Cambridge Professional Development

Script F – Paper 4

1a Loyalty cards try to attract consumers by giving out promotions and price reduction to
those who have access to the card. Furthermore, loyalty cards help supermarkets to build
barriers between retailers in order to gain a marketing advantage. Loyalty cards reduce
free competition and prevents consumer from switching between brands as consumers
work to collect points towards the loyalty card of a specific supermarket. Loyalty cards
also provide companies with data regarding consumer preferences.

1b Consumer loyalty will mean that consumers will be relatively inelastic in their demand as
they are unlikely to change retailers. Retailers may be interested in the link between price
elasticity and revenue gained. If demand is relatively elastic, an increase in price will decrease
revenue as consumers demand less, and a decrease in price will lead to an increase in
revenue.

1c Loyalty cards are effective towards retailers as they allow them to gather data on
consumers and their buying preference. 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 the consumer are looking for one-stop shopping factor when
determining their choice of buying comparing to the price factor (18%). In addition, when
consumer has low emotional attachment to the product, 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 aim to achieve maximum satisfaction when
purchasing goods or services. Within the indifference curve analysis, the consumers are able
to rationally compare two goods and the satisfaction. The indifference curve model assumes
that consumers conduct research before making choices in a rational way. They will make
rational choices without having any imperfect market information and not to decide for
any choices under the 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 the 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 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 less 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 for the demand of 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 for higher wages, the firms can simply replace them for cheaper machinery.
Hence trade unions will avoid requesting higher wages. Furthermore, the proportion of total
costs which the wages of trade union members represents 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 increase 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 of 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 the labour. If the demand and supply for labour is relatively inelastic due to the
labour not being easily substituted for capital, the skill required for the job, 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 of
minimum prices have the ability to lead to higher wages and more employment. Whether
imperfect labour markets will always lead to lower wages and higher unemployment can
also depend on if the country is developed or developing. Developing economies tend to have
less members included within a trade union and hence their bargaining power is less effective.

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 performances 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 the low-income countries.

FDI can increase innovation through technology and transfer of expertise. Many MNCs will
bring and set up their own technology to operate within the 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 within 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 on 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 the
low-income country due to increase in job opportunity 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 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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