How Markets Work (Edexcel A Level Economics A): Exam Questions

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: www.gov.uk)

The UK energy market

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

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.

Cobalt is a key metal used in the batteries of electric cars. China is the world’s largest producer of electric cars but has recently cut subsidies to its manufacturers.

The Democratic Republic of the Congo (DRC) produces more than 60% of the world’s supply of cobalt, from its small-scale mines. Many new small mines opened in 2018 as a result of improved expectations of profit.

The following graph shows the price of cobalt between June 2018 and June 2019.

Disney+ is a streaming service that distributes films and television series produced by the Walt Disney Studios.

(Source adapted from: https://www.businessofapps.com)

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

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)

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.

Hand car wash (HCW) firms in the UK

Extract A

What is the true human cost of your £5 hand car wash (HCW)?

The UK’s hand car washes (HCWs) are extremely price competitive, but they have also been linked to modern slavery. Are they ever fair for workers?

There is little agreement about how many HCWs there are in the UK. Estimates range from 10000 to 20000. This lack of accurate information about the industry makes government regulation very difficult. Automated car washes, with their fierce rotating bristles, used to be the first option for drivers in a hurry. Now there is more choice. While the economy slows and incomes fail to keep up with inflation, demand for HCWs has grown. Many people see paying £5 for a car washed by someone else, rather than cleaning it at home, as a small expense which yields a high utility. But what is the true cost of a £5 car wash – and what should we be paying?

The growth of HCWs is partly the result of changes in the structure of industry in the UK. Many petrol stations have closed as drivers fill up at supermarkets. Garages and their forecourts have closed as cars become more reliable and locked into service agreements. The available sites for HCWs have therefore increased significantly and rents have fallen.

HCW entrepreneurs have identified available land and have benefitted from changes in the labour market, partly as a result of EU migration. UK drivers are now able to obtain cheap and effective hand car washing. For many migrants, car washes are a first job. “They accept car washing for a short period while they improve their language skills and move into other industries,” says Ian Clark, a professor of work and employment at Nottingham Business School. “But there are also car-wash workers without networks who are in a dead end, working there for long periods.”

Many drivers are only interested in getting the cheapest wash. If the price is very low, it probably means that workers are receiving less than the minimum wage and working in poor conditions. Crude calculations illustrate the problem. A £5 HCW employing five workers for 10 hours a day would need to wash 79 cars a day to just cover the wage costs. This assumes the workers are paid the minimum wage. This is one car every seven and a half minutes. Even if the profit can be higher on valet services, the price of which can be as little as £12 for a full inside-and-out clean, it’s hard to see how a car wash price as low as £5 pays a living wage. This ignores all other costs which HCWs incur such as business rates and rent.

Evidence from car-wash workers is limited but Clark and others have been able to build a picture of some of the tougher conditions on drenched forecourts. “Like nail bars and small garment manufacturers, car washes are what we call ‘hard-to-reach places,’” Clark 5 10 15 20 25 30 P65667A0336 Turn over 3 explains. As part of the research, Clark and his team spoke to workers from 45 HCWs in the Midlands. Clark and his team met and observed workers who lacked waterproof boots or trousers, or hi-vis jackets and gloves. “They’re spraying around hydrochloric acid solution for alloy wheels, breathing in the vapour and fumes,” Clark says. Some workers were paid a little over half the minimum wage.

(Source adapted from: https://www.theguardian.com)

Figure 2: UK online streaming services – monthly fees

(Source adapted from: https://www.radiotimes.com)

Extract A

How Netflix makes use of behavioural science

In the last few years, companies have been trying to find ways to attract the attention of customers. Various streaming platforms such as Netflix, Amazon, and YouTube use ‘nudges’ to influence consumer behaviour. The ‘next-up’ feature on Netflix or ‘auto-play’ on YouTube has been subject to research that relates it to binge-watching. Binge-watching is the practice of viewing for a prolonged period, multiple episodes of a TV show or several films in rapid succession.

Similarly, the policy of offering a one-month free subscription under the label of ‘free trial’ requires credit card information to turn the forgetful subscriber into a potential paying one. Following this strategy, Netflix has expanded to 190 countries in just seven years and according to the Wall Street Journal, the company generated total revenue of over $5.2 billion in 2019, which was an increase from 2018 of around $4 billion.

However, 2022 data shows that consumers, increasingly worried about the rising cost of living, are turning their back on Netflix. With a reported cancellation of over 200000 subscriptions in the first quarter and another two million forecast to leave by the end of the year. Subscribers are rethinking their commitment to the streaming services that grew their numbers sharply during the home-based months of the global health crisis. Netflix subscribers have also quoted a decline in value for money and satisfaction with the quality of the shows as key motives for cancellation.

Disney now see higher satisfaction rankings than Netflix across the quality of shows, amount of original content, number of new-release films, variety of classic films and amount of kids’ content. Forecast cancellation rates for Disney+ fell to an all-time low of 3.2%.

(Source adapted from: https://www.novanudge.com)

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 https://www.theguardian.com)

Figure 2: International coffee price (Arabica bean), US dollars per kilogram

(Source: adapted from https://www.indexmundi.com)

Extract B

What is the true cost of the food delivery service?

The food delivery industry has boomed in recent years. Just Eat, Uber Eats and Deliveroo all offer very similar services – third‑party food delivery firms that take up to 30% of the price of restaurant meals and deliver them to customers within a certain radius. The average spend per customer is around £15 with a £5 delivery fee, about five times more expensive than cooking at home and the same price as eating in the restaurant. Cash rich, time poor professionals increasingly turn to food delivery.

Food delivery comes with many layers of packaging. In the UK, there are 200 million meals annually with around 1.4 billion individual pieces of plastic for heat retention and protection when travelling, but does it really have to be plastic? People tend to order more food, often high in fat, sugar and salt, and don’t even have to get up from their sofa.

But there are concerns that the delivery firms are exploiting employees who have no alternative. There is an issue of low pay and informal contracts. Delivery drivers are classed as ‘independent contractors’, and therefore not subject to some employment rights including a guaranteed minimum wage, sick pay, pensions or holiday pay. Drivers are paid either a flat hourly rate, or a fee per delivery. Factors such as delivery distance, speed, how busy it is and whether there are multiple drop‑offs are all factored into how much a driver is paid. Deliveroo says its wages amount to around £10 per hour, but drivers say that during 2020 their pay has been as low as £1 per hour. Drivers are not paid extra for petrol or to maintain their vehicles. Many drivers are recent immigrants or students, who do not have property or savings to fall back on.

The government could address this with widening minimum pay legislation to contracted workers, by setting codes of practice, or by setting recommended wage targets. Furthermore, there are health and safety issues for workers. Vehicle safety checks, length of shifts and safety equipment are of concern. However, there are still people who take benefit from working flexibility.

(Source: adapted from https://www.theguardian.com and https://digitalcommons.molloy)

Figure 1: Market share of UK online streaming services

Figure 2: UK online streaming services – monthly fees

Extract A

Starbucks in Britain – a loss-making business?

Coffee shops are among the most profitable parts of the food and drink industry, and few are doing quite as well as Starbucks, a US-based transnational company. Starbucks may be complaining of adverse global market conditions but that did not stop the world’s biggest coffee chain from reporting record annual profits in 2016. It made a profit of almost US$4.2 billion for the year, up 16% on 2015. That was mainly the result of a strong performance in its biggest market, America, where revenue rose 11%. The fastest growth was in the China and Asia Pacific region, with revenue up 23%. Howard Schultz, the CEO of Starbucks, said its Chinese coffee shops were the most efficient and profitable. While Starbucks still makes most of its profit in the US, Mr Schultz has said expansion in China will secure its future for “decades to come” and announced plans to more than double the number of shops in China to 5 000 by 2021.

However its British subsidiary, at first glance, appears to be doing less well. It has announced its first ever profit in Britain in 2015 – of just £1 million – despite opening its first coffee shop in the UK in 1998. It now has 849 UK outlets. The main reason why Starbucks has reported persistent losses in the UK is not due to a lack of demand for its coffee, but to minimise its tax bill. It is claimed that some of Starbucks’ revenue earned in the UK is transferred to its Dutch subsidiary, which is charged lower rates of tax.

Starbucks is not finding life as easy in Britain as in the USA. It faces competition from home-grown chains such as Costa and Caffè Nero. Accusations of tax avoidance have also damaged Starbucks’ sales to the benefit of its competitors. A survey found that a third less people rated Starbucks as their preferred coffee shop than they did before the tax avoidance allegations were first published.

These issues have forced Starbucks to change its strategy. It has slowed down its expansion plans in the UK and has closed 67 underperforming coffee shops over the past year. It has also tried to repair its reputation by transferring its European headquarters from Amsterdam to London.

(Sources: adapted from http://www.economist.com and http://s21.q4cdn.com/369030626/files/doc_financials/ 2015/Starbucks-Fiscal-2015_Financial-Highlights.pdf)

Extract B

Tax on disposable coffee cups?

Two and a half billion disposable cups are thrown away every year in the UK, that is, seven million every day. Only one in 400 is recycled. The UK Environment Minister has suggested that a coffee cup tax could work in a similar manner to the plastic bag charge. The 5 pence a bag charge has led to an 85% reduction in the number of bags being given out since October 2015. It is estimated that introducing a tax on disposable coffee cups would cut usage by two billion every year. One environment spokesperson, Kate Parminter, said: “We’ve seen how dramatically a small charge has affected public behaviour when it comes to the plastic bags and it is clearly time to extend it to coffee cups. Most people purchase a tea or coffee and throw away the cup without even thinking about it, but a charge would increase our awareness of the environmental impact.”

In response, another MP welcomed her comments but said he did not believe a tax was the solution. He said: “My initial reaction is charging 5p or 10p for the cup will not work. It will not encourage people to take their own cups in if a coffee goes up from £2.60 to £2.65. I suspect a more technological answer is what we need – either the composition of the disposable cups being changed so they’re more easily recyclable, or changing the technology in the recycling.”

Disposable coffee cups contain a plastic coating inside the cups which prevent them from becoming soggy, making them difficult to recycle. There are just two specialist facilities in the UK that have the required equipment to separate plastic from paper for recycling. Almost no recycled paper is used in the production of disposable cups, meaning that some 43 000 trees must be cut down annually to keep up with the demand. CO emissions of around 83 000 tonnes are generated every year for their production.

(Sources: adapted from http://www.independent.co.uk and https://www.cchdaily.co.uk)

Extract C

German city of Freiburg takes action on cutting the use of disposable coffee cups

The ‘Freiburg cup’, made from dishwasher-proof plastic, can be reused hundreds of times. Cups are issued with a one-euro deposit, and can be returned to any of the participating coffee shops in the German city. The cups, which are provided to coffee shops by local councils, are washed in the cafés and bakeries that have signed up to the scheme before being reused. 56 coffee retailers have signed up, and 10 000 cups are being used.

One of the main obstacles facing a wider-reaching scheme, however, is the number of café chains in Germany that are unwilling to use unbranded multi-use cups, particularly Starbucks and McDonald’s. Starbucks already offers a discounted coffee for customers with a multi-use cup, but only if it is bearing the unmistakable Starbucks logo. (Source: adapted from http://www.dw.com)

Extract A

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.