Contestable Markets (Micro and macro impact and… | tutor2u Economics
Practice exam questions

Contestable Markets (Micro and macro impact and evaluation)

  • Levels: A Level
  • Exam boards: Edexcel

Here is an example of an approach to an Edexcel paper 3 question focusing on the impact of an increase in contestability in markets.

The essay-style question was:

Evaluate the microeconomic and macroeconomic impact of increased contestability in UK industries such as telecommunications, food manufacturing and food retailing. (25)

Reminder of technique for Edexcel Paper 3 Economics

25 marks in total – all levels based (25-30 minutes to write)
One minute per mark rule is a good one to follow
16 marks for KAA 
  • 4 Knowledge
  • 4 Application (data supported paragraphs)
  • 8 Analysis (using chains of reasoning)
9 marks for Evaluation
  • Critiquing a point or offering a counter-point
  • Answer must cover both micro and macro
  • Refer to all aspects of the question
  • Signpost when you are making a point or an evaluation
These are “essay-type questions” rather than full essays
No introduction or conclusion is necessary
Each evaluation should be given a separate paragraph

Micro point 1

One micro effect of an increase in contestability is that prices for consumers may fall as a result of greater competition between suppliers. A good example would be contestability between broadband suppliers which involves better deals offering a range of choices for consumers. Lower prices then increase the level of consumer surplus.

However a possible consequence is a fall in industry profits which might then affect how much money  broadband firms can invest in expanding network capacity & speed of service for their customers

Micro point 2

A second micro impact of competition between firms in food retailing is that firms have to become more productively efficient by controlling their unit costs. A lack of competition can lead to X-inefficiency including higher levels of waste and businesses operating with higher levels of fixed cost. This lowers profits and might lead to lower share prices.

However if there are more firms competing in a market, then the scope for each firm to utilize internal economies of scale could be limited in the long run. This can lead to higher unit costs and prices

Macro point 1

One macro effect of increased contestability in an industry such as food manufacturing might be that a rising share of the market comes from imports. If food imports rise, this will cause a deterioration in the trade deficit and the current account of the balance of payments and thus cause a fall in AD. Food imports are a leakage from the circular flow.

However competition from food imports is an incentive for domestic manufacturers to improve their dynamic and productive efficiency. Trade on the basis of comparative advantage improves welfare.

Macro point 2

An increase in contestability in industries can lead to a lower rate of consumer price inflation which helps the Bank of England meet the 2% inflation target. A lower rate of inflation then allows the MPC to keep interest rates at current historically low levels which in turn is a support to consumer and business confidence and helps maintain competitiveness.

That said, the drive to control costs in a contestable market might lead some firms to invest more in robotics/automation which might cause job losses and perhaps a rise in structural unemployment.

Subscribe to email updates from tutor2u Economics

Join 1000s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning.

You can also follow @tutor2uEconomics on Twitter, subscribe to our YouTube channel, or join our popular Facebook Groups.

Job board

Economics Contributor

tutor2u, On-line

Teaching Vacancies

Recruitment

Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›

Advertise your teaching jobs with tutor2u

A New Home for tutor2u Resources

We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores.

For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

Simply add the required resources to your cart, checkout using the usual options and your resources will be available to access immediately via your mytutor2u account.