Edexcel A-Level Economics A2 3.3.3 Market Structures and Contestability Questions

D

A

Application 2

Quantitative skills assessed:

QS2: Calculate, use and understand percentages, percentage changes and percentage point changes

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Up to 2 marks for calculation:
$$\text { - } 16.9+14+14+13(\mathbf{1})=57.9 \%(\mathbf{1})$$

NB: Award full marks for correct answer (57.9\%) regardless of working.

Award 1 mark without the percentage sign award e.g. 57.9 (1)

D

A

A

Knowledge 2 Application 2

Quantitative skills assessed:

QS2: Calculate, use and understand percentages, percentage changes and percentage point changes

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Knowledge:

1 mark for identification of oligopoly (1)

1 mark for identification of a characteristic of oligopoly e.g.

- a few dominant firms/

- a high concentration ratio/

- interdependence/

- high barriers to entry/

- imperfect information/

- differentiated goods/

- non-price competition (1)

Application up to 2 marks for application to Figure 1 or Extract B (1+1):

Figure 1

- The three-firm concentration ratio is 53%/ The four-firm concentration ratio is 59%/ The five-firm concentration ratio is 64%/ The six-firm concentration ratio is 68% (1+1)

Extract B:

- The lower prices of Tesla's electric vehicles had a significant impact on its competitors/ Domestic and other international manufacturers responded by reducing their prices for electric vehicles as they competed for market share (1)

Knowledge 2 Application 2 Analysis 2

Quantitative skills assessed: QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Knowledge and analysis

1 mark for a definition of barriers to entry- factors that prevent or make it difficult for new firms to enter a market (1)

Up to 2 marks for identifying two barriers and 1 mark for linked expansion of each e.g.

- Lack of knowledge/experience/ language/cultural awareness of the market (1) makes it more difficult for Stellantis to adapt cars to meet consumer's needs (1)
- High levels of competition in the Chinese market (1) increases marketing costs and risks (1)
- Brand loyalty (1) consumers will have habitual consumption of cars making it difficult to sell in the market (1)
- High sunk costs (1) makes it more expensive to enter the new market/gain market share (1)

Application

Up to 2 marks for application to Extract A

- In 2020 the two firms had a total 1% market share in China (1)
- Chinese car firms had a 40% market share (1)
- The Chinese car market is dominated by many well-established firms including Volkswagen/Honda/Toyota (1)

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

QS4: Construct and interpret a range of standard graphical forms.

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Knowledge, Application, Analysis ( 12 marks) - indicative content

Indicative content

- Definition of collusion - where firms agree to cooperate in their pricing and output policies.
- Applies where the market is an oligopoly and the firms are interdependent.
- Collusion provides the pharmaceutical companies with the ability to fix prices and limit output that wouldn't be possible if the firms were competing
- Ability for each firm to increase its supernormal profit as consumers have to pay higher prices for goods
- Collusive behaviour might increase entry barriers so enabling existing firms to increase their supernormal profits
- Barriers enable firms to restrict competition increasing revenue and profits
- Reduces unpredictability and uncertainty in the pharmaceutical market which may lead to higher levels of investment from firms/firms can save money by not competing helping to reduce costs and increase profits
- Candidates provide an appropriate diagram e.g. below

Firm B

High price

Low Price

High Price

Firm A

(collusion)

(A) $£ 8 \mathrm{~m}$, (B) $£ 8 \mathrm{~m}$

(A) $£ 1 \mathrm{~m},(\mathrm{~B}) £ 10 \mathrm{~m}$

Low price

(non-collusion)

(A) $£ 10 \mathrm{~m}$, (B) € 1 m

(A) $£ 3 \mathrm{~m}$, (B) $£ 3 \mathrm{~m}$
- Firm colluding will agree to sell at the high price, high price outcome to increase revenues
- Without collusion both firms will sell at the low price, low price outcome with lower revenues
- Collusive firms may act like a monopolist to increase supernormal profits. (May draw cost and revenue diagram)

- Super-normal profits are made at $\mathrm{PP}^{1} \mathrm{AB}$
- If the profits of the pharmaceutical firms increase, this may enable them to invest in more research and development, leading to new pharmaceutical drugs being produced
- Prices may be less volatile, making it easier for healthcare providers to plan their expenditure on pharmaceutical products
- Possible benefit to consumers is that sharing of information between firms can help with product development e.g. vaccine development, or safety data
NB if no game theory model candidate can achieve a maximum of level 3

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Limited application of knowledge and understanding to economic problems in context.

A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.

Level 3

7-9

Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.

Level 4

10-12

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (8 marks) - indicative content

- Higher prices after the agreement reducing consumer surplus
- Less choice if firms reduce output, reducing standards of living
- Exposure of illegal price fixing by the government may increase costs to the firm if they have to pay heavy fines ( £ 1.2 million)
- It negatively impacts firms trying to enter the pharmaceutical market as barriers to entry have increased
- Breakdown of trust between colluders may lead to breakdown of any collusive agreements
- Short run may be sustained but more problematic in the long run
- Lack of coordination
- New entry into the market
- Collusive behaviour resulting in more non-price competition could increase costs of firms

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

4-6

Evidence of evaluation of alternative approaches.

Some supporting evidence/reference to context.

Evaluation is supported by a partially-developed chain of reasoning.

Level 3

7-8

Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

- QS4: Construct and interpret a range of standard graphical forms.

- QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Effects on consumers

- Economic inefficiency causing higher prices: as prices are set above competitive levels this would lead to a deadweight loss in the economy

- Price fixing leads to a fall in allocative efficiency and economic welfare and to a fall in consumer surplus

- Reduced competition resulting from collusion may limit product choices for consumers

- Pressure exerted on suppliers to maintain high input prices or engage
in collusive behaviour themselves

NB: If no reference to game theory candidate can achieve a maximum of level 3

Candidates must include effects on both businesses and consumers to achieve a level 4

Accept advantages as KAA and disadvantages as evaluation or vice versa

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Limited application of knowledge and understanding to economic problems in context.

A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.

Level 3

7-9

Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.

Level 4

10-12

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (8 marks) - indicative content

Evaluation

- Benefits are more likely to apply to businesses that collude rather than consumers because the producer surplus is rising at the expense of the consumer surplus

- Benefits to businesses may occur in the short-run only, if one or more colluding businesses break away from the agreement

- Collusion may be illegal. If caught the business may have to pay a fine and face damage to its reputation e.g. Leicester City FC having to pay £880 000

- The increase in supernormal profits of the colluding businesses may allow for greater dynamic efficiency as they have an increased ability to invest in quality and choice for consumers

- Price stability will enable consumers to plan future expenditure

- Effect on consumers depends on the value of PED. For example, if substitutes are available the impact will be reduced

- The entry of new firms into the industry may break existing collusive agreements

- Unstable market dynamics because the collusion agreement can break down at any time. When this happens, it can lead to sudden price wars

- Some forms of collusion may be beneficial to both producer and consumer e.g. R&D cost savings and efficiencies or developing improved industry standards

Mark Descriptor

0

Level 1

1-3

Level 2

4-6

Level 3

7-8

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Knowledge, Application, Analysis ( 8 marks) - indicative content

Tesla has engaged in price competition

- Price competition is a type of competition where businesses compete against each other by offering lower prices for their goods or services

- Tesla has tried to attract more customers and increase market share by offering a lower cost alternative to other electric car producers

- Tesla's current market share of 12% is below that of SAIC ( 25% ) and BYD (16%)

- Price leadership encouraged other electric car vehicle manufacturers to lower their prices

- There might be a price war in the Chinese car market

- Reward appropriate game theory matrix, supported with explanation

- Some manufacturers may use non-price competition as means of increasing their market shares e.g. advertising, branding, product differentiation

- Tesla may be using limit pricing- the reduced prices are in place to limit the profits- this may reduce the likelihood of competitors entering the market to seek profit

- Predatory pricing is where the firm prices below its AVC in order to put pressure on the competition to leave the market as they will be loss making- this may result in loss of competitors/competitors exiting the market

- Competitor may report Tesla to competition authorities for predatory pricing

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models. Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.

Level 3

7-8

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to link knowledge and understanding in context using relevant examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (6 marks) - indicative content
- If electric vehicle manufacturers are able to differentiate their vehicles from Tesla they may not need to compete over price
- There may be little impact on other vehicle manufacturers if they have a strong reputation for reliability, safety and quality
- Other vehicle manufacturers in China benefit from government subsidies and low wage costs. Therefore they can also lower prices and are not significantly impacted
- If Tesla/other vehicle manufacturers experience increase in costs in the long-run they may have to increase their prices
- Lower prices may decrease super-normal profits reducing the available capital to spend on non-price competition
- Firms are interdependent and therefore they will all copy each other's non-price competition strategy
- Vehicle manufacturers do not benefit if a price war starts as they may all lose revenue, reducing the incentive to continue to reduce prices
- SAIC is in a stronger position to withstand competition from Tesla given that its market share is more than double that of Tesla
- Predatory pricing is illegal and Tesla may be fined/lose consumer confidence

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-2

Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.

Level 2

3-4

Evidence of evaluation of alternative approaches
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.

Level 3

5-6

Evaluation recognises different viewpoints and/or is critical of the evidence.

Appropriate reference to evidence/context. Evaluation is supported by a logical chain of reasoning.

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms

Knowledge, Application, Analysis (8 marks) - indicative content

- Non-price competition involves ways to increase sales and attract custom through methods other than price

- Methods of non-price competition include: product differentiation, advertising and branding, quality, endorsement, product placement, after sales service

- Car manufacturers operate in an oligopolistic market with high levels of interdependence

- Innovation and quality are important to the Chinese consumer

- 79% of consumers plan to purchase a connected-car in the future

- Chinese consumers are highly influenced by reputation of the firm and social media when choosing to purchase a car

- Younger consumers are attracted to cars with a more modern design

- Non-price competition is important as it increases demand and revenue

- Non-price competition can increase the profits for Chinese car manufacturers

- Number of joint-ventures able to offer product differentiation e.g. Alibaba and BMW

Maximum L2 if no reference to car manufacturers

Level

Mark Descriptor

0 No rewardable material.

Level 1

1-3 Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.

Level 3

7-8

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using relevant examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (6 marks) - indicative content

- Some types of non-price competition are likely to be more expensive than others e.g. advertising at prime time on TV may be more expensive than branding

- Some types of non-price competition may be more effective (in increasing demand and making demand less price elastic) than others e.g. connected-cars; high quality may be more effective than branding

- The most significant factor when buying a car for many young Chinese consumers is the environment. Therefore, other forms of non-price competition may not as significant

- Price is the most important factor as new cars are expensive and this is causing their demand to fall

- New car sales have declined in China as consumers seek low-cost alternatives

- There are lots of available substitutes to cars

- Consumers are using car-hailing apps instead of cars as they are more price competitive

- Electric cars are becoming more price competitive as the government is subsidising them and other car manufacturers will need to lower their price to compete.

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-2

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

3-4

Evidence of evaluation of alternative approaches

Some supporting evidence/reference to context.

Evaluation is supported by a partially-developed chain of reasoning.

Level 3

5-6

Evaluation recognises different viewpoints and/or is critical of the evidence.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.

Knowledge 2 Application 2 Analysis 2

Quantitative skills assessed: QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Knowledge, analysis and application

For each of the two methods identified: 1 mark for application to Extract A, 1 knowledge mark for identification of one method of competition and 1 mark for linked analysis e.g.

- Amazon focuses on convenience (1AP) by providing access to its goods and services online ( 1 K ) making it more convenient for consumers than having to travel to a store (1AN)

- Amazon competes with low prices (1AP) making it more price competitive (1K) encouraging consumers to switch from alternative products/increase in consumer surplus (1AN)

- Amazon offers faster delivery (1AP) by providing better customer services ( 1 K ) customers receive their goods without delay (1AN)

- Amazon focuses on choice for its consumer (1AP) by providing alternatives/more options (1K) helps Amazon meet its consumers' needs (1AN)

A monopoly is the sole supplier. Ethio Telecom could exploit economies of scale, lowering long-run average cost and potentially prices, and as a state-owned firm it may be required to provide affordable or subsidised services. Supernormal profits could finance investment in network coverage and new technology, while price discrimination could increase access for lower-income consumers. A monopoly may also keep prices low to deter entry. However, without competition it may charge high prices, restrict output, become X-inefficient and offer less choice or innovation; profits may be distributed rather than reinvested. The benefit to Ethiopian consumers depends on regulation, the firm's objectives, the scale economies available and whether investment actually improves quality and coverage.

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

QS4: Construct and interpret a range of standard graphical forms.

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

- Definition of price discrimination - where a firm is charging different prices to different users for the same product/service

- Conditions necessary for Price Discrimination:

- monopoly power

- PEDs must be different in each sub-market

- it must be possible for the business to be able to keep the sub-markets separate, so that there is no switching between sub-markets

Output OQ and high price OP where demand is price inelastic

Output OQ1 and lower price of OP1 where demand is price elastic Higher total profit when compared with combined market

Possible benefits to the business

- Charging higher prices to those consumers whose demand is relatively inelastic and lower prices to those consumers whose demand is relatively elastic . Increases revenue for the business
- Extraction of consumer surplus to increase producer surplus benefits the business as profits rise
- Selling to a larger market increases revenue for the business
- The business may be able to use resources more efficiently, such as increasing use of space during off-peak times (e.g. hotels, train companies and restaurants)
- The business may be able to use resources more efficiently, such as increasing use of space during off-peak times (e.g. hotels, train companies and restaurants)

Possible benefits to consumers
- Consumers in the sub-market in which demand is price elastic will benefit from lower prices and higher consumer surplus e.g. low-income groups
- This may result in more options e.g. staying in different cities or resorts
- Higher profits may encourage further investment by firms which can improve quality and possibly lower prices due to effects of dynamic efficiency
- Without price discrimination, the business may make losses and exit the industry reducing consumer choice Cross-subsidisation of different business activities to avoid losses means some consumers are able to purchase the good/service
- Improved quality of service for price-inelastic consumers (less crowding on peak services)
NB if no diagram candidate can achieve a maximum of level 3
NB Level 4 response requires benefits to both business and consumers

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Limited application of knowledge and understanding to economic problems in context.

A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.

Level 3

7-9

Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.

Level 4

10-12

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (8 marks) - indicative content

The business:

- Higher revenue/profits depend on the extent to which the firm can maintain the conditions necessary for price discrimination

- May only apply in the short-run. If a new business enters the market because of the supernormal profit being made, price discrimination may not be possible

- If costs of separating the sub-markets are high then the extra revenue gained may be limited

- If the impacts are judged to be anticompetitive, there are regulatory bodies in place, then the business may be fined

- Damage to reputation of business

Consumers:

- Consumers with inelastic demand will be paying higher prices resulting in a loss of consumer surplus

- A significant number of different prices can be confusing and potentially costly for consumers

- Price discrimination may make it more difficult for consumers to make rational choices

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

4-6

Evidence of evaluation of alternative approaches.

Some supporting evidence/reference to context.

Evaluation is supported by a partially-developed chain of reasoning.

Level 3

7-8

Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.

Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.
Quantitative skills assessed:
QS4: Construct and interpret a range of standard graphical forms.
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
Knowledge, Application, Analysis (12 marks) - indicative content
- A monopoly market structure is when there is one single dominant supplier in the market. These firms possess price setting ability
- Allocative efficiency occurs when P=MC, productive efficiency occurs when the business is producing at the lowest point of it LRATC curve, X
inefficiency occurs when a business allows average costs to rise, dynamic efficiency occurs when a business is investing to reduce it costs
- Firms with monopoly power, such as MTN Ghana, face limited competition therefore it has price setting ability
- MTN Ghana can abuse their dominant position by offering low quality products to consumers to save on costs of production. As consumers have limited other options but to purchase from them, consumer welfare decreases
- Monopolies will not be allocatively efficient as the lack of competition, such as MTN Ghana controlling 70% of the market, allows them to charge higher prices ( P>MC ) than in a more competitive industry
- Monopolies benefit from high producer surplus, reducing consumer surplus and causing a deadweight welfare loss
Costs &
Revenue

- A monopoly may be productively inefficient if it restricts output below the lowest point on the AC curve

- A monopoly may restrict output and produce at a point below the lowest point of the AC. The monopoly produces at 0Q

- 0 Q is profit-maximising output, shaded area is supernormal profit

- A monopoly will be x-inefficient. The lack of competition and inelastic demand enables the business to increase the price without a proportionate fall in quantity demanded. If costs increase the monopoly can allow prices to increase to cover the rising costs

Accept reverse argument as KAA

Restrict to a maximum of Level 3 if no appropriate diagram provided

Level

Mark

Level 0

Level 1

1-3

Level 2

4-6

Level 3

7-9

Level 4

10-12

Evaluation (8 marks) - indicative content

- Monopolies are large firms and have a greater capacity to be productively efficient and achieve economies of scale. The fall in LRAC may cause the price to fall for consumers, improving consumer welfare

- Monopolies have greater potential for dynamic efficiency -financial resources for investment in R & D and product innovation for consumer benefit

- A monopolist in a contestable market may choose to set the price low to deter potential entrants (making close to a normal profit) where P is closer to MC and therefore closer to allocative efficiency

- A monopolist may be able to cross subsidise loss-making parts of its business and cover the losses with the supernormal profits made in other parts of the business. This increases consumer choice

- If the monopoly is a natural monopoly it is more efficient to have a single seller in the market achieving economies of scale, than to have firms competing

- Regulation may ensure efficient operation of monopolists

- Monopoly power is dependent on the firm's share of the market and the market shares of its competitors

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.

Level 2

4-6

Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.

Level 3

7-8

Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.
Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.

Question

Evaluate measures to reduce the occupational and geographical immobility of

labour.

Indicative content

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

- The definition of monopsony - a monopsony is where there is a single buyer in the market
- The definition of monopsony power - where a firm has significant buying power over its suppliers

Impact on suppliers

- Lower prices for their goods because there is no-one else to sell their product to
- Decreasing revenue for the suppliers
- This causes a fall in supernormal profits for the suppliers and potentially puts them out of business if prices fall too low
- Lower producer surplus for suppliers that may prevent them from investing as much, reducing dynamic efficiency
- Less negotiating ability over contracts, which may prevent suppliers from being able to sell their agricultural products to other supermarkets
- Lack of bargaining power may allow monopsonists to pass costs onto suppliers, reducing profit margins
- Increased dependence on one main customer, making them more vulnerable if that customer were to go out of business

Impact on employees

- The monopsony employer has buying power over its potential employees. This gives it wage-setting power in the industry's labour market
- Employment might be lower in the industry as there are less opportunities for workers
- Monopsonies may pay lower wages and provide poorer working conditions compared to a competitive labour market

NB Maximum level 3 if no reference to a firm with monopsony power

Maximum of level 3 if only one economic agent is discussed

Accept reverse argument

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Limited application of knowledge and understanding to economic problems in context.

A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.

Level 3

7-9

Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.

Level 4

10-12

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (8 marks) - indicative content

Suppliers:

- Monopsony may offer more stable contracts guaranteeing demand for the suppliers, this may encourage more investment and dynamic efficiency from the suppliers
- If the monopsony is socially responsible, suppliers may be paid a fair amount for their products
- If monopsony power is weak/not significant, prices might not be that different to a competitive market
- There is often government intervention in monopsony markets that prevents the monopsony from abusing its dominance
- Farmers may organise into cooperatives to increase their bargaining power against the monopsony
- Businesses will attempt to find other alternative routes to market eg, farmers market or farm shop

Employees:

- Job security is likely to be higher than in more competitive markets
- Walmart/the firm may not be the only employer of workers therefore they may pay higher wages than a pure monopsony
- If a trade union exists, wages may be higher depending on the relative bargaining power of the union/monopsony
- Many monopsony employers are governments that do not profit-maximise and may seek to prioritise other objectives such as well-being

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

4-6

Evidence of evaluation of alternative approaches.

Some supporting evidence/reference to context.

Evaluation is supported by a partially-developed chain of reasoning.

Level 3

7-8

Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.