2018 Flashcards
(8 cards)
a) With reference to Figure 1, explain one likely reason for the overall trend in the real price of gas and electricity. (5)
Real prices of gas and electricity have risen since 2004 with electricity rising from an index of 70 [Api to an index of 119 in 2016 [Ap]. One reason for this could be an increase in demand. A rise in incomes means that demand for normal goods such as electricity rises putting an upward pressure on prices
With reference to Extract A, discuss the likely effectiveness of ‘measures to open up and increase competition’ in the UK energy markets (12)
The measures introduced by the Competition and Markets Authority
(CMA) aim to increase competition in the UK energy market by addressing imperfect and asymmetric information and reducing barriers to entry [K]. The extract states that 70% of customers of the six largest energy firms remain on expensive standard rates, despite potential savings of over £300 per year [Ap]. The introduction of a customer database will allow rival suppliers to directly contact these customers, making them more aware of potential savings and increasing competitive pressure on established firms
Another measure is the installation of smart meters, which gives customers real-time information about energy usage and prices [K]. The extract highlights that new entrants have already gained 12% market share, suggesting that improved market information could further encourage switching [Ap]. By reducing asymmetric information, smart meters force suppliers to be more price-competitive, increasing the effectiveness of competition
However, many consumers may still not switch to cheaper tariffs despite having access to better information [E]. Issues such as computation difficulties, habitual behaviour, and consumer inertia may limit the effectiveness of these measures, meaning that many customers remain on high-cost standard tariffs
Additionally, the temporary price cap for vulnerable prepaid meter customers may have unintended consequences [E]. While it protects certain customers from high energy costs, it could reduce the incentive for firms to enter the market if they fear regulatory intervention in pricing, limiting competition in the long run
««Expert tuition version
With reference to Extract B, assess how the regulation of energy suppliers’ profits is likely to affect consumers and suppliers in the energy market. (10)
The Chairman of the CMA
recommended a profit cap of 1.25% of total revenue [Ap]. This is a limit on profits as a percentage of total revenue [K]. Supporters of profit caps argue that they are necessary to protect consumers from being exploited in concentrated markets where supernormal profits are being earned [An]. A profit cap is likely to lower prices [K] because it forces firms to make less profit, thereby reducing prices. This would make consumers better off in real terms and increase consumer surplus [An]. This could incentivise consumers to use more energy [K]. As the price is lower, there is an extension in demand, so consumers may use more gas and electricity to power devices in their homes
However, households might not enjoy lower prices [E]. As firms face a cap on profits, rather than reduce prices they might become less effective at keeping costs low. As they become more X-inefficient, their profits fall even though price remains
unchanged. [E] As firms have less profit to reinvest, they may be less dynamically efficient, and so prices may rise in future [El L2 E
The regulation is likely to harm energy firms because their profits will fall [K] from “7% of average revenue” to 1.25% [Ap]. Withless profit, there will beless retained profit to reinvest [An].
With lower investment, there is less potential for future growth and future profitability [An]. Furthermore, with less profit, there would be lower dividends to shareholders and it is likely that share prices of energy firms would fall However, energy firms may not suffer too much [E] because many of them are multi-national companies that may use transfer pricing. They may avoid paying tax on profits in the UK, but declare their profits in a country without the profit cap
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.
(d) With reference to Extract A and your own knowledge, examine two possible reasons for the change in price elasticity of demand for electricity over time (8)
One reason is that consumers have existing contracts [K]. Demand is price inelastic in the short term with a value of -0.35 but becomes less price inelastic in the long run with a value of -0.85 [Ap]. When prices rise, the percentage fall in demand is proportionately smaller in the short run as consumers are locked in to contracts so are unable to switch
Another reason is consumer inertia
Extract A says “customers could each save over £300 a year by switching to a cheaper deal but appear reluctant to do so” [Ap]. In the short run consumers are unlikely to switch to save time, preferring convenience over price [An]
However, not all households are the same. Some consumers may finish their contracts sooner than others whilst some may have stronger habits [E]. Younger consumers may be less habitual than older ones so they might be more responsive to the change in price even in the short run
With reference to Extract C and your own knowledge, discuss policies businesses and government might implement to reduce labour immobility to benefit the energy sector (15)
One way to reduce labour immobility in the energy sector is to increase investment in training programmes to develop a skilled workforce [K]. Firms could expand apprenticeship schemes or offer training subsidies to encourage workers to develop the technical skills required [Ap]. By increasing the quantity and quality of human capital, businesses can fill vacancies and improve productivity in a highly regulated industry [An].
Government intervention through tax breaks for firms investing in training could further reduce skills shortages ir gas and electricity industries, where 29% of employers report unfilled vacancies
However, training programmes involve high costs for both businesses and the government [E]. Training takes time, particularly for specialist roles, meaning shortages may persist in the short term [E]. Additionally, the quality of training matters-if it fails to meet industry standards, productivity gains may be limited [E]. Level 3 E
Another approach is recruiting skilled workers from overseas through international recruitment campaigns or trade journals [K]. This provides an immediate supply of labour, reducing delays in filling vacancies [Ap]. The government could introduce visa schemes to attract skilled workers, particularly in STEM fields where shortages are severe [An]. Retaining an ageing workforce through higher wages, flexible working hours, or part-time contracts could also help prevent knowledge loss as two-thirds of the workforce is aged over 50
However, recruiting from overseas comes with challenges. Brexit may have restricted access to international workers, while language barriers and qualification differences could limit their effectiveness [E]. Similarly, retaining older workers may lead to lower productivity due to declining health, and this only delays the problem rather than solving it
««_space;Same Q from expert tuition
Gov
-can invest in training and education programmes= helps reduce occupational immobility
-by providing education schemes= can develop skills necessary to take up jobs in that sector to fill shortages
-EVAL- time lag
Businesses
-Provide housing subsidies= improved geographical immobility if labour
-Incentivises more ppl to move to where there are job shortages= attracts and recruit skilled workers from overseas
EVAL
- family ties
- language barriers
