Unit 1 ECON1 - Economics: Markets and Market Failure
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AQA A-level Economics
This document contains answers to exam questions on the privatisation of the Royal Mail from an AQA Economics paper and details answers to the calculation and data analysis questions as well as a model answer to a 9 mark question on how increased costs affect monopoly profit.
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Unit 1 ECON1 - Economics: Markets and Market Failure
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Privatisation of Royal Mail Thursday 17th October 2019
Q1. Using the data in Extract A (Figure 1), calculate the three-firm concentration ratio in the
UK parcels delivery market. Give your answer, as a percentage, to one decimal place. (2
marks)
32.8 + 10.4 + 10.3 = 53.5%
Q2. Explain how the data in Extract A (Figure 2) show that the UK parcels delivery market is
displaying dynamic efficiency. (4 marks)
Dynamic efficiency is achieved when a firm reduces it's production costs through implementing
new production processes.
In 2008, the UK parcels delivery market employed almost 60,000 people, and by 2014 it
employed around 45,000 people, a massive reduction in employees. The amount of parcels
needed to be delivered would not have decreased by this much in comparison, so it is clear that
the process has become more efficient so requires less workers.
Additionally, the data shows that in 2008, the revenue made per employee was just over
£150,000, and by 2014 it had increased massively to almost £300,000 per employee. This also
suggests that the market has continued to bring in the same amount of revenue if not more and
continued to be successful despite having a smaller labour force, which suggests that
production processes have improved.
Overall, this extreme improvement in production over a small amount of time suggests that the
industry is displaying dynamic efficiency.
Q3. Extract B states that ‘The Universal Postal Service obligations require Royal Mail to deliver
letters and parcels to all parts of the country 6 days a week.’ With the help of a monopoly
diagram, explain how the Universal Postal Service obligations are likely to affect Royal Mail’s
costs and profits. (9 marks)
Since it's privatisation the Royal Mail has become the dominant firm in the parcels delivery
market, as shown by it's 32.8% market share in 2015 (Figure 1) and thus would be able to exert
monopoly power in a free market. A monopoly is a market structure in which there is a single
seller with a unique product, who enjoys the ability to set prices above marginal cost as they
face no competition and there are no close substitutes. Whilst Royal Mail does not have total
market control, in reality if a firm has over 25% market share then it is able to exhibit similar
abilities to a monopoly firm.
UPS is a regulatory body that aims to ensure that the parcels delivery service is operating fairly.
In the UK heavy privatisation of state-owned assets in the 1980s was arguably very successful
in improving the efficiency of certain industries, so in privatising the Royal Mail in 2013 the
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