A Level Economics AQA Practice Exam

What constitutes barriers to entry in a market?

1. Regulations that discourage competition

2. Favorable market conditions for consumers

3. Strong customer loyalty towards existing firms

4. Investment opportunities for new firms

The correct answer is: Strong customer loyalty towards existing firms

Barriers to entry in a market refer to obstacles that prevent or impede new firms from entering an industry. Strong customer loyalty towards existing firms is a significant barrier because it can make it extremely difficult for a new entrant to attract customers away from established players. When consumers have a strong preference for the products or services of existing firms, they are less likely to switch to a new brand, regardless of the price or quality offered by the new competitors. This loyalty can be built through various means, such as effective branding, quality service, or unique product offerings. Factors like regulations that discourage competition can also act as barriers, but they do not encompass the market dynamics that customer loyalty illustrates. Favorable market conditions for consumers often indicate an open market, which typically would not include significant barriers. Meanwhile, investment opportunities for new firms may encourage entry rather than serve as a barrier. Thus, the aspect of strong customer loyalty captures a fundamental challenge that new firms face when attempting to enter a market dominated by established competitors.