2016 H2 Economics Paper 2 Essay 3: Suggested Answers
How to use these essay answers. The responses below, including the part (a) answer, are structured guides to the requirements of the question, the content, analysis and evaluation a strong answer must cover, rather than full essay prose with a written introduction and conclusion. Use them to see what to include and how to build the argument, then write it up in your own continuous prose, adding your own introduction and conclusion.
Using the Australian petrol market, this essay explains why less competition can lead to higher and more stable prices, then asks whether differences in competition are the main reason for the gap between rural and urban retail petrol prices.
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Explain why less market competition might lead to higher and more stable prices.
Markets with fewer competitors tend to have higher and more stable prices because firms hold greater market power and face less pressure to cut prices. This is typical of oligopoly, where a few large firms dominate, barriers to entry are high, and firms are mutually interdependent.
Higher prices. With limited competition, firms become price makers rather than price takers. High barriers to entry, product differentiation and brand loyalty reduce the price elasticity of demand, so firms face a relatively inelastic demand curve and can charge above the competitive price without losing many customers. In the petrol industry a small number of firms dominate, allowing prices to stay above the perfectly competitive level. By contrast, in more competitive structures such as monopolistic competition, many firms and low entry barriers compete prices down towards normal profit in the long run.
More stable prices. Limited competition also brings price stability, often explained by the kinked demand curve. Firms in an oligopoly are mutually interdependent. If one firm raises price, rivals are unlikely to follow, so it faces highly elastic demand above the current price and loses many sales. If one firm cuts price, rivals match it to protect market share, so the gain in quantity is small and revenue may fall. This asymmetric response creates a kink in the demand curve and a discontinuous marginal revenue curve, making firms reluctant to change price even when costs move. Firms therefore prefer non price competition such as branding, giving price rigidity and greater stability.
Link weak competition and inelastic demand to higher prices, and use the kinked demand curve to explain price rigidity.
Tests: Oligopoly, Barriers to entry
Assess whether differences in the level of competition are likely to be the main reason for differences in the retail prices of petrol in rural and urban areas of Australia.
- Frame the rural and urban price gap and set up competition as one possible cause among several.
- Build the competition argument, contrasting the number of firms and the elasticity of demand in the two areas.
- Introduce economies of scale as a distinct cost based cause and explain how it reinforces the gap.
- Introduce demand and supply factors such as distance, transport costs and turnover as a further cause.
- Weigh competition against the cost and demand factors over the short run and the long run.
- Reach a judgment on whether competition is the main reason or only part of the picture.
This part is gated. The full model answer with the worked cost and market structure analysis and the evaluation, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Tests: Oligopoly, Economies of scale
Questions students ask
Where can I get the full worked answers to the 2016 H2 Economics paper 2 essay 3?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2016 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How should I use these suggested essay answers?
Treat them as a guide to the requirements of the question, the content, analysis and evaluation a strong answer must cover, not as full essay prose. Write the essay up in your own continuous prose, with your own introduction and conclusion.
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