market mechanism and forces

Question 1

define specialisation

Answer 1

concentration of production on a narrow range of goods and services

Question 2

adv of specialisation

Answer 2

• increases output max= resources purely focused into efficient production
  = inefficient previous production will cease and instead divert resources to most efficient firm or country
• increases trade as countries can import goods that they cant efficiently produce
  = increase export revenue= increase job creation and economic growth
• wider range of goods produced
  = higher allocative efficiency as resources go to most efficient producers
  = more choice to satisfy consumer demand
  = reduce risk of over exploitation of scarce resources= solve basic economic problem
• quality improvements
• workers have specialised skills which are used more efficiently
  = max worker productive potential= decrease COP= passed onto consumers via lower prices

Question 3

disadv of specialisation

Answer 3

• firms who are over- specialised and require certain input for production that may be finite resource e.g. oil
  = risk of resource depletion= destroy production and end firm
• change in trends and taste may discourage consumption of certain specialised goods
  = high risk for firms that aren’t diversified
• foreign firms and countries may suddenly become more efficient due to funding etc
  = less efficient firms will have to de-industrialise
  = increase unemployment and decrease SOL
• for specialisation to work there needs to be mutually beneficial trade between countries in order to exploit their surplus of specialised goods through exports
  = risk of international relations issues could reduce trade
  = decrease efficiency and productivity of exports and imports

Question 4

define division of labour

Answer 4

breaking down the productive process into separate tasks upon specialisation

Question 5

adv of division of labour

Answer 5

• higher worker productivity as they repeat same tasks which constantly increases their productivity
  = increase wages for workers and time savings for firms
  = decrease COP= decrease prices= max output and profitability of firm
• workers could be complimented with specialist machinery and capital
  = increase productivity to max output
  = increase consumer surplus, choice and quality and quantity of goods

Question 6

disadv of division of labour

Answer 6

• demotivation of workers due to nature of repetitive tasks
  = decrease productivity over time= increase COP in LR
• increase worker turnover
  = higher rate of employees leaving firm to find more satisfying and stable job
• workers may become over-specialised for a narrow and specific job
  = hard to transfer skills to another job role
  = high risk of structural LR unemployment= decrease SOL and increase pressure on gov finance
• capital may replace employees
  = become automated process of production
• risk of goods becoming highly standardised
  = lose unique touch consumers may want to see

Question 7

1st degree price discrimination

Answer 7

• consumers charged exact same price they’re wiling and able to pay
  = erode all consumer surplus in market and turn it into monopoly profit

Question 8

2nd degree price discrimination

Answer 8

• when firm with fixed capacity like trains w max seats and hotels with max rooms
  = makes no sense to leave capacity idle as firms need to pay same fixed costs where full or empty
  = decrease prices last min to fill capacity and contribute towards their fixed costs
• increase consumer surplus for people paying P2
  = max revenue

Question 9

3rd degree price discrimination

Answer 9

• when firm segments market into diff price elasticities of demand
  = one group of inelastic vs elastic
  = based off age, income, time diffs etc as each person has diff willingness to pay diff prices
• inelastic demand would be peak consumer on Trainline e.g. commuter
  = large change in price barely affects demand
• by charging diff prices to diff consumers, firms can max joint profits

Question 10

disadv of price discrimination

Answer 10

• allocative inefficiency as prices are charged beyond MC
  = exploit consumers massively= decrease SOL and welfare
• 1st degree and inelastic 3rd degree exploit consumers with high prices
  = can be regressive on low income consumers
• anti-comp pricing in 3rd degree elastic segment
  = low prices may not be comp= drive out and decrease competitors
  = firm will be left with pure monopoly power

Question 11

adv of price discrimination

Answer 11

• high profits made by firms= high re-investment potential
  = dynamic efficiency benefits
• high Q in 2nd and 3rd degree
  = high EoS benefits to decrease prices in LR
• some consumers like 2nd and 3rd degree benefit from low prices in elastic sector