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1. Using the information provided, explain the market structure that best describes the hand car wash (HCW) industry in the UK - Edexcel - A-Level Economics A - Question 1 - 2021 - Paper 3
Question 1
1. Using the information provided, explain the market structure that best describes the hand car wash (HCW) industry in the UK. There is little agreement about how ... show full transcript
Worked Solution & Example Answer:1. Using the information provided, explain the market structure that best describes the hand car wash (HCW) industry in the UK - Edexcel - A-Level Economics A - Question 1 - 2021 - Paper 3
Step 1
Using the information provided, explain the market structure that best describes the hand car wash (HCW) industry in the UK.
Answer
The hand car wash (HCW) industry in the UK can be characterized as an oligopolistic market structure. This is due to a few key factors:
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Limited Number of Major Players: Although there are thousands of HCWs, many operate independently or in small groups, leading to limited competition among well-established entities. This allows a few large operators to dominate the market in areas where they exist.
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Non-Price Competition: HCWs often compete on factors other than price, such as service quality, convenience, and customer experience. For instance, businesses might offer loyalty programs or premium services that set them apart from competitors.
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Barriers to Entry: While many people can start an HCW, regulatory or financial barriers can limit entry into this market, especially when it involves complying with environmental laws.
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Consumer Preferences: Many consumers seek the cheapest option available, which can lead to price wars. However, concerns regarding quality and workers' rights may dictate other purchase decisions, thus showing that both price and non-price factors play keys roles in consumer choices.
Step 2
Examine two reasons why the demand for HCWs increases during a period when consumer incomes fail to keep up with inflation (Extract A line 8).
Answer
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Affordable Luxury: When consumer incomes do not rise relative to inflation, individuals still seek affordable luxuries like a hand car wash as a means of convenience. Since people are often busier with their day-to-day activities, and if they perceive a hand car wash offers good value, they are likely to prioritize this expense over more significant purchases.
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Time Savings: With stagnant incomes, consumers may seek services that save them time without overly impacting their budgets. Hand car washes provide a convenient solution that allows them to maintain their vehicle's appearance without sinking much effort, hence increasing demand even in tougher economic times.
Step 3
Discuss the likely effects of changes in the level of migration on firms such as HCWs in the UK. Use a labour market diagram and the information provided to support your answer.
Answer
Changes in the level of migration can significantly impact the HCW industry in several ways:
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Increased Supply of Labor: An increase in migration can lead to a larger pool of workers willing to work in the HCW sector. This can lower labor costs, allowing firms to offer cheaper prices and potentially increasing demand for services.
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Diversity of Services: A more diverse workforce can introduce different skills or knowledge, enabling HCWs to offer a broader range of services or improved customer service characteristics. This could help firms differentiate themselves in a competitive market.
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Labor Market Diagram: In a diagram illustrating the labor market, an increase in migration shifts the supply curve to the right, leading to lower wages. This can stimulate demand for labor, allowing firms to grow and potentially increase output.
Step 4
Evaluate the microeconomic and macroeconomic factors which determine the number of firms in an industry. Refer to HCWs or another industry of your choice.
Answer
Microeconomic factors:
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Cost of Entry: The start-up costs associated with an HCW or any similar business can affect how many firms operate in the industry. Lower initial costs typically encourage the entry of new firms.
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Demand Elasticity: If demand for HCW services is elastic, prices can be adjusted based on competitive pressures, influencing the number of firms that can sustain operations.
Macroeconomic factors:
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Economic Conditions: During times of economic growth, more individuals may seek car washing services, leading to potential higher profit margins and attracting new firms.
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Regulatory Environment: Government policies regarding taxation or environmental regulations can create barriers or incentives for the number of firms entering the market. For instance, heavy regulations may dissuade new entrants, reducing overall competition.
Step 5
Evaluate the microeconomic and macroeconomic effects of increased government intervention in an industry. Refer to HCWs or another industry of your choice.
Answer
Microeconomic effects:
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Cost Structures: Increased government intervention, such as imposing stricter environmental regulations or higher minimum wages, can raise operating costs for HCWs. This, in turn, may lead to fewer firms able to sustain operations or may push some businesses to pass costs onto consumers through higher prices.
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Market Structure: Government policies can also lead to changes in market dynamics. Increased regulation may favour larger firms that can better absorb costs, reducing market diversity.
Macroeconomic effects:
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Overall Economic Impact: If many HCWs shut down due to increased costs, this could lead to higher unemployment in the sector, reducing overall economic activity and affecting consumer spending power.
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Investment Incentives: Conversely, if interventions provide incentives for 'green' practices or improved worker conditions, this could attract socially responsible investments, potentially spurring innovation and growth within the industry.