Effect of inflation on microeconomy

Question 1

Impact on firms’ costs and profitability

KAA1

Answer 1

Knowledge/Analysis
increased input costs-Increase in costs of production for firms-increase in average costs of production-increased in productive and X-inefficiency-reduction in purchasing economies of scale

Higher costs for consumers-loss of price competitiveness

loss of dynamic efficiency- loss of technical economies of scale

Application:
Supermarket industry-higher costs of agricultural products-lower profit margins

Diagram:
Costs revenue diagram
Outwards shift in MC and AC
Use Letters to show the decrease in supernormal profits

Question 2

Eval

Answer 2

Goods and services with a relatively inelastic PED-firms can easily pass on the higher prices to consumers-increased revenue-increased profits

reinvest profits into technical economies of scale-increase dynamic efficiency-reduce costs-increasing profitability

Application:
Cigarette brands-tobacco as input
Supermarket industry-lacks of profits for reinvestment into R&D-less self-checkouts