Economics · May / June 2016 · Paper 21 · Question 1
2281
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The question as text
Changes in car production Car production is changing. Until recently car manufacturing firms had the most power in the market. Now, however, firms producing car parts are gaining more power. The markets for both cars and car parts consist of a relatively high number of firms that range from very large to small. In 2014 the market was dominated by sixteen major car firms, each selling more than one million cars a year. In that year there were ten major car part firms and these were gaining more power over the car producers. The world’s largest car part supplier by revenue claims to supply at least one of the parts in every car sold throughout the world. The firm has grown as a result of mergers and is moving towards total control of the market. It is seeking to build up high barriers to entry and to become the sole producer. The ten largest car part firms accounted for 63% of the total output of car parts in 2013, producing US$250 billion of car parts in that year. These ten firms now have the ability to build 85% of a car’s internal systems, leaving the car manufacturing firms to make little more than the engine. Car production is increasing in a number of developing countries but declining in some developed countries. Car manufacturing increased in the UK between 2013 and 2014, but the industry had been experiencing problems before 2013. In 2008 the average wage of car workers fell. In that year the UK experienced a recession. Real wages in the UK car industry for the lowest paid workers also declined after 2008 and the number of workers employed fell between 2008 and 2012. This was despite output per worker increasing, partly because some less skilled workers lost their jobs and the industry replaced some of these workers with capital equipment. Buyers of cars often borrow money from commercial banks to make their purchases. In some cases buyers use their savings, which may be withdrawn from commercial banks, to buy cars. The behaviour and performance of car firms are influenced by the economic system of the country they are producing in. In countries with a market system there is likely to be greater consumer sovereignty. Car firms in such countries may be more likely to innovate, bringing in new methods of production and developing higher-quality products.
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1(a)[2]
Using information from the extract, identify two characteristics of monopoly. [2]
High barriers to entry and exit (1)A sole producer (1)Gain total control of the market (1)1(b)[3]
Calculate the total output of car parts in US$ in 2013. [3]
US$396.8 bn Accept US $396 bn or US $397 bn or US $3.968253968x1011 (3)Correct working i.e. US $250 bn x 100/63 (2)US$250 bn is 63% of the total (1)1(c)[2]
Explain, using information from the extract, why wages in the UK car industry fell in 2008. [2]
A recession occurred in the UK in 2008 (1). Falling GDP may reduce demand for cars (1). Demand for labour falls (1)1(d)[4]
Using information from the extract, explain two merits of a market system. [4]
Consumer sovereignty (1)consumers having the power to decide what is produced / firms allocate resources according to consumer demand (1)
results in greater choice for consumers (1)
Firms respond to price changes (1)bring in new methods of production (1)
may lower costs / are more efficient / competitive (1)
May encourage innovation (1)improve quality (1)
due to the profit motive (1)
1(e)[4]
Analyse two reasons, referred to in the extract, why a decrease in employment may increase labour productivity. [4]
Less skilled workers may lose their jobs (1)they may have relatively low productivity (1).
The industry may become more capital intensive (1)machines replacing workers / more capital equipment per worker enables workers to produce more output (1).
1(f)[5]
Discuss whether a declining industry should be protected by the government. [5]
Up to 3 marks for why it should:
Will save jobs / prevent unemployment (1)this can prevent living standards falling (1)
prevent government spending on unemployment benefits rising (1)
prevent loss of tax revenue (1)
give workers time to find other jobs (1)
Will stop real GDP / output falling (1)avoid a recession / fall in economic growth (1).
Will assist exports / reduce imports (1)positive effect on Balance of Payments on current account (1)
Industry may be a strategic industry (1)such industries are important for the survival of the country (1). Up to 3 marks for why it should not:
An inefficient use of resources (1)involves an opportunity cost (1)
resources would be better devoted to infant industries / expenditure on health and or education (1).
May provoke retaliation (1)other countries may impose trade restrictions (1)
this may raise the cost of other firms/make it difficult for them to sell abroad (1).
Industry becomes too dependent on government support (1)making it less competitive (1)
1(g)[4]
Using information from the extract, explain two functions of commercial banks. [4]
Provide loans (1)interest will be charged on these / enable households and firms to borrow (1).
Enables customers to save (1)provides a secure place/pays interest (1).
1(h)[6]
Discuss whether small car manufacturing firms can compete with large car manufacturing firms. [6]
Up to 4 marks for why they might:
Small firms can specialise in luxury models (1)cater for a small market (1). May provide specialist parts for bigger firms (1)
Small firms can provide a specialised product (1)build cars to suit individual customer needs (1).
Small firms may be subsidised / have taxes reduced by the government (1)reduce costs of production (1).
Large firms may experience diseconomies of scale (1)example (1)
giving small firms a cost advantage (1).
May experience external economies of scale (1)example (1). Up to 4 marks for why they might not:
Average costs may be higher (1)as large firms may experience economies of scale (1)
example (1).
Large firms may have brand loyalty (1)well known/high spending on advertising (1)
high spending on research and development (1)
Large firms may force small firms out of the market (1)by lowering prices (1)
NOTE: MAX of 4 marks if no mention of car manufacturing.
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