2.
5 – COMPETITION
Question 1
Answer : C
Question 2
Answer : A
Question 3
Answer : C
Question 4
Answer : B
Question 5
Answer : A - if demand is inelastic then it will lead to a large drop in equilibrium price and only a small increase in
equilibrium quantity.
Question 6
Answer : B
Question 7
Answer : B
Question 8
Answer : C
Question 9
Answer : B
Question 10
Answer : C
Short Questions
Question 11: Explain what is meant by non price competition and give an example. (2 marks)
Ans: Non-price competition is where firms compete for customers in ways other than by having the lowest price.(1) e.g. service, quality of
product etc.(1) Allow any suitable example.
Question 12: Explain one way a business at market entry stage may compete. (2 marks)
Ans: They might spend a large amount on advertising(1) because they are completely unknown and need to create awareness of their
product.(1)
They might offer low prices or even product giveaways(1) in order to attract new customers.(1)
Question 13: Explain what an oligopoly is and give an example of one. (2 marks)
Ans: An oligopoly is a market where a small number of firms control the majority of the market share.(1) e.g. UK Supermarkets or UK
Banks(1) Allow other suitable examples.
Question 14: Draw a supply and demand graph showing the effect of increased competition. (2 marks)
Ans: 1 mark for showing a right shift of supply, 1 mark for all the labels.
Question 15: Explain what monopoly power is. (2 marks)
Ans: When one firm controls 25% or more of their market(1) they acquire some of the influence normally attributed to a monopoly.(1)
Case study/Scenario
Question 16: Trevor's Taxis is a taxi firm based in the village of Stonding. You can get other taxis from the nearby town of Swanbridge but
only to and from Swanbridge. For trips between Stonding and its neighbouring villages Gunderidge, Hobden End and Fallstead Trevor's
Taxis have a monopoly. These routes are often busy on a Friday and Saturday evening when people often travel between the towns to meet
up with friends.
Trevor is thinking about investing in another two taxis but is concerned about the possibility of another firm setting up in the area.
Analyse the effects on Trevor's Taxis of a new taxi firm operating in the same area. (6 marks)
Ans: Trevor may lose passengers to the new firm{AO1} leading to less demand for his taxis.{AO2} This could lead to lower revenue{AO3a}
which may have to make him reconsider his expansion plans.{AO3a}
Trevor may have to decrease his fares in order to attract passengers{AO2} This will mean less revenue if demand is inelastic.{AO3a}
Additional notes:
There are a number of other factors you might have analysed here including
He may have to increase advertising, or have to improve service or compete for drivers with the new firm, all of which would lead to
increased costs and so lower profits.
Question 17: Evaluate the extent to which the locals in the area benefit from Trevor's Taxis being a monopoly. (6 marks)
Ans: Trevor's Taxis will be guaranteed a lot of customers and make a good profit.{AO2} It mentions that Trevor is thinking of investing in
more taxis which would mean shorter waits for passengers wanting a taxi{AO3a} and a better quality of service.{AO3a} However Trevor
may realise that his PED is more inelastic because customers have no choices and he may charge higher prices{AO3b}. This means
customers would have less money to spend on other wants.{AO3b}
If Trevor uses his profits to invest in more taxis and people get a better service they may not mind paying a little bit more. However the
extent to which he raises prices if he does would have an effect on whether his customers benefit or not.{A03b}
Additional notes:
Make sure you are in context. Here I have talked about passengers and fares and mentioned his desire to invest in new taxis mentioned in
the scenario.
It's an evaluate question so you are looking to cover both sides of the argument.
The concluding statement should say in what circumstances it will benefit customers and when it won't not whether you think it will or
won't.
