Competition and the labour market (1.2.4-1.2.6)

Pearson Edexcel International GCSE in Economics (4EC1), specification Issue 3, February 2026. This topic covers spec sections 1.2.4–1.2.6 in full: business competition — competition, monopoly and oligopoly (10 rows); the labour market (6 rows); and government intervention (4 rows). The labour model is supply $W = 4 + 0.02L$ against demand $W = 16 - 0.04L$; the monopoly model is AR $P = 70 - Q/2$ with MC $P = 10 + Q/2$.

Must-know for this topic:

Competition 竞争 advantages (1.2.4a): EFFICIENCY (firms must cut costs to survive), CHOICE, QUALITY, INNOVATION and LOWER PRICES for consumers; the economy gains allocated resources. Disadvantages: duplicated capacity, and firms may cut corners to undercut. Large firms exploit economies of scale, branding and finance, but can suffer diseconomies and lose touch with customers; small firms are flexible and personal but lack scale and bargaining power (1.2.4b). Growth of firms (1.2.4c): government regulation (constrains or enables), access to finance, economies of scale, the desire to spread risk, and the desire to take over competitors. Firms stay small (1.2.4d): the size of the market, a NICHE market's nature, lack of finance, and the entrepreneur's aims (control, lifestyle).

A monopoly 垄断 is a market dominated by one firm (1.2.4e) — features: one business dominates, unique product, a PRICE-MAKER, and barriers to entry: legal barriers, patents, marketing budgets, technology, high start-up costs (1.2.4f). Advantages (1.2.4g): economies of scale may lower unit costs, dynamic innovation from large profits, and a stable supplier. Disadvantages: higher prices and lower output than competition, restricted choice, possible X-inefficiency, and little pressure to innovate. Model: with AR $P = 70 - Q/2$ and MC $P = 10 + Q/2$, the monopolist sets MR $= 70 - Q$ equal to MC: $Q_m = 40$, price $= 50$ on the AR curve; with ATC $= 30$ at that output, supernormal profit $= (50 - 30) \times 40 = 800$ per day — against the competitive benchmark $(60, 40)$, a deadweight loss of 200.

An oligopoly 寡头垄断 is a market dominated by a few large firms (1.2.4h) — features: few large firms, DIFFERENT products, barriers to entry, COLLUSION (against the consumer's interest), non-price competition and price competition (1.2.4i). Advantages (1.2.4j): choice through differentiation, innovation funded by large profits, and economies of scale. Disadvantages: collusion and CARTELS fixing high prices; PRICE WARS that destroy profit and can drive firms out.

The demand for labour (1.2.5a) is DERIVED from demand for the final product; it is affected by the availability of substitutes (machines) and the productivity of the workforce. The supply of labour (1.2.5b) responds to population size, migration, the age distribution, retirement and school-leaving ages, female participation, skills and qualifications, and geographical/occupational mobility. The QUANTITY and QUALITY of labour matter to business (1.2.5c); education and training raise human capital 人力资本 and labour quality (1.2.5d). The labour diagram (1.2.5e): supply $W = 4 + 0.02L$ meets demand $W = 16 - 0.04L$ at $(200, 8)$ — wage 8, employment 200; a shift in demand (product demand rising) raises both; a shift in supply (migration) raises employment and lowers the wage. Trade unions 工会 bargain for better working conditions and higher wages (1.2.5f) — pushing above equilibrium creates unemployment the same way a minimum wage does.

Policies for externalities (1.2.6a): Taxation 征税 (raises the private cost towards the social cost), subsidies 补贴 (internalise external benefits), fines 罚款, regulation 监管 and pollution permits 污染许可证 (capping total emissions and letting firms trade). Each has advantages (targeted, revenue-raising, market-based) and disadvantages (hard to set correctly, enforcement costs, regressive effects) (1.2.6b). Competition regulation (1.2.6c): to PROMOTE competition, LIMIT monopoly power, PROTECT consumer interests and CONTROL mergers and takeovers. Labour-market intervention (1.2.6d): the minimum wage 最低工资 exists to prevent exploitation and reduce in-work poverty; at wage 9 the model gives $L_d = 175$ against $L_s = 250$ — 75 workers unemployed — so its advantage (higher pay for the employed, poverty reduction) trades against disadvantages (unemployment, higher business costs, price rises).

Extract. The UK's National Living Wage, the legal minimum hourly wage for workers aged 21 and over, rose from £11.44 in April 2024 to £12.21 in April 2025. The government said the rise would help about 3 million low-paid workers and reduce in-work poverty. Many cafés, shops and care homes employ workers on the minimum wage. Some owners said they would raise prices, cut staff hours or use more self-service machines, because employers' national insurance payments also rose in April 2025. Others said better pay would help them keep staff and reduce the cost of training new workers.

Questions

• (a) Calculate the percentage increase in the National Living Wage between April 2024 and April 2025. [2]
• (b) A café employs 10 workers on the minimum wage for 30 hours a week each. Calculate the increase in its weekly wage bill. [2]
• (c) With the help of a diagram, explain the possible effect of a minimum wage set above the equilibrium wage. [4]
• (d) Explain two ways the café might respond to the higher wage bill. [4]
• (e) Evaluate whether raising the minimum wage is the best way to reduce poverty. [9]

Model answers

(a) $\tfrac{12.21 - 11.44}{11.44} \times 100 \approx 6.7\%$.

(b) The rise per hour is $12.21 - 11.44 = £0.77$. Hours per week $= 10 \times 30 = 300$. Increase $= 300 \times 0.77 = £231$ a week.

(c) On the minimum-wage diagram above, the minimum wage is set above the equilibrium wage. At this higher wage, firms demand less labour ($L_d$ falls) because workers cost more, while more people want to work ($L_s$ rises). The gap between them is unemployment (75 workers in the model). Workers who keep their jobs earn more.

(d) The café could raise its prices, passing the cost on to customers; if demand for coffee is price inelastic it keeps most of its sales. It could cut staff hours or jobs, or replace some work with machines such as self-service ordering. (Other answers: accept lower profit, or improve productivity so fewer hours are needed.)

(e) For the minimum wage: it raises pay for about 3 million low-paid workers directly, at no cost to the government budget. Higher pay can reduce staff turnover, so firms save on hiring and training, and workers may be more productive. Low-paid workers spend most of their income, which raises demand in the economy.

Against the minimum wage: if it is set too high, firms employ fewer people or cut hours, and the people who lose work are often the least skilled. Small firms such as cafés may raise prices, which hurts poor consumers too, or close. Many poor households have no one in work (for example pensioners or the sick), so a minimum wage does not help them at all.

Other policies: benefit payments and tax credits can target poor households directly, including those without work, but cost the government money. Education and training raise workers' skills and productivity, which raises pay in the long run.

Judgement: a minimum wage is an effective way to raise the pay of low-paid workers, as long as it is not raised so fast that jobs are lost. It is not the best single way to reduce poverty, because it misses households without work. It works best combined with targeted benefits and training.

What examiners reward: calculations with the working shown, a labour-market diagram with $L_d$, $L_s$ and the unemployment gap labelled, responses linked to the café in the question, and a balanced judgement.

• Competition's five advantages and the economy-level effects; large vs small firms; five growth factors; four reasons firms stay small (1.2.4a–d).
• Monopoly: definition, six features and five barriers; advantages and disadvantages; the model (40, 50, 800, DWL 200) (1.2.4e–g).
• Oligopoly: definition, seven features; advantages and the cartel/price-war disadvantages (1.2.4h–j).
• Labour demand (derived, substitutes, productivity) and supply (eight factors); quantity and quality; human capital (1.2.5a–d).
• The labour diagram with equilibrium (200, 8) and shift analysis; trade unions (1.2.5e–f).
• Externality policies (five) with pros and cons; competition regulation's four aims; the minimum wage with the 75-unemployed arithmetic (1.2.6a–d).

Boundary notes: Paper 1's 20-mark questions often ask for one diagram with both equilibria and the unemployment gap labelled. Lists (barriers, features) are definition-mark material. All worked numbers are original on the shared models.