This is an essay that achieved A* grade and 80% marks. it is an answer to short questions in the AQA A-level economics paper 1. It is extremely helpful for revision and guidance for an aspiring A/A* grade student
FOR QUESTIONS: https://filestore.aqa.org.uk/resources/economics/AQA-71361-SQP.PDF
1) [(1420-1145)/1145]x100 = 24.02% (2d.p)
2) Profits are costs minus revenue for firms, it is also the rewards for
the risk taken. As evidenced by extract A, it is clear that profits rose
at a faster rate than the household bills in the period of 2009 to
2013 the data shows profit in household bills rose from £10 to £95
between 2009 and 2013 average bills per household rose from
£1145 to £1420 over the period, a greater increase than the rise in
wholesale energy costs in household bills- £615 to £635, this is a
clear indication of exploitation of market share as profits rose at a
faster rate. Furthermore, between 2012 and 2013, wholesale costs
increased by £10 per bill at a time when household bills rose by
£120 and profits by £45 per bill. Therefore, the data in extract A
clearly proves that the energy suppliers have exploited their market
power.
3) Collusion is a non-comparative, sometimes illegal, form of
agreement between rival firms in order to distort the market
equilibrium in their favour. Energy suppliers as stated by Extract B,
operate in an oligopolistic market, this means the market is
dominated by a few firms and they rely on interdependence. Firms
may collude in order to maximise profits where MC=MR. They may
choose to restrict output so that they can charge higher prices to
the consumers. This will raise prices because, collectively they
possess a monopoly power over the consumers. This is seen in the
following diagram:
As a result of collusion,
firms restrict output from Qc
to Qm which forces the
market price to be set
where MC=MR, resulting a
deadweight loss.
However, collusion may also
lead to non-price
competition between firms.
This means that some firms
may wish to make their
services more efficient
through differentiation. Firms can do this through the supernormal
profits gained through collusion. Although firms are bound to adhere
to the prices set, their innovation which causes efficiency, will lead
to consumers paying a lower price in the long run as their goods and
services are more efficient meaning there are less costs and losses.
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