4.1 (Competition & Market Power)

Question 1

What are marginal revenue & marginal cost?

+ calculations

Answer 1

MR: the change in total revenue from selling one more unit of output
+ change in total revenue/ change in quantity

MC: the change in total costs from making one more unit of output
+ change in total cost/change in quantity

Question 2

How to calculate average revenue?
+ what is it equal to?

What happens when production increases?

Answer 2

Total revenue/quantity
+ price

average fixed costs fall & therefore average total cost falls until a certain point and then it begins to rise again.

Question 3

What is the profit maximisation point?

+ how does economies of scale & average cost curves work?

(reality of economies of scale?)

Answer 3

Marginal Cost=Marginal Revenue

+ when a firm increases its output they have the advantage of lowering their long-run cost per unit (economy of scale)
+ this continues until the minimum efficient scale (lowest average cost per unit) is reached
+ the firm loses efficiency after a certain size and average CPU begins to rise again (diseconomy of scale)

(important in competitive industries but very large firms stay competitive despite any diseconomies)

Question 4

How do businesses use marginal cost & revenue to make decisions?

Answer 4

1) if MCs clearly outweigh MR production of an extra unit would be unsustainable
2) if MR outweighs MC but the probability of success is low (due to trends and the rest of the market) it might still be unsustainable

Question 5

8 factors which influence business objectives & pricing strategies

Answer 5

+ level of competition
+ amount of differentiation
+ cost & the need to make a profit
+ price elasticity of demand
+ pricing objective (e.g market share)
+ target audience
+ stage in product life cycle
+ strength of the brand

Question 6

Examples of more pricing strategies

Answer 6

• loss leader (goods deliberately sold below cost to encourage sales elsewhere)
• price leadership (one firm sets price & other firms adopt same price level)
• price discrimination (charging different price for same good/service in diff markets)
• target pricing (setting price to target specific profit level)