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6 (a) With reference to Figure 1, explain one likely reason for the overall trend in the real prices of gas and electricity - Edexcel - A-Level Economics A - Question 6 - 2018 - Paper 1

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6 (a) With reference to Figure 1, explain one likely reason for the overall trend in the real prices of gas and electricity. (b) With reference to Extract A, discus... show full transcript

Worked Solution & Example Answer:6 (a) With reference to Figure 1, explain one likely reason for the overall trend in the real prices of gas and electricity - Edexcel - A-Level Economics A - Question 6 - 2018 - Paper 1

Step 1

With reference to Figure 1, explain one likely reason for the overall trend in the real prices of gas and electricity.

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Answer

One likely reason for the overall trend in the real prices of gas and electricity from 2004 to 2015 is the increase in demand for energy. As the economy expanded during this period, more households and businesses required energy, which led to upward pressure on prices. Additionally, fluctuations in global energy markets, including the cost of commodity inputs like gas and oil, would have contributed to increasing retail prices.

Step 2

With reference to Extract A, discuss the likely effectiveness of measures to open up and increase competition in the UK energy market.

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Answer

The measures proposed by the CMA, such as creating a database to assist consumers in switching suppliers and making it easier to compare energy usage, are likely to increase competition in the UK energy market. By facilitating informed choice among consumers, these measures can empower users to seek better deals, potentially driving down prices. However, the effectiveness may be limited by the inertia of customers who may still prefer to stay with familiar suppliers despite having options. Additionally, new entrants to the market must overcome significant barriers to establish credibility and trust with consumers.

Step 3

With reference to Extract B, assess how the regulation of energy suppliers' profits is likely to affect consumers and suppliers in the energy market.

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Regulating energy suppliers' profits to a cap of 1.25% can benefit consumers, as it prevents excessive pricing and promotes affordability of energy bills. For consumers, this means potentially lower prices in a market where energy costs were previously rising sharply. However, suppliers may view this cap as limiting their profitability, which could discourage investment in infrastructure and innovation that is essential for maintaining supply reliability. In the long run, it could lead to a reduction in competition if companies exit the market due to unsatisfactory returns.

Step 4

With reference to Extract C and your own knowledge, examine two possible reasons for the change in price elasticity of demand.

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Answer

Price elasticity of demand for energy may change due to factors such as the availability of substitute goods and changes in consumer behavior. First, if more renewable energy options become available, consumers may have alternatives to traditional gas and electricity, increasing elasticity as they can switch providers more easily. Secondly, government initiatives aimed at promoting energy efficiency can lead to a change in consumer consumption patterns, making demand more responsive to price changes as consumers become more aware of their usage.

Step 5

With reference to Extract C and your own knowledge, discuss businesses and government initiatives to reduce labour mobility in the energy sector.

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Answer

Businesses can collaborate with educational institutions to develop tailored training programs that meet the specific needs of the energy sector, thereby encouraging workers to develop niche skills that are in high demand. Government initiatives, such as providing incentives for continuous professional development and facilitating apprenticeships in the energy sector, can help retain talent. Additionally, regulatory measures to ensure job security in the midst of industry changes can stabilize employment within the sector, thereby reducing labour mobility.

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