interpreting market size, market growth or decline and concentration ratio; and the effect of changes in incomes, interest rates, exchange rates, costs of inputs, government policies and competition (including from abroad). It does not list income elasticity of demand, normal and inferior goods or the four firm form of the ratio in that section; those points, and market share, come from the 9725 wording. Published by OxfordAQA.