2020 Paper 1 (Micro) Flashcards
5 Marker -
(a) Refer to Figure 1. Explain the likely effect of the change in subsidy levels between 2017 and 2018 on rail fares.
Include a supply and demand diagram in your answer.
(5)
A subsidy is a government grant given to producers/consumers, in this case a rise from ‘£277m to £287.9m’ to railway firms, to encourage production/consumption of a good, often because it is a merit good with positive externalities. It is a form of financial assistance, meaning that the cost of production borne by firms should decrease. These lowered costs can be passed onto consumers in the form of lower rail fares, as shown in the diagram from P to P1
Diagram to show a rightwards shift in supply.
8 MARKER -
(b) With reference to Figure 2, examine two possible factors which may have
influenced demand for rail travel since 2008.
(8)
AO2 - Since 2008, rail travel has increased from 50billion rail travel kilometres per year to 65billion passenger kilometres per year
Increased demand could be due to greater prices of car travel. As they are substitutes with a positive XED, increase in price of car travel increases demand of rail travel. (DIAGRAM OF RIGHTWARDS SHIFT IN DEMAND) This has been seen with emission charge in London, disincentivising driving to work in the City.
However, prices of rail travel has increased since 2008, demand pull inflation as seen in diagram ,’, reducing demand
Increased demand by 30% since 2008 could be due to increased migration to commuter towns -> increased number of consumers demanding rail travel to commute into the city.
However, trains in the UK often experience many cancellations and delays, which may have disincentivised people to continue demanding rail travel.
10 MARKER -
(c) Assess whether complete nationalisation of the rail industry might protect employees.
(10)
Nationalisation refers to when the state offers provision of a good that was previously privately owned
Impact could be reduced wage inequality between workers. -> many managers on high salaries in private industries e.g. Average train driver salary £47,705, while Southern Rail boss earned £495,000 in 2016. -> Gov. may cut wages of managers and directors due to reducing ost of state provision due to opportunity cost.
DRAW MAX WAGE DIAGRAM
However, cutting wages of managers -> shortage of supply of specialist managers -> decreased profitability and efficiency -> redundancies in the long run
May be better job security -> State less focused on cutting costs due to no profit incentive -> lower likelihood of redundancy.
However, big assumption -> if gov. has to undergo austerity -> railway spending cuts -> redundancies
12 MARKER -
(d) With reference to Extract A, paragraph 3, discuss whether the rail network can be considered to be a natural monopoly.
(12)
Natural Monopoly is where there is only room in the market for one firm to fully exploit the available economies of scale. For example, the Gas network is often considered a natural monopoly. In a natural monopoly it is often impractical to have more than one producer supplying the good, as fixed costs are so high.
Natural Monopoly Dal Diagram (with LRAC & LRMC).
If more than one firm then they may profit maximise, SNP and higher prices. However, when only one they produce where P=MC (Allocative Efficiency) and subnormal profit is subsidised by the gov with line AB. This maximises consumer surplus.
However, said there is overcrowding on train services. Thus another firm entering the market could alleviate this issue, increasing quality of service for consumers.
Operating one railway track minimses AC -> 2 or more railway companies with multiple tracks is wasteful. e.g. 2 tracks of ‘35000km’ going to same place is pointless -> Greater costs for firms likely to raise prices for consumers. Thus could be concluded that only 1 firm in the market is beneficial, thus is natural monopoly by definition
However, gov. support for competition:’ companies can bid to build new lines to upgrade the railway’, suggests more than 1 firm could reduce AC as ‘upgraded railways’. ,’, not natural monopoly
15 MARKER -
e) Discuss the likely benefits of price discrimination to rail passengers. Use a diagram to support your answer. (15
Price discrimination - charging different prices to different groups of consumers for the same service/good. For example, adult fares vs child railcard fares (16-25), or peak and off-peak services.
Those in elastic market benefit e.g. 16-25 Railcard who pay £69.50 for Ed to Leeds rather than £105.30 adult fare.
DRAW PRICE DISCRIMINATION DIAGRAM
Lower prices -> higher disposable income -> quality of life.
However, those in inelastic market lose out -> falling consumer surplus as firms aware of the inelastic PED -> overall consumer surplus may be lower due to Price Discrim
Firms reinvesting profit from price discrim -> greater quality of service. e.g. luxury seating or wi-fi.
However, assumes profits will be reinvested ->many give profit to shareholders through dividends . Customer service could actually worsen as firms see no need to improve it de o inelastic PED regardless of quality, due to lack of competition
