Cambridge Professional Development

Script F – Paper 4

1a Loyalty cards help supermarkets to build barriers between retailers to gain a marketing
advantage. It prevents consumers from switching between brands and prevents smaller
retailers to survive due to high initial costs. Loyalty cards also cause misunderstanding of
information to consumers leading to imperfect knowledge.

1b Price elasticity of demand refers to the responsiveness of consumers’ demand due to the
change in the price of the product. Consumer loyalty will make the demand of the
consumers become inelastic as they are unlikely to change retailers. When the demand of
the consumers becomes inelastic, supermarkets will increase the price in order to maximize
their revenue and profit.

1c Loyalty cards are effective towards retailers as they allow them to gather data on
consumers and their buying preferences. This will allow the retailers to provide special
discounts and promotions flavoured towards the consumers. On the other hand, price is
not the most significant factor to determine the choice. Based on the article, it has been
found that 43% of consumers are looking for a one-stop shopping factor when
determining their choice of buying compared to the price factor (18%). In addition, when
a consumer has a low emotional attachment to the product, the price will be less of a
determining factor for the purchase of goods. Overall, there is contradicting evidence in
the articles on the effectiveness of loyalty cards which offer price discounts.

1d Consumers act rationality in which they always aim to maximize their satisfaction when
purchasing goods or services. Within the indifference curve analysis, the consumers are able
to rationally compare the price (cost) that they pay and the satisfaction (benefit) that
they gain. They know the combinations between which there is indifference before making
choices in a rational way. They will make rational choices between two goods without
having any imperfect market information and not decide on any choices under a situation
of uncertainty.
3 Imperfect labour market is a market in which there is a single buyer of a good, service or
factor of production. This means that in the labour market, there is only one employer. A
firm will demand workers based on the marginal revenue product theory which is
calculated using MPP multiplied by MR. It is the additional revenue generated for a firm
by employing one more unit of labour.

In a monopsony market, there will be an upward-sloping labour supply curve, as the firm
will have to offer higher wages in order to attract more workers into the industry.

A firm will employ labour up to point E2 where the revenue received by adding an
additional unit of labour is equal to the cost of employing them where MRPL = MCL on the
diagram. Imperfect labour markets can lead to lower wages and higher unemployment.
This is because since there is a single employer, the firm can pay workers a wage level for
what they are willing to work for. This results in the firm paying a wage rate of W3 for
employing E2 number of workers, rather than where demand is equal to supply at the
point W1E1, which would be allocatively efficient. This means that a monopsony will
employ fewer workers from E1 to E2 and pay a lower wage from W1 to W3 in
comparison to a firm operating in competitive conditions.

Trade unions, however, can intervene in order to alter wage levels within imperfect labour
markets. Trade unions may restrict the supply of labour in return for a higher wage level
from the firm. This will lead to higher wages but also higher unemployment.
As trade unions restrict supply from S1 to S2, the wage level would increase from W1 to
W2. However, there is higher unemployment from Q1 to Q2. Trade unions can also
increase the productivity of labour (MPP) by providing additional training or programs in
order to increase the skill of labour. Increasing the marginal physical product of labour
would increase the marginal revenue product, essentially increasing the demand for labour.
The increase in productivity will lead to an increase in the demand for labour (MRP) and
demand shifts from D1 to D2. This will create both higher wages from W1 to W2 and
more employment from Q1 to Q2. However, trade unions may not always be successful in
bargaining for higher wages. The success of trade unions depends on the availability of
substitute factors of production. If it is relatively easy to substitute labour for another
factor of production (like capital for example), this means that as unions demand more
wages, firms will simply replace labour for capital. For example, in manufacturing
industries. If workers demand higher wages, the firms can simply replace them with
cheaper machinery. Hence trade unions will avoid requesting higher wages. Furthermore,
the proportion of total costs which the wages of trade union members represent also
affects the bargaining strength of trade unions. If labour costs form a large proportion of
total costs, bargaining for higher wages will be more difficult compared to if labour costs
only make up a small proportion of total costs. However, labour productivity will also
affect bargaining strengths. If the marginal physical product of each worker is rising, then
it is more likely that firms will agree to wage increases as rising productivity leads to more
revenue that can be used to pay for the wage increases. This is why increasing productivity
through training by trade unions will lead to both increases in wages and increases in
employment.

In addition, government intervention can alter the wage and employment level within an
imperfect labour market.
 If governments choose to introduce a minimum wage level above the market equilibrium
wage at NMW, this will lead to an increase in the wage rate from W1 to NMW but there
will be an increase in unemployment from Q3-Q2. This is because firms will want to
reduce the costs of labour following wage increases by laying off more workers. However,
whether or not minimum wages result in unemployment depends on the elasticity of
demand and supply for labour. If the demand and supply for labour are relatively inelastic
due to the labour not being easily substituted for capital, the skill required for the job, and
the number of qualified people for the job is low, then the introduction of a minimum
wage will not cause much change in the employment level. For example, if there are wage
rises introduced for doctors, there will not be much of a change in employment levels due
to the skill and training required for the job.

In conclusion, imperfect labour markets will not always lead to lower wages and higher
unemployment. Bargaining powers of trade unions and government intervention in
minimum wages are the main factors and have the ability to lead to higher wages and
more employment. For example, in developing economies, government tends to set a lower
level of the minimum wage, and fewer members are included within a trade union, hence
their bargaining power is less effective. Therefore, lower wages and greater
unemployment are likely to happen in the imperfect labour markets. However, in
developed economies, labour union tends to be strong and powerful, and the government
tends to set a higher level of minimum wage. Therefore, higher wages and greater
employment are likely to happen in the imperfect labour market.

5 Foreign Direct Investment is an investment from a country made by MNCs within foreign
countries. Low-income countries are developing countries that are facing fast population
growth, high inequality of income distribution, and are highly reliant on primary and
secondary sectors. Living standards are the level of wealth, comfort, material goods and
necessities available to a socioeconomic class or geographic area.

FDI can lead to an improvement in economic performance such as increases in GDP per
capita which can be linked to an increase in the standard of living. FDI can have a positive
impact on the standard of living in low-income countries. FDI increases employment
within low-income countries as they create more job opportunities for the local people.
This increase in employment will lead to an increase in national income as more
individuals are working and generating output. Therefore, the standard of living increases
as individuals have more disposable income to afford necessities such as housing, food and
clothing. However, through this employment of locals by MNCs, there arises a problem of
the exploitation of local workers. Although MNCs may provide employment for the local
people, they may be provided with very poor working conditions such as sweatshops and
they may be forced to work long hours with very little wage payments. This massively
reduces the standard of living of the local people within low-income countries.

FDI can increase innovation through technology and the transfer of expertise. Many MNCs
will bring and set up their own technology to operate within low-income countries. This
allows the government to potentially utilise this new technology for the development of its
own economy. Furthermore, the local workers can be taught how to operate and use the
new technology and machinery by the MNCs which provides them with a wider range of
skills that can be used in the future. This new innovation and technology can help increase
the overall productivity of the economy. However, there is no guarantee that MNCs will
educate the local population on how to utilise the new technology or machinery. MNCs can
choose to bring along their own experts from their home country to operate the
machinery themselves. This leaves the local workers with manual labour jobs instead of
being taught how to utilise the machines. Furthermore, MNCs may only teach local
workers skills that are only applicable within their own company. This means that they
are not being taught any useful transferable skills that will benefit them in the long run.
For example, local workers may only be taught how to operate specific machines for the
MNC that have no use outside of the industry. This means that they are unable to utilise
the skills outside of the MNC.

In addition, the local government can obtain more tax revenue from MNCs as they apply
indirect taxes to the goods and services produced by them. This will ultimately allow the
government to spend more revenue on essential infrastructure such as healthcare and
education or to correct market failures by providing public goods for example. However, it
is not guaranteed that the government will spend the extra tax revenue on essential
sectors of the economy such as healthcare or education. Governments, especially if they are
corrupt, can spend the extra revenue to gain political advantages.

In the long run, MNCs may remit profits back towards their home country. This means
that the profits generated by FDI are not reinvested into the low-income country. This
prevents any economic growth from occurring within the low-income country.

In conclusion, FDI can be very beneficial towards low-income countries as they provide
new technology, employment and tax revenue. However, FDI can also negatively impact
the low-income country. The contribution of FDI towards low-income countries can highly
depend on the time frame. In the short run, FDI can be seen as being very beneficial
towards low-income countries due to an increase in job opportunities and technology.
 However, in the long run, FDI may present pollution problems and produce more negative
externalities than the benefits that it provides. This will ultimately lower the standard of
living in the long run. Furthermore, we must consider how the standard of living is
measured. If it is being measured through GDP per capita, this will not accurately
represent the living standard within the low-income country. Increases in GDP per capita
may not necessarily mean that individuals within the low-income country are living
better.

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