Photo AI
6 (a) With reference to Figure 1, calculate the three-firm concentration ratio for branded coffee shop chains - Edexcel - A-Level Economics A - Question 6 - 2022 - Paper 1
Question 6
6 (a) With reference to Figure 1, calculate the three-firm concentration ratio for branded coffee shop chains. (b) With reference to Figure 2 and your understanding... show full transcript
Worked Solution & Example Answer:6 (a) With reference to Figure 1, calculate the three-firm concentration ratio for branded coffee shop chains - Edexcel - A-Level Economics A - Question 6 - 2022 - Paper 1
Step 1
With reference to Figure 1, calculate the three-firm concentration ratio for branded coffee shop chains.
Answer
To calculate the three-firm concentration ratio (CR3), we first need to identify the leading coffee shop chains based on the number of shops as presented in Figure 1. The top three chains are:
- Costa - 2681 shops
- Starbucks - 1025 shops
- Caffe Nero - 648 shops
The total number of shops among these three firms is:
Next, we find the total number of branded coffee shops which includes all chains:
Thus, the concentration ratio is calculated as follows:
This indicates that the top three coffee shop chains control approximately 65% of the market, demonstrating significant concentration.
Step 2
With reference to Figure 2 and your understanding of price elasticity, examine two factors that may cause significant changes in the international price of coffee beans.
Answer
Two key factors that may cause significant changes in the international price of coffee beans include:
-
Supply Chain Disruptions: Events such as inclement weather, diseases affecting coffee plants, or logistical issues can drastically affect the supply of coffee beans. For instance, a drought might limit production, leading to reduced availability and consequently a price increase.
-
Global Demand Variability: As consumer preferences change, the demand for coffee can rise or fall. For example, an increase in popularity of specialty coffee drinks can drive up demand, thus increasing the price of coffee beans due to the heightened competition among buyers.
Step 3
With reference to Extract A, assess whether profit maximisation is the case for coffee shops.
Answer
In assessing whether profit maximization is the primary objective for coffee shops based on Extract A, several points must be considered:
-
Rising Costs vs. Revenue: Coffee shops are facing increased costs due to shortages of trained staff and higher rents, which puts pressure on profits. Companies like Costa have expanded aggressively but must balance these costs with their revenue strategies.
-
Market Positioning: The extract highlights how coffee quality is prioritized by consumers. Coffee shops may not focus solely on profit maximization if they adopt strategies to improve consumer experience and brand loyalty. This could lead to higher operational costs that might not instantly translate into higher profits but could benefit long-term sustainability.
Step 4
With reference to Figure 1, evaluate the degree of market power held by coffee shops.
Answer
In evaluating the degree of market power held by coffee shops as seen in Figure 1, several aspects should be considered:
-
Dominance of Leading Brands: The figure shows that Costa, with the highest number of shops (2681), holds considerable market power over competitors like Starbucks and Caffe Nero. Their significant market share enables price-setting abilities and brand loyalty.
-
Competitive Landscape: Despite having strong players, the presence of various other chains (Soho Coffee, AMT, etc.) suggests some level of fragmentation within the market. This indicates that while leading chains possess market power, they must remain competitive and responsive to consumer needs to maintain it.
Overall, while dominant chains hold substantial power, the market's competitive nature tempers it.