A Level Economics AQA Practice Exam

How does productivity affect competitive advantage in markets?

1. Higher productivity can lead to lower pricing of goods

2. It has no impact on competitive positioning

3. Lower productivity increases market share

4. Only service-based industries benefit from productivity

The correct answer is: Higher productivity can lead to lower pricing of goods

Higher productivity can indeed lead to lower pricing of goods, which is a crucial factor in gaining a competitive advantage in markets. When a firm is able to produce more efficiently, it can lower its average costs. This reduction in costs may allow the firm to price its goods more competitively than its rivals who have not improved their productivity. Lower prices can attract more customers, enhance sales volumes, and ultimately lead to increased market share. Additionally, high productivity not only enables cost savings but can also improve profitability if a company chooses to maintain or slightly decrease pricing while enjoying a healthier margin. This dual benefit of price competitiveness and potentially higher profit margins is key to establishing and sustaining competitive advantage. Firms that leverage productivity effectively can innovate further, invest in growth, and respond flexibly to market changes, thereby strengthening their overall market position. In contrast, the other options do not provide a clear or valid link between productivity and competitive advantage. Some suggest that productivity has no effect, which overlooks the fundamental economic principle that cost structures influence pricing strategies and market positioning. Others imply that lower productivity can increase market share, which contradicts the logic that efficiency and productivity typically enhance a firm's ability to compete. Lastly, the assertion that only service-based industries benefit from productivity is too narrow