Photo AI
Question 6 (a) With reference to Figure 1, explain one likely reason for the overall trend in the retail prices of gas and electricity - Edexcel - A-Level Economics A - Question 6 - 2018 - Paper 1
Question 6
Question 6 (a) With reference to Figure 1, explain one likely reason for the overall trend in the retail prices of gas and electricity. (b) With reference to Extra... show full transcript
Worked Solution & Example Answer:Question 6 (a) With reference to Figure 1, explain one likely reason for the overall trend in the retail prices of gas and electricity - Edexcel - A-Level Economics A - Question 6 - 2018 - Paper 1
Step 1
(a) With reference to Figure 1, explain one likely reason for the overall trend in the retail prices of gas and electricity.
Answer
One likely reason for the overall upward trend in the retail prices of gas and electricity from 2004 to 2015, as depicted in Figure 1, is the increasing costs of production and supply. These costs may include fluctuations in global energy prices, regulatory costs, and investment in renewable energy sources. As production costs rise, companies generally pass these costs onto consumers, leading to higher retail prices.
Step 2
(b) With reference to Extract A, discuss the likely effectiveness of measures to open up and increase competition in the UK energy market.
Answer
The measures introduced by the Competition and Markets Authority (CMA), such as the creation of a database to help customers switch suppliers, aim to enhance competition in the UK energy market. By making it easier for customers to compare options and switch suppliers, these measures can potentially lower prices and improve service quality. However, the effectiveness may be hindered by customer inertia, where consumers remain with their suppliers despite better options, and the complexity of energy tariffs may still confuse some customers.
Step 3
(c) With reference to Extract B, assess how the regulation of energy suppliers’ profits is likely to affect consumers and suppliers in the energy market.
Answer
Regulating energy suppliers' profits to a cap of 1.25% on revenue can have mixed effects. For consumers, it may lead to lower bills as companies are pressured to operate more efficiently and pass savings on. However, for suppliers, it could limit profit margins and reduce incentives for investment in infrastructure and innovations, potentially impacting service quality. Balancing consumer protection with ensuring suppliers remain profitable is crucial for a sustainable market.
Step 4
(d) 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.
Answer
The low price elasticity of demand for electricity indicates that consumers are relatively insensitive to price changes. In the short run, a −0.35 elasticity suggests that a 1% increase in price results in only a 0.35% decrease in quantity demanded. In the long run, a higher elasticity of −0.85 suggests that consumers may adjust their consumption more significantly in response to price changes as they find substitutes or make long-term changes in energy habits. This shift demonstrates increased sensitivity over time.
Step 5
(e) With reference to Extract C and your own knowledge, discuss possible reasons for the change in price elasticity of demand.
Answer
The change in price elasticity of demand for electricity may be influenced by several factors. First, increased awareness and availability of alternative energy sources, such as renewables and energy-efficient technologies, may lead to more responsive consumer behavior. Furthermore, government policies promoting energy efficiency and sustainability can encourage consumers to be more conscious of their energy use. Lastly, market saturation and maturity in the energy sector may lead to a greater variety of choices, allowing consumers to react more favorably against pricing changes.
Step 6
(f) With reference to Extract C and your own knowledge, discuss businesses and government initiatives to reduce labour mobility in the energy sector.
Answer
To address skills shortages and retain talent in the energy sector, both businesses and the government could implement several initiatives. Businesses might introduce training programs and apprenticeships tailored to develop necessary skills for workers. Additionally, collaborative partnerships between educational institutions and industry can enhance skill development. Governments could incentivize skill retention through tax breaks or grants for companies that actively invest in employee development. Moreover, improving career prospects and awareness among young people about opportunities in the energy sector could also help in minimizing turnover.