2023 Paper 1 Flashcards
(7 cards)
a) With reference to Figure 1, explain the market structure that best describes the market for UK online streaming services. (5)
Oligopoly as its dominated by a few large firms. Conc ratio for top 2 firms in Q2 2022 is 47.4% indicating that a small number of firms hold significant market share and Amazon prime alone had market share of 25.9% in Q2 2022 which suggests substantial influence over the market. Oligopolistic firms are interdpeendat on one another and also firms engage in non-pricing strats like exclusive content and promotional offers to attract and retain customers
b) With reference to the information provided, assess whether Netflix subscribers behave rationally. (10)
Netflix subsribers behave rationally as they make decisions based on utility maximisation. Many consumers subscribe to services that offer the best value for money,prioritising low prices and better content. Extract says customers cancelled netflix subsriptions due to a decline in value for money and satisfaction with the quality of shows. This shows they are rationally switching to alternarives like Disney + which offers more original content and higher satisfaction rankings
Another example of rational behaviour is budget concious decision making. The rising costs of living has led many households to cut non-essential spending. The extract highlights that 200000 subsribers left Neflix in the first quarter. This shows consumers are making rational choices to save money as they are unsubscribing when its getting more expensive
However some subrsibers may behave irrationally due to habitual behaviour. Many customers continue paying for Netflix through direct debit evene if they no longer use it and some forget to cancel free trials, leading to unintended payments
Netflix also uses nudges like auto-play and next-up features to influence decisions, these tactics encourage bingewatching keeping customers engages longer than they might intend
c) With reference to the information provided, examine the likely numerical value of the cross elasticity of demand between UK online streaming services. (8)
The numerical value of XED is likely to be positive as UK online streaming services are substitutes. Netflix’s market share fell from 15% in Q2 2021 to 4.5% in Q2 2022, while Disney+ rose from 16% to 21.5% in the same period. When the price of a streaming service increases, consumers may switch to cheaper alternatives, increasing their demand.
XED measures the responsiveness of a percentage change in quantity demanded of good x relative to a percentage change in price of good y. Figure 2 shows that Netflix’s premium plan costs £15.99 compared to £7.99 for Disney+ and £8.99 for Amazon Prime. So if Netflix raises prices,it creates an incentive for consumers to switch to cheaper alternatives leading to a higher XED value between streaming services suggesting close substitutes
However, exclusive content like stranger things limits switching meaning XED pay be positive but less than 1 so weak substitutes. But can aslo be considered strong substitutes as since lockdown, rising living costs have forced consumers to choose one platform becasue lack of affordability
More eval
-each provider provides different shows which oils e unique to them so XED may be low so less than 1 =weak
-maybe viewed as stronger substitutes due to cost of living rise where consumers are forced to make a choice due to lack of affordability
d) With reference to Extract C, discuss the likely private and external benefits of viewing educational websites and TV programmes. (12)
Positive externality diagram
Educational websites and TV programmes provide private benefits by helping individuals gain knowledge and skills that improve school performance and career prospects [K]. Students using BBC Bitesize and Oak National Academy may achieve higher GCSE and SAT scores, leading to better jobs and higher future earnings. The extract states that Bitesize attracts two million weekly users, peaking at 3.3 million during exams, showing it is widely used [Ap]. These resources reduce the need for costly revision guides or private tutoring, making education more affordable and accessible [An].
However, measuring private benefits is difficult [E]. Success in careers or earnings depends on many factors, not just online learning [E]. Also, some students may find online lessons less engaging than face-to-face teaching, limiting its effectiveness
Educational websites also create external benefits, as a well-educated population leads to a skilled workforce, higher productivity, and innovation [K]. The government recognises this and has invested £43 million in Oak National Academy, showing its commitment to education [Ap]. With higher skills and productivity, businesses benefit from a more capable workforce, boosting the economy [Ani.
However, there are limits to these benefits [E]. The £43 million spent on Oak National Academy could have funded teacher salaries or classroom resources, which might have had a bigger impact [E]. Also, spending more time online could have negative effects on health, such as obesity or digital addiction, reducing overall well-being
Extra on positive externalities diagram
- market equilibrium Q1 and social optimum Q2
-welfare gain
-MPB+MEB=MSB
EVAL
-difficult to measure
-other factors
-othe problems eg obesity or phone addiction
(e) Using examples from Figure 2 or Extract B, discuss the likely impact of price discrimination on a firm’s profits. Use a relevant diagram to support your answer. (15)
Price discrimination is where monopsonists charge different prices to different groups of consumers for the same service. Netflix charges higher prices in uk 15.99 while offering lower prices in india . The diagram shows how firms segment markets based on PED. In the first diagram price is set higher as consumers are less responsive to price changes. While in the 2nd diagram price is lower to attract more customers, maximisng their total revenue
However, administering price discrimination incurs costs. Netflix must prevent users from accessing cheaper markets, which increases monitoring expenses [E]. Additionally, password sharing could undermine the strategy, leading to lost revenue [E]. If costs outweigh the benefits, profitability gains may be lower than expected
Amazon Prime also practices price discrimination, offering students a lower subscription fee (£4.49) compared to adults (£8.99) [K]. This reflects elastic demand among students, who may only subscribe at lower prices [Ap]. The diagram shows that by charging a higher price (P3) in the combined market, the firm extracts more consumer surplus, increasing total supernormal profit (SP) [An]. This strategy enabled Netflix to become a $100 billion company in just 20 years
However, market conditions may reduce the effectiveness of price discrimination. Increased competition means consumers now have more choice, making demand less inelastic [E]. Investing in exclusive content may be a more effective way to boost profitability rather than segmenting prices alone [E]. If price variation is too extreme (e.g., £4.49 vs £8.99), customers may switch to rivals, undermining long-term gains
Eval
-seepage may share subsceiptions so cost of policing so night that profits don’t rise
- students my not be inelastic as other substitutes= less revenue made as might go from less than proportionate increase in demand to less than
Evaluate possible methods of government intervention to reduce carbon emissions caused by road transport in the UK.
(25)
indirect taxation - e.g. tax on petrol cars = increases price of petrol cars= decreases disposable incomes= demand shifts left for petrol cars na petrol usage = decreases emissions= also encourages drivers to switch to cleaner energy cars eg electric cars or switch to public transport.
EVAL In SR the PED for fuel is relatively inelastic because driving is a necessity for many people. As a result, taxes may raise revenue but have limited immediate effect on emissions. Also fuel taxes are often regressive, disproportionately affecting lower-income households, which may worsen social inequality unless the revenue is recycled into support schemes (e.g., public transport subsidies). Thus, taxation alone is unlikely to fully solve the problem without accompanying measures.
- subsidies on public transport eg TFL= lower COP of public transport, such as cheaper bus, and train services. A subsidy shifts the supply curve rightward, lowering ticket prices for consumers and travel becomes more affordable. Cheaper public transport increases consumer surplus and make public transport relatively more attractive compared to private car use, creating a substitution effect, leading to lower demand for cars and less congestion and reduced emissions.
EVAL
-the effectiveness of public transport subsidies depends on service quality. If buses or trains are infrequent, delayed, or poorly maintained, consumers may still prefer the convenience of private cars even at higher costs so emissions may not fall
-Magnitude of Subsidy:
The impact of the subsidy depends heavily on its size .Small subsidies may produce only marginal changes in behaviour if consumers still perceive public transport as inconvenient or unreliable.
-Market Distortion and Dependency:
Subsidies risk distorting market signals. Firms receiving subsidies may become dependant and so complacent, facing weaker incentives to innovate, improve efficiency. When subsidies are removed firms might cut service quality = distortion
Evaluate possible methods of government intervention to control household energy bills in the UK. (25)
+One method is price regulation through the imposition of an energy price cap.
=By limiting how much firms can charge per unit, the government directly reduces the cost of energy for households, improving affordability and helping to maintain real disposable income. Also prevents firms from exploiting inelastic demand for essential services like heating and lighting, which consumers cannot easily reduce.
Lower bills can increase consumer surplus, and stabilise consumption during periods of high energy prices.
EVAL
If the energy price cap is set too low, = firms may be unable to cover their production costs, leading to reduced profits = suppliers leave market= supply shifts leftwards, reducing the number of competitors. As competition falls, consumers could suffer from less choice, and higher prices in the LR. Also , constant low prices would discourage investment by remaining firms, causing dynamic inefficiency as firms lack incentives to improve efficiency, or invest in renewable energy technologies. Therefore, while a price cap may provide short-term consumer protection, it risks creating significant long-term market failure
+Another method is the government could offer subsidies directly to energy firms to reduce their production costs. A subsidy lowers firms’ marginal and average costs of production, meaning they can supply the same quantity of energy at a lower minimum price while maintaining profitability., this causes t to shift to the right so price falls adn quantity rises
Households benefit from lower energy bills, which raises consumer surplus and improves allocative efficiency, as more consumers can afford essential energy services.
EVAL
However, if subsidies are maintained for too long, firms may become complacent. Knowing that government support will cover rising costs, firms may have weaker incentives to innovate, cut waste, or improve efficiency. This could cause dynamic inefficiency as firms underinvest in renewable technologies which may decrease competitiveness in the long run
Additionally, subsidies have high opportunity costs as funds are diverted from other essential areas such as education, healthcare, or investment in green energy infrastructure.
