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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
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 Extract A, disc... show full transcript
Worked Solution & Example Answer: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
With reference to Figure 1, explain one likely reason for the overall trend in the retail prices of gas and electricity.
Answer
The overall trend in the retail prices of gas and electricity as shown in Figure 1 indicates an increase over the years, particularly from 2010. One likely reason for this trend is the increasing costs of production and distribution influenced by factors such as higher energy input costs and regulatory fees. Additionally, demand pressures during colder months might lead to elevated prices as seen in the observed data, which can trigger a rise in retail prices.
Step 2
With reference to Extract A, discuss the likely effectiveness of measures to open up and increase competition in the UK energy market.
Answer
Extract A highlights several measures implemented by the Competition and Markets Authority (CMA) to promote competition in the energy market. The creation of a switching database aims to assist consumers in changing suppliers, thus enhancing competitive dynamics. However, while these measures are expected to encourage competition, their effectiveness may be limited by factors such as consumer inertia and lack of awareness. Moreover, the existing market structure, dominated by a few large suppliers, poses a challenge to new entrants, which might hinder the overall impact of these measures.
Step 3
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
According to Extract B, regulation could cap profits, shifting the financial burden onto energy suppliers to maintain lower prices for consumers. This could benefit consumers in the short run by ensuring more predictable pricing. However, suppliers may respond by cutting corners on service quality or investments, which could negatively impact consumers over time. Furthermore, if profit margins become too slim, it may deter new investment in the energy sector, potentially compromising future service reliability and innovation.
Step 4
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 price elasticity of demand (PED) indicates how responsive the quantity demanded of electricity is to price changes. A PED of -0.35 in the short run suggests that demand is inelastic, meaning that consumers do not significantly reduce their electricity consumption when prices rise. In the long run, with a PED of -0.85, demand becomes more elastic, suggesting that consumers will adjust their consumption habits more in response to price changes. Understanding these elasticities is vital for suppliers when considering pricing strategies. As a result, small price increases may not significantly deter demand in the short term but could foster changes in consumer behavior over a longer time frame.
Step 5
With reference to Extract C and your own knowledge, discuss businesses and government initiatives to reduce labour mobility in the energy sector.
Answer
Extract C indicates that the energy sector struggles with skill shortages and workforce aging, leading to initiatives aimed at reducing labour mobility to stabilize the workforce. Businesses may focus on improving job satisfaction and working conditions to retain employees. Government initiatives could include training programs and incentives for local employment to encourage workers to stay within the sector. Additionally, partnerships with educational institutions can help align training with industry needs, mitigating the skills gap and reducing turnover. Addressing labour mobility is critical to ensuring a knowledgeable, stable workforce that can adapt to evolving demands within the energy sector.