RI 2026 TP - H2 Econs P1&2 Examiners report Final

ECONOMICS Y6 H2 Timed Practice 2026 Case Study Question a) i) Identify and explain a fixed cost and a variable cost for a pharmaceutical company. [2] Variable cost – cost of variable factors like biobags or filters or sterilisation gear which increases as the output of pharmaceutical products increases. [1] Fixed cost – An example of a fixed cost is the rental of manufacturing facilities which does not increase with the output level. [1] Examiners’ comments Students are advised to use very explicit and clear examples which are related to a pharmaceutical company and explain how they are variable or fixed costs. ii) Explain how fixed costs may have an impact on the size of firms in the pharmaceutical industry. [2] If there are high fixed costs involved, e.g. purpose -built factories with specialised equipment to manufacture drugs, then the size of the firm is likely large. [1] This is because high fixed costs would imply a high startup cost for the firm (for instance the cost to purchase expensive machinery). This will require a firm to have a large output level before its average cost of production start to fall significantly - the firm reaps i nternal Economies of Scale (Technical – indivisibility of factors of production) over a large output level. OR High fixed costs is a large start -up cost which is a high barrier to entry preventing the entry of small firms and this allows incumbent firms to have large output and therefore size of firm is likely large. [1] Examiners’ comments This question was poorly done. Most candidates had the correct idea about iEOS but failed to explicitly bring in the concept of spreading startup cost over large output such that the firm faces lower average cost of production. b i) With reference to Figure 1, describe the changes in the level and composition of national healthcare expenditure in USA. [2] The level of National Health Expenditure (NHE) has increased. [1] In terms of composition, out-of-pocket expenses has significantly fallen whereas health insurance’s share of National Health Expenditure (NHE) has increased significantly. [1] ii) Discuss whether demand or supply factors are more significant to account for the change in the level of national healthcare expenditure in USA. [8] Identify that Total Expenditure = PxQ and that national healthcare expenditure in USA has risen.

Y6/9757/TP/2026 2 © RI 2026 [Turn Over Note: Students need not explain every factor. A total of 2 distinct demand and supply factors with PED discussed is suffice and the link must be made to total expenditure (TE). Supply Factors (1) Ext 1 P7: “continued staff shortages with more healthcare workers choosing to leave the profession”  with increasing net number of healthcare workers leaving the profession, possibly due to the long hours and tedious nature of work  results in fall in labour supply in the market and that is likely to drive up wage rate. Labour costs constitute a large portion of healthcare providers’ cost of production and thus this increases the cost of production of healthcare goods and services. (2) Ext 1 P3: The use of newer procedures to treat illnesses which involve use of new advanced technology will increase the COP of healthcare institutions too. Use of new drugs which are highly expensive because of patents contributed to this rise in COP too. Explanation of how the fall in Supply causes total expenditure to rise: As a result, firms are less willing and less able to supply at each and every price level. Hence, Supply curve shifts leftwards from S 0 to S1. Brief price adjustment mechanism: At the prevailing price, with a fall in supply, quantity demanded is greater than quantity supplied and that leads to a shortage in the market. Consumers will bid up price and firms will start to increase output and a new equilibrium will be reached at a higher price P 1 and lower output Q1. The demand for healthcare is price inelastic since there are few substitutes to improve health outcomes when one is ill, apart from consuming healthcare products and services. Hence the fall in qty demanded (Q0 to Q1) is met with a more than proportionate increase in price from P0 to P1. Hence, total healthcare expenditure increases from 0Q0 AP0 to 0Q1 BP1. Demand Factors (1) Ext 1 P4: “Medical advances can improve our health and extend our life, but they can also lead to an increase in spending and the overutilization of expensive technology and drugs.” The longer lifespan of Americans increases the need for more medical care because seniors and elderly are more prone to illnesses and have a higher risk of medical complications when ill  contribute to higher demand for healthcare. (2) Ext 1 P6: “Another prominent concern is that an increasing proportion of the U.S. population has at least one chronic disease”  there is an increase in the proportion of overweight Americans and this is likely due to the diet and sedentary lifestyle  result in high rate of chronic illnesses like diabetes, Market for healthcare P0 Q0 D0 S1 Price Quantity 0 S0 P1 Q1 A B Shortage

Y6/9757/TP/2026 3 © RI 2026 [Turn Over heart diseases, high blood pressure which require long term treatment  greater demand for healthcare (3) Ext 1 P5: “Moral hazard issues… encourage a high volume of redundant testing and overtreatment.”  Consumers whose medical expenses are covered by health insurance may demand additional but unnecessary treatment, procedures or consultation visits to the doctor because they need not bear these additional charges. These costs are borne by the insurance c ompanies and that led to an increase in demand. The above factors led to an increase in demand for healthcare services  caused a shift in the demand curve to the right. At the prevailing price of P 0, a shortage arise and through the price adjustment mechanism, there is upward pressure on price to P1 while quantity increases to Q 1. Total expenditure increases from 0Q0A P0 to 0Q1B P1. Evaluation: Any reasoned and substantiated conclusion on whether demand or supply factors are more significant in leading to a rise in expenditure. For example: Demand factors are likely to be more significant in the increase in expenditure in USA because increasingly, most medical expenses are paid through insurance policies, and this has resulted in sharp increase and unnecessary expenditures. Also, in a developed economy like USA which uses plenty of technology and where work is mainly indoor and sedentary and where average lifespan is high, these are strong demand contributors regarding the lifestyle change of an average American leading to increases in expenditure. Whereas where supply is concern, the government is likely to intervene in the control of monopoly power to prevent profit taking and mark ups by firms as well as the increase in the number of government-run healthcare institutions which can keep prices low. Therefore, demand factors are likely to be more significant. Mark Scheme: Knowledge, Application, Understanding, Analysis L1  Major conceptual inaccuracies  Smattering of points not directly linked to question  No reference to case material at all  Journalistic explanation 1 - 3 Q0 Market for healthcare P0 S0 D0 Price Quantity 0 D1 P1 Q1 A B

Y6/9757/TP/2026 4 © RI 2026 [Turn Over L2  Good rigour and accurate economic analysis based on price adjustment process, non-price determinants of supply and demand and relevant elasticity concepts  Explicit and sustained application of case evidence  At least one demand and one supply factor each, well discussed with links made to total expenditure 4 - 6 Evaluation/Synthesis (can be in the body and/or in the concluding paragraph)