How Markets Work (Edexcel A Level Economics A)

With reference to Extract C, assess possible reasons why many ‘landline-only’ customers do not switch to a cheaper telephone provider.  

Extract C

BT to slash landline charges for 1 million customers

Rental charges for landline-only customers – households with a telephone-only contract but no BT broadband – will fall from £18.99 to £11.99 per month after the regulator attacked existing deals as ‘poor value for money’. This rental reduction will save a million landline-only customers £84 a year. 

The regulator Ofcom (Office of Communications) said it stepped in because these bills for landline-only customers – nearly two-thirds of whom are over 65 – have “soared” in recent years. This is despite BT and other landline providers benefiting from significant cuts in the wholesale line rental cost of providing the service by BT Openreach. Many landline-only customers are elderly, and have been with BT for decades. Ofcom has focused on BT because it accounts for two-thirds of the UK’s 1.5m landline-only customers.

A spokesperson for Ofcom said “This position [of dominance] has allowed BT to increase prices without much risk of losing customers, and other providers have followed BT’s pricing lead. We expect BT’s price cut to mean other providers will follow suit”. Ofcom said that over three-quarters of BT’s landline-only customers have never switched provider, which has left them a prime target for price rises. The regulator said that all major landline providers have increased their line rental charges by between 23% and 47% in recent years, while their own costs for providing the service have fallen about 27%. Ofcom said it is also looking at measures to help people shop around for better deals with more confidence.

(Source: adapted from ‘BT to slash landline charges for 1m customers’, Mark Sweney, Copyright Guardian News & Media Ltd 2017 https://www.theguardian.com/business/2017/oct/26/bt-to-slash-landline-charges-for-1m-customers)

Fuel duty is an excise tax imposed on the sale of petrol, included in the price paid by consumers, set at 58 pence per litre.

(Source: https://www.gov.uk/tax-on-shopping/fuel-duty)

Draw a supply and demand diagram to show the incidence of a specific petrol tax on consumers and producers.

The UK energy market

Figure 1: UK retail electricity and gas real price indices, 2004–2015

With reference to Figure 1, explain one likely reason for the overall trend in the real price of gas and electricity.  

The table shows market data for e-cigarette kits. The original equilibrium price is £23.

As a result of a successful advertising campaign, demand increased by 3 000 e-cigarette kits at all prices. At the same time production costs fell leading to an increase in supply of 1000 e-cigarette kits at all prices.

Calculate the new equilibrium price and quantity following the successful advertising campaign and the fall in production Use the last two columns for your working.

In August 2017 Hurricane Harvey caused the closure of nearly a quarter of the oil production capacity in the United States.

Draw a supply and demand diagram to show the likely microeconomic effects of the hurricane on the US oil market.

Figure 2: Rail passenger kilometres travelled per year in the UK, billions

With reference to Figure 2, examine two possible factors which may have influenced demand for rail travel since 2008.  

Extract A

Competition and Markets Authority (CMA) report into the UK energy market

An investigation into the UK energy market by the CMA concluded that customers have been paying £1.4 billion a year more than they would in a fully competitive market. It found that 70% of domestic customers of the six largest energy firms were on an expensive standard rate. These customers could each save over £300 a year by switching to a cheaper deal but appear reluctant to do so.

However, the CMA investigation found no evidence of anti-competitive practices by firms. There has even been an increase in new entrant energy suppliers over recent years and their combined market share has reached 12% in both gas and electricity supply. 

To protect consumers, the CMA has introduced various measures to open up and increase competition in the UK energy market. These include: • the creation of a database designed to help consumers switch energy suppliers – rival suppliers can directly contact these customers • the conversion of all homes to smart energy meters making it easier for customers to measure energy consumption and switch supplier • new rules to protect the four million vulnerable customers using prepaid meters – this includes a temporary price cap until smart meters have been installed.

(Source: adapted from ‘Competition and Markets Authority Final report into Energy Market Investigation’ https://www.gov.uk/government/ news/cma-publishes-final-energy-report-in-full)

The price elasticity of demand for electricity in the UK is estimated to be –0.35 in the short run and –0.85 in the long run.

  With reference to Extract A and your own knowledge, examine two possible reasons for the change in price elasticity of demand for electricity over time.  

Read Extracts With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of increased UK demand for coffee at branded coffee shops (25)

Newspapers worldwide are grappling with a significant challenge as the price of newsprint, the paper used for printing their publications, has surged by over 50% in recent months. This sudden increase in costs is creating financial strain for newspapers globally.

In the past, newspapers had a mutually beneficial relationship with paper mills. However, as advertising revenue shifted to online platforms and newspaper circulations declined, this partnership became more transactional, and tensions have escalated.

For years, paper mills suffered as newspapers reduced the number of pages they printed, went fully digital, or closed down. Newspapers were able to negotiate lower prices for newsprint due to decreasing demand, leaving paper mills struggling in silence. But that has changed; mills are now shutting down newsprint capacity and diversifying their products. Some are converting their machines to produce packaging for e-commerce.

The COVID-19 pandemic worsened the situation as people working from home reduced newspaper purchases, further decreasing the demand for newsprint and affecting paper suppliers. As economies reopened, newsprint demand suddenly rose. With reduced production capacity and soaring energy prices, newsprint prices skyrocketed. Some paper suppliers are trying to pass on energy surcharges to newspaper companies, which newspapers argue is a breach of their contracts.

Newspapers across Europe are facing newsprint prices that are 50-70% higher in the first quarter of 2022 compared to the previous year, and their counterparts in Asia and Oceania are dealing with prices 25-45% above their usual rates. This increase is causing significant financial difficulties for publishers, potentially leading to layoffs and the closure of newspapers.

In response to this crisis, some publishers may need to shift further towards digital platforms to reduce their reliance on expensive newsprint. The future remains uncertain for the newspaper industry, with many hard conversations and tough decisions ahead.

With reference to the information provided, discuss the impact on the market for newspapers of the issues raised by the article. Use a demand and supply diagram to support your answer. (15)