Micro

Question 1

What are the evaluation for PD(strengths)

Answer 1

Strength-
1.Higher quantity- in 2nd and 3rd degree pd= greater EOS benefits= allows firms to sell at a much higher output= therefore making use of its previous spare capacity= allows firm to be more efficient with its FOP=lower price=maybe future prices for consumers over time

2.Cross subsidisation benefits- due to high profits= cross subsidies loss making g/s elsewhere in the business= consumers could benefit from net welfare gain from this if they receive lower price

-3.consumers that are previously excluded by high prices can benefit from g/s= now have access=yield positive externalities= boosting their surplus and enhancing their welfare

4.- supernormal profit from producer= stimulates investment

5.better use of spare capitcity= less wastage

Question 2

Evaluations of pd (weakness)

Answer 2

1.loss of consumer surplus= p greater than mc= exploiting consumers drastically( 1st and 3rd degree)= allocative inefficient= Stengthen the monopoly power on firms= higher prices in long run

2.Inequality- in 1st degree, and inelastic segment of 3rd degree= if its consumers with lower income= can widen income inequality

3.Anticompetitive pricing- in elastic (3rd degree pd = if prices very low= drive competitors out of the market= firms left with pure monopoly

Question 3

Conditions of Pd

Answer 3

Firms must have price making power= therefore barriers to entry likely to exist= without competitions = fewer options= more likely to pay higher prices if they need and want the product
2. Firms should be able to identify and separate different groups of consumer by understanding their PED
3. No seepage— when customers can buy at a lower price from a firm and re sell it themselves= reduce profit

Question 4

What is price discrimination

Answer 4

Occurs in a monopoly- when monopolist decides to charge different groups of consumers different prices for the same goods/services. This is not for cost reasons

It’s due to monopolist being price makers- ability to influence price

Question 5

What is 1st degree PD

Answer 5

When firm knows the maximum price that each individual can pay
- firm able to charge a different price to each consumers= maximizing its potential to extract profit from the market
Loss of consume surplus as everybody paying their maximum possible price
-in reality- can’t really be done as seller would need perfect info to achieve this
gathering info is very costly= unlikely to benefit from first PD

Question 6

What is 2nd degree pd

Answer 6

Price is charged based on the quantity you buy
Often the case in wholesale market
Discounts are provided to those who buy large quantities of a good= the more you buy= the less you pay per unit
This encourages larger orders to be made
This who don’t bulk buy = pay the market price

Question 7

What are the long run benefits that are likely to result from competition

Answer 7

• likely to be more productively and allocatively efficient- as they provide g/s that consumers want to satisfy their needs. Also competitive pressure forces them to lower their prices
  -economic growth- as firms work to operate effectively =innovation = increase productivity =increasing wealth, employment growth and general economic expansion

Question 8

Short run benefits which are likely to result from competition

Answer 8

• might make supernormal profit= can be reinvest back into the firm= increases dynamic efficiency and lower LRAC
• wide variety of choices due to no. Of firms in the market= g/s likely to be higher quality, since firms try gain customer loyalty
  -improving quality of product or innovative to keep up with the latest technology= product remain competitive
• enhance customer service- customer satisfaction frequently prioritized by business to achieve competitive edge

Question 9

The dynamics of competition and competitive market process

Firms don’t just compete on price so what else?

Answer 9

Firms try and distinguish their products and gain market share using non price competition. Might aim to:
-improve products- quality or innovating to keep up with latest tech= product remain competitive
- reducing cost= implementing efficient production methods= cutting their expenses= be competitive= still remain profitable
-improve quality of services provided. E.g. banking- need good customer service such as investment in personnel training, creation of effective customer support

Question 10

What is competition

Answer 10

• occurs due to rivalry between firms
  -there’s different degrees of competition
• competition leads to lower prices and greater choice of products

Question 11

The dynamics of competition and competitive market process

The process of creative destruction

Answer 11

If firms have monopoly power and making huge profits = gives firm incentive to enter the market and innovate to overcome barriers to entry = this is the process of creative destruction
- schumpeter, an economics, proposed the idea of CD- that new entrepreneurs are innovative= challenges existing firms in the market
- the more productive firm then grow, whilst the least productive are forced out together the market. This results in the expansion of the economy productive potential
- CD= more innovation and production of new g/s= better products= increase competitiveness = promoted economic growth
- technological change can lead to the development of more products, development of new markets and destruction of existing markets e.g. development of dvds, then blue rays and now rise of Netflix

Question 12

Spec for objectives of the firm

Answer 12

-how the economic theory assume that the objective of firm is to maximize profit
- the profit maximizing rule (MC= MR)
-the reasons for and the consequence of a divorce of ownership from control
- firms have a variety of other possible objectives
- the satisficing principle

Question 13

Objectives of firms
Why do some firms choose to profit maximise

Answer 13

Profit maximisation occurs when MC=MR. Means that each extra unit produced gives no extra loss or no extra revenue
— profit increase when MR>MC : selling an extra unit will add to profit
Firms choose to PM because:
— reinvestment back into the business in form of new capital, new tech and r and d= big deal for pharmaceutical companies, electronics= innovation/ able to develop new products
— allows for lower cost= keeps profit high= pass lower cost to consumers by lower price= benefits both
—it provides greater wages and dividends for entrepreneurs ( keeps shareholders and employees in the business)
— retained profit are a cheap source of finance= saves them from paying high interest rates in loans= can invest using their profit
—in the short run the interest of owners or shareholders are most important since their aim to maximize their gain from company
— in long run firms profit maximize since consumers do not like rapid price change in short run= this would provide a stable price and output
— PLC particularity keen to PM as they could lose their shareholders if they don’t receive high dividend

Question 14

Objectives of firm
Why might a business decide not to profit maximise

Answer 14

—- to avoid scrutiny- if firm makes very large profit= competition authorities, regulators might investigate= negatives outcomes= forces them to reduce price = increases cost for business= so business may lower profit to avoid scrutiny

• other objectives are appropriate e.g. profit satisficing

Question 15

Price discrimination
3rd degree PD

Answer 15

— when different groups of consumers are charged with different prices for the same g/s. Firms are able to segment market into different PED
—e.g. higher price at peak times on a train is a form of 3rd degree PD, as usually commuters use trains at peak times than off peak times
— it’s a necessity to get to work= company will raise price
— in off peak times, people travel for leisure= companies more relaxed with their pricing as customers are more likely to be more sensitive to the price
Other e.g.
1 child vs adult pricing (cinema)
2 peak vs off peak travellers
3. Different prices charged in different countries
4. Adult vs pensioners pricing

Question 16

The objectives of the firm
The reasons for and the consequences of a divorce of ownership from control

Answer 16

— the principal agent problem can be linked to the theory of asymmetric info
— this is when agent makes decisions for the principal BUT agent is inclined to act in their own interest rather than those of the principal
— e.g. shareholders and managers have diff objectives which might conflict— managers might choose to make a personal gain such as a bonus, rather than maximise the dividends of the shareholders

• when the owner of the firm sell shares= lose some control over the firm= could result in conflicting objectives, between different stakeholders in firm
  —e.g if managers very good= might require higher wages to keep them in firm. Also need to keep shareholders happy, since they are an important source of investment
• not always possible to give both shareholders large dividend and give managers high salary= funds limited
• when a manager sell their shares= shareholders gain more control over the decisions of firm= rise to shareholder activism.= could be put to pressure on management of firm or to try get high dividends. E.g Sainsbury shareholder objected the decision to give chairman 2.3 billion bonus in 2004

Question 17

Objectives of firm
Maximizing sale revenue

Answer 17

— revenue maximization occur when MC=0 . So each extra unit sold generate no extra revenue
— why company wants to maximise revenue
1) EOS benefits- we can see revenue max quantity GREATER than the profit max quantity= greater growth= greater EOS= lower average cost= lower price for consumers
2) predatory pricing — firm will undercuts its rival on purpose in order to drive out competitors in market= may lose profit

Question 18

Objectives of firm
Sales maximision

Answer 18

— this is when firm sell as much of their g/s as possible without making a loss
—is where AC= AR
- not for profit organizations might work at this output and price
—AMazon sold many kindles as possible to gain market share so they can earn more profits in the long run= help deter competitors
Why?
— strong sales figures can attract investors and make it easier for a business to secure finance for growth
— EOS
— represent limit price- if you price it at break even at normal profit= takes away the incentive for new firms to enter market= limiting competition
— flood the market= consumers become aware of your product= develop loyalty
— after you can change your objective to profit max. E.g. Netflix, Amazon- they use SM to flood market

Question 19

Objectives of firms
Survival

Answer 19

— particularly for new firms entering a competitive market= might aim to simply survive.
—this is a critical period before establish a customer base and able to cover cost
—so might aim to sell as much as possible to keep their market position even if there’s a loss in short run
— during periods of economic decline such as the 2008 financial crisis= when consumer spending plummet= firms might aim for survival as their objectives= until there economic growth

Question 20

Objectives of firm
- quality

Answer 20

— firms might aim to increase their competitive sis by improving their quality
— firms might consider improving customer service or quality of the good they produce= can be achieved through innovation = gain reputation for high quality goods= potentially charge high prices= since consumers more willing to pay more for them

Question 21

Objectives of the firm
Satisficing principle

Answer 21

— involves owner of a business/ shareholders setting a minimum acceptable level of achievement of revenue
— means business making enough profit to keep shareholders happy or it’s sufficient for investors to maintain confidence in the management they appoint
— shareholder want profit since they can earn dividends from them= managers might not aim for high profit as their personal reward for them is small compared to shareholders
— therefore managers might choose to earn enough profits to keep shareholders happy, whilst still meeting their other objectives
— this occurs where there is a divorce of ownership and controls

— this objective more appropriate in modern day world as it can satisfy as many key stakeholders as possible
— if business main objective is profit max= may harm key stakeholders in the process e.g. consumer can suffer through excess prices being charged
Workers could suffer if wages are low as a result of cost cutting
Environmental groups won’t like it if cost are cut and environment takes a hit e.g. pollution
Problems- if harm consumers= suffer bad reputation
Workers can strike
Environmental group= protest. Attack on social media, in modern world reputation is a big thing for business

Question 22

Objectives of firms
What other possible objectives

Answer 22

— society— business often contribute to charities and social causes= engage with local communities through funding education programs, supporting healthcare facilities, building infrastructure (public sector organizations)
So they keep prices low, quantity high to maximize society
— environmental- reducing carbon emissions, waste reduction and promote recycling= improve sustainability

Question 23

Objective of firm
Increase market share

Answer 23

— can be achieved by maximizing sales.g. Amazon aimed to increase their market share in e reader market by tiny to sell as much kindles as possible = gained customer loyalty
- helps increase change of surviving in the market

Question 24

Perfect competition
Definition and characteristics

Answer 24

— is a market structure that represents a theoretical model of a market
— no single firm has a dominant position, consumers shave plenty of choice
Characteristics:
— many buyers and sellers
— firms operating in PC markets are price takers
—free entry to and exit from market without any cost
— homogenous goods= for that reason firms are price takers= no ability to set their own price= if raise prices= lose all demand
— firms are short run profit maximiser ( where MC= MR)
—Perfect knowledge— consumers know what price. Quality, producers know the price and cost
—in a competitive market , profit likely to be lower than market with only few large firms= due to each firm has very small market share= market power is very small

Close to perfect competition Internet related industries. The internet has made many markets closer to perfect competition because the internet has made it very easy to compare prices, quickly and efficiently (perfect information). Also, the internet has made barriers to entry lower. For example, selling a popular good on the internet through a service like e-bay is close to perfect competition. It is easy to compare the prices of books and buy from the cheapest.

2. Agricultural markets. In some cases, there are several farmers selling identical products to the market, and many buyers. At the market, it is easy to compare prices. Therefore, agricultural markets often get close to perfect competition.

Question 25

Perfect competition
Profit maximizing equip in short run and long run

Answer 25

— in short run, firms can make supernormal profits
— in the long run, profit are competed away = only normal profits. This is due to the supernormal profit made by existing firms give incentive to enter the industry
— since there’s no barriers to entry in this market= firms are able to enter the industry
— new equilibrium will be P= MC

Question 26

Percent competition
Advantages

Answer 26

— allocative efficiency is achieved when P= MC= means resources are perfectly following consumer demand= prices are low= consumer surplus high= consumer benefitting following their demand

— productive efficiency (only long run)- firm operating at the lowest point on the AC curve at Q__= means full exploitation of any EOS there might be in this market

— the supernormal profit produced in the short run might increase dynamically efficiency through investments

Question 27

Perfect competition
Disadvantage

Answer 27

—in the long run= dynamically efficiency might be limited due to lack of supernormal profit= unable to reinvest back into the company= consumers cannot see brand new innovative product over time= new tech= producers not able to lower their cost= market not progressing through innovation

— since firms are small= fewer or no EOS

—the assumption of model rarely applied in real life. In reality, branding, product differentiation, adverts, positive/negative externalities= competition is imperfect

— however given certain assumption e.g. lack of externalities, perfect competition will result in efficient allocation of resources

Question 28

Monopolistic competition SPEC

Answer 28

The diagrammatical analysis of the monopolistically competitive model in the short run and long run
Characteristics
— monopolistically competitive market will be subject to non - price competition

Question 29

Characteristics of monopolistic competitive markets

Answer 29

— has imperfect competition. Firms are short run profit maximisers= producing where MC=MR

— firms sell non- homogenous products due to branding( there’s product differentiation) however there’s lots of relatively close substitute = makes the XED of the g/s sold high

— firm use non price competition as they can’t raise price significantly to make high supernormal profit. Also demand more price elastic
So firms will steps on advertising to establish brand loyalty and repeated customers by making consumers aware of the product and persuading them

—no barriers to entry to or exit from the market

— they are price makers due to their differentiated products.

—imperfect info

Question 30

Monopolistic competition
Definition

Answer 30

— model based on the assumption that there’s large number of buyers and sellers which are relatively small and act independently

— each seller has the same degree of market power as other sellers, but their market power is relatively weak

—e.g of monopolistic competition are hairdressers, regional plumbers, clothing market. Fast food, taxis, hairdressers, bars

Restaurants compete on quality of food as much as price
Product differentiation is a key element of the business = relatively low barriers to entry in setting up a new restaurant

Clothing- designer label clothes are about the brand and product differentiation

Question 31

Monopolistic competition
Evaluation ( disadvantages)

Answer 31

—allocatively efficiency not being achieved(in short and long run)= means consumers exploited in theory = price greater than cost= output restricted = choice restricted= loss of consumer surplus= but can benefit firms

—we are not at the minimum point on the AC curve= not productive efficient= cost not being minimised

—no dynamic efficiency in the long run= not enough profit to be reinvested back into the company

– in monopoly and perfect competition we get some kind of efficiency but monopolistic competition = seems there’s none.

Question 32

Monopolistic competition
Advantages

Answer 32

— consumers have wide variety of choice

— model more realistic than perfect competition . Also PC sell homo good( IS THIS WHAT CONSUMER DESIRES) clothing, restaurants= we don’t want homo goods= like differentiation
Means consumer are willing to pay more= allocatively inefficiency not bad= desirable

—the supernormal profit produced in short run = increase dynamically efficiency through investment

— productive inefficiency in monopolistic C, might be due to product differentiation of consumer = we like variety= harder to exploit EOS wide range of products
SO it might come from consumer desire for differentiation = we are willing to pay higher prices

Question 33

Oligopoly
Definition and characteristics and examples

Answer 33

— a market structure where there are a small number of large firm
— is an imperfectly competitive industry
Characteristics
— higher barriers to entry and exit= makes the market less competitive

— there’s a high concentration ratio: only few firms supply majority of the market e.g. in UK supermarket industry is an oligopoly. High concentration ratio= market less competitive

— there’s a degree of product differentiation- firms differentiate their products from the other firms using branding.= makes them price makers

—interdependence of firms- means action of one firm affects the other firm’s behavior = because of that we see price rigidity.
Because of interdependence = profit max not the sole objective of firms as they always thing what the rivals going to do

Real life example. Global soft drink industry e.g coco cola and Pepsi. Global car industry e.g. OPEK
Petrol retail
Newspapers- I’m I’ll market share is dominated by daily mail, the sun, the mirror, the star and daily express

Question 34

Oligopoly a market structure and a behaviour

Answer 34

— firms can either operate in a market with is oligopolistic or several firms can display oligopolistic behavior
— there’s types of behaviour might be interdependent, stable price, collude or have non price competition

Question 35

Calculation of concentration relation and their significance

Answer 35

Is the complained market share of the top few firms in a market
E.g. if 4 firm CT was calculated, the market share of the 4 largest firms would also be added together
— the higher the CR= less competitive the market since few firms are supplying bulk of the market

Question 36

Oligopoly
What does kinked curve illustrate

Answer 36

— illustrate interdependence = can lead to out conclusion of price stability

Question 37

The difference between collusive and non collusive oligopoly

Answer 37

— collusive behaviour occurs if firm agree to work together to set price or fix output level for their own mutual benefits OR minimize the competitive pressures they face
— it leads to lower consumer surplus= higher prices= greater profit for firms colluding so therefore they are maximizing their joint profit
— allows oligopolistic to act as a monopolist
— so firms have an incentive to collude as making agreements they restrict output= maximizing their own benefit causing market price to increase= deters new entrants
— it’s anti competitive — illegal in many countries
— collusion more likely to happen if there’s only few firms, that face similar cost, high barriers, ineffective competition policy

— non collusive behaviour— occurs when firm are competitive= established a competitive oligopoly= more likely to occur when there:
Several firms
One firms has a significant cost advantage, products are homogenous
Firms grow by taking market share from rivals

In 2007, British Airways was fined £270m for illegal price-fixing arrangements with Virgin on long haul flights. The two companies met to agree and collude on the extra price of fuel surcharges in response to rising oil prices. Between 2004 and 2006, surcharges on air tickets rose from £5 to £60 per ticket.

Question 38

How can collusion be overt or tacit

Answer 38

— overt collusion— when formal agreement is made between firms
— only works best when there’s few dominant firms= so one don’t refuse
— is illegal in the EU, US and several other countries
—often suspected that fuel companies partake in this= could be in the form of price fixing= maximise their joint profit= cut cost of competitors
- this prevents firms using wasteful advertising and reduces uncertainty

Tacit collusion— no formal agreement, but collusion is implied
— can be through subtle signals that led other firms know what they are doing e.g. Supermarket industry’s and their suppliers.
Grocery price war pushes Waitrose profit down 24 percent

Question 39

Oligopoly
Difference between cooperation and collusion

Answer 39

— cooperation is legal and allowed in a market, collusion is NOT as it’s a illegal agreement between rivals business that manipulate the market outcomes= limit competition at the expense of workers

— cooperation is beneficial - firms working together to achieve mutual benefit in a way that don’t have consumers or market.e.g. Cutting expenses, collaboration in r and d l, joint ventures
— results EOS, innovation, market expansion

—e.g. joint venture between Tesla and punasonic on co developing battery technology

Question 40

The reasons for non- price competition in oligopoly

Answer 40

— aims to increase loyalty= makes demand for a good more price inelastic

— e.g. firms might improve the quality of a customer service e.g. having more available delivery times, keeps shops open for longer = so consumers can visit when it’s convenient

— special offers s.g. But one get one free, loyalty cards= attracts customers = increase demand

— advertising, marketing = make their brands more known
HOWEVER. Difficult to know what the effect of increased advertising spending will be= might be ineffective= incur snuck cost= unrecoverable
BUT- firm increased brand loyalty = demand price inelastic= as brands are used to differentiate products= firms can keep customers= increase market share

Like hairdressers

Question 41

The reasons for the operation of cartels in oligopoly

Answer 41

— a cartel is a group of 2 or more firms which have agreed to control prices, limit output or prevent entrance of new firms into market

—e.g. OPEC fixed their output of oil.= seas possible since they controlled 70% of supply of oil around the world= reduced uncertainty for firms

— can lead to higher prices for consumers and restricted output.

Question 42

Reasons for price leadership and price wars in oligopoly

Answer 42

— price leadership— explains the significance of interdependence
— firm in an oligopoly often referred to as price leaders
— occurs when one firm changes their prices= and other firm follows
— the firm usually the dominant firm in the market (have the best knowledge of prevailing market conditions)
—other firms forced into changing their price too or else risk loosing market share
— explains why there is price stability in oligopoly

Price wars- a type of price competition, involves firms constantly cutting their price below of its competitors
— this also is to increase their market share, sale revenue.
— happens in supermarkets industry.

Question 43

The reason for barriers to entry in an oligopoly

Answer 43

— firms will drive competitors out of the market in order to increase their own market share.
— barriers to entry are designed to prevent new firms entering the market profitably= increase producers surplus

Question 44

Conclusions from the kinked demand curve

Answer 44

— shows there could be price competition in market. Firms may still try and reduce price to gain more market share ( price wars)
— we still see a lot of non price competition in an oligopoly of price stay at P1
— strong temptation to break interdependence and to collude altogether= not having to worry what other rivals are doing

Question 45

Oligopoly advantages

Answer 45

— can earn significant supernormal profit= might invest in more r and d= can yield positive externalities= more dynamically efficient in the long run= could be more invention and innovation
Boos productivity= competitive advantage

— higher profit is a source of gov revenue

— industry standards could improve e.g pharmaceutical industry- firms can collaborate on technology and improve it= saves on duplicate r and d

— since oligopolies are large= exploit EOS, so they have lower average COP= these can be passed on to the consumers with reduced price= use the curve to show this

Question 46

Disadvantages of oligopolies

Answer 46

— basic model of oligopoly suggest that higher prices and profit and inefficiency may result misallocation of resources compared to the outcome in a competitive market

— if firms collude= loss of consumer welfare, since prices are raised and output are reduced= option limited

— collusion could reinforce the monopoly power of existing firms =makes it harder for new firms to enter= absence of competition = efficiency falls= increase average cost of production = pass on to consumers

— also absence of competition may affect quality/ innovation

— kinked curve: price does change, some firms may have strong brand loyalty= able to increase price without demand being overt price elastic

Question 47

Monopoly power and monopoly
— definition and characteristics

Answer 47

— pure monopoly exist when there is a single supplier of a g/s. = therefore 100% market share
— pure monopoly is a theoretical extreme
— monopoly power more realistic
— in the UK when a firm dominates market market market with more than 25 % market share , firm has monopoly power
— google dominates the search engine with. 90% share market
Characteristics
— high barriers to entry
— price makers
— price discrimination
—some seller in the market ( pure monopoly) no competition
— profit maximisation— monopolist earns supernormal profit in both short run and long run
— imperfect info

— monopoly power can be gained when there are multiple suppliers

Tesco has market share of 27.2%

Question 48

Factors influencing monopoly power
(Lesbos)

Answer 48

—Barriers to entry: if thats higher= easier for firms to maintain monopoly power :
-EOS: as firm grows= AC of production falls due to EOS= means existing large firms have a cost advantage over new entrants to market= maintain their monopoly power
- brand loyalty= consumers loyal( can be increased by advertising)= difficulty for new firms to gain market share
- limit pricing= involves existing firms setting price of a good below production cost of new entrants= making new firms not enter profitably
- set up cost- it’s expensive to establish firm= new firm unlikely to enter the market
- sunk cost= if unrecoverable cost like advertising are high in the industry = new firms will be deterred from entering market= unable to compete as they don’t get the value of the cost back
- owning resource = early entrants can establish their monopoly power by gaining control of a resource. E.g. Microsoft owning the window operating system brand

The number of competitors- fewer firms= increases the barriers to entry= harder to gain larger market share

Advertising- increase customer loyalty= demand more price inelastic = create barriers to entry

Degree of product differentiation = more product is differentiated through quality, pricing and branding= Easier to gain market share= because its unique = fewer competitors the firm faces.

Question 49

Pros and cons of monopoly

Answer 49

Pros:
— range of potential EOS despite the productive inefficiencies = means as firms increases it output== they can have lower average COP due to its size
LRAC curve can show this

— make supernormal profit= can invest in more r and d= leading to innovation= better tech and better quality products = more firms likely to innovate if they can protect their ideas since there high barriers to entry = more likely to happen= increases dynamic efficiency = gain market share by beating rivals through innovation

— if there’s a natural monopoly= might be efficient for only one firm to provide a g/s since having duplicate of same infrastructure = wasteful. E.g considered wasteful of having 2 lots of water supplies = not fully utilized
— high profit= source of gov revenue

Cons
—higher prices and allocative inefficiency = misallocation of resources= monopolist could exploit by charging high prices P>MC = means good under consumed= consumers need and wants not fully met

—productively inefficient- can get too big suffer diseconomies of scale= cost higher prices higher
Multinational company can suffer problems of communication or control e.g. language, time zones,

Question 50

What is a contest able market and its characteristics

Answer 50

• are in which new entrants can easily enter and compete with established firm= even if those firms have significant market share

Characteristics
- face actual and potential competition
- entrants have free access to production techniques and technology
- no to low entry or exit barrier to the industry
-. Will be no sunk cost in the market
-low customer loyalty
- the number of firms in the market varies

Question 51

The significance of market contestsbility for the performance of an industry

Answer 51

1. If market contestable= firms likely to be allocatively Efficient.
   In lint run firms operate at the bottom of the AC curve= makes them productively efficient

2firms are wary of new entrants entering market, taking supernormal profit then leaving= known as the hit and run competition

3.market which are highly contestable= akin to a perfectly competitive market= due to existing firms act as though there’s lots of competition

4. Could be supernormal profit in the short run and only normal profit in the long run
   - in the short run, new firms can enter and take advantage of the supernormal profit. HOWEVER firms can only earn normal profit in long run
   - without supernormal profit= no incentive for new firms to enter even if barriers are low

Question 52

How to help make market more contestable

Answer 52

• impact of new tech such as e commerce= easier for smaller firms to enter
• lowering legal barrier to entry such as reform of patents = allowing more operating licenses
  Royal mail used to be a legal monopoly but firms are allowed to enter the market for sending letters and parcels
  -

Question 53

Concept of sunk cost and contestability

Answer 53

Sunk Costs & the Degree of Contestability

Sunk cost are cost that cannot be recovered once they have been spent

One of the main barriers to exit is the existence of sunk costs
To enter the industry, the firm may have acquired expensive assets that are highly specialised & difficult to resell
Other examples include money spent on advertising, research & development, branding etc.

If sunk costs in an industry are high, it will limit competition & decrease contestability as firms will be more hesitant to enter
The lower the sunk costs the more contestable the market
The higher the sunk costs the less contestable the market

-NO market are perfectly contestable, markets generally have some degree of contestability

Question 54

How does barriers to entry reflect the maerket contestability for the performance of an industry

Answer 54

Greater EOS= less likely that new firms will enter.= due to they would produce a comparatively expensive g/s so cannot compete = reduce contestability

Legal barriers like patent and exclusivity rights to production means other firms cannot enter market.
Some industries such as taxi gain market licenses to operate= new firm have to gain a license

Customer loyalty and branding= market less contestable as demand become more price inelastic = consumer less likely to try other brands

Predatory pricing = involves setting low price below their AC to drive out firms the industry in short run = make losses
As firm leave remaining raise prices slowly to regain their revenue= reduce contestability

Limit pricing

Question 55

The concept of hit and run competition (contestable market)

Answer 55

This is due to low barriers of entry and market being contestable

New firms can easily enter market while it is making supernormal profit. Also firms able to leave market without by a great deal of cost

Question 56

Why is there a contestable market

Answer 56

• due to increase in technology in last few decades = constable market has dramatically increased
• tech massively reduce barriers to entry= business don’t have a store= reduce start up cost= reduce sunk cost= don’t need to hire workers necessary
• technology has allowed for greater innovation for new firms to come in and disrupt market
  -improved info = firms can find out easier about cost through internet

Question 57

Pros and cons of contestable market

Answer 57

Pros
1. Allocatively efficiency— lower prices = higher consumer surplus for consumers= higher quality and quantity in market= great choice
2 productive efficiency- greater exploitation of EOS= lower cost = lower price for consumers
3. Job creation= due to high quantity in market= more demand

Cost
1 lack of dynamic efficiency- due to lower profit margin = not get much progress over time
However if new firms come in with innovative ideas= benefit of dynamic efficiency = shows there’s innovation first by not overtime

2. Creative destruction = when new firms is innovative= destroys existing firms= job losses.
   However if overall market greater = new firms larger= where jobs been loss those workers can move to newer firms in same industry

3.anti competitive strategies- in short run = may be contestable market, but overtime if the business used ACS like limit pricing , predatory pricing , heavy advertising = contestability won’t last overtime.
These ACS won’t give us static efficiency in the long run

Question 58

Evaluation of contestable market

Answer 58

1length of contestability-
How long is market contestable for. If firms using anti competitive strategies = market not gonna be contestable over time

2. Role of technology= can it increase or decrease contestability due to patent copyrights ?
3. If there’s regulation to reduce the cons= protect product standards, health and safety standards
   So help prevent anti competitive strategies

Question 59

The difference between static and dynamic efficiency

Answer 59

• static efficiency describes the level of efficient at one point in time . Productive and allocative efficiency are an example of static efficiency

Dynamic efficiency is concerned with new technologies and increase in productivity which causes efficiency to increase over time
Firms would need to be able to invest in new tech, training and capital goods , conduct r and d
Occurs when efficiency is implied over time

Question 60

The conditions required for productive efficiency and allocative efficiency

Answer 60

— productive efficient occur when firms minimize their ATC

This is when firm produce at the lowest point of the AC curve
MC= AC is a point of produce efficiency. All points on the PPF curve are productively efficient

Allocatively efficiently occurs when resource are distributed to the g/s that consumers want.
This maximized utility.
It exist at p= mc. Means that consumers pay for the value of the marginal utility derived from consuming the g/s.

In free markets are considered to be allocatively efficient

Question 61

What is dynamic efficiency influenced by

Answer 61

• r and d, investment in human and non human capital and technological change
• is when all resources are allocatively efficient over time and the rate of innovation is at the optimum level= lead to falling LRAC

‘Market dynamically efficient if consumer needs and wants are met as times goes on- related to the rate of innovation , which might lead to lower cost of production in the future or creation of new products

DE, is affected by short run and long run factors such as demand,. Interest rates and past profitability

Evaluation
- time lag between making an investment and having falling AC
- consider how factors change in the long run. Moreover firms may face a trade off between giving their share holders dividend and making an investment

Question 62

Consumer and producer surplus

Answer 62

They are both maximiser at the free market equilibrium

Consumer surplus- the difference between the price alter consumer is willing and able to pay and the price they actually pay
This is based on what the cylinders percieces their private benefit will be from consuming a good
- above the equilibrium level

This can be due to the law of diminishing marginal utility= consumer surplus generally declines with extra unity consumed
-this is due to either extra unit generate less utility than one already consumed= therefore consumers are willing to pay less for the extra units

• inelastic demand curve= gives larger consumer surplus. As consumers are willing to pay much higher price to consume the good

Producer surplus is the difference between the price the producer is willing to charge and the price they actually charge
- always the area below market price and above the supply curve
There are combinations producers don’t have to sell the g/s for as they can sell it at higher market equilibrium price

Question 63

What is economic welfare

Answer 63

-is the total benefit society received from an economic transaction
- calculated by the area of producer surplus and consumer surplus added together

Important when considering the effects of government policies which could affect either producer or consumer surplus

Question 64

How does price discrimination and deadweights with monopoly contribute to consumer and producer surplus

Answer 64

• price discrimination occurs in a monopoly when the monopolist decides to charge different groups of consumers different prices for SAME goods/services
  = loss of consumer welfare

By charging higher prices= monopolist can maximise their overall profit and producer surplus

• dead weight loss is the loss of economic efficiency when the equilibrium price and quantity are not achieved
  For example higher prices due to monopoly power would lead to a net deadweight loss to society

Question 65

Analysis of consumer and producer efficiency

Answer 65

• both consumer and producer surplus are measure of welfare.
  Therefor if consumer surplus goes up= consumer welfare will go up
• if price of goods/s increase , the welfare taken away from consumer= could be worse for consumer, better for producer= decrease in consumer surplus and increase in producer surplus

Maybe because consumer face and increase in opportunity cost when buying goods/s when price increase = many consumer leaving market, not make purchases

Question 66

Evaluation of monopoly

Answer 66

• is dynamically efficiency really going to occur- in reality other things can be done with profit= give it to shareholders via dividends, could save it, pay workers , pay debt= not really reinvesting back into capital in business
• EOS or DOS- which is more likely to happen ( depends on size of firm)
• objectives- assumes profit max is the in main objective= but what if business object is to want better for society
  Such as sales maximisation, reduce inefficiency

Regulation= reduce inefficiency
Examples: windfall tax on monopoly profit,
Investigate abuse of monopoly power

Price discrimination- negative of monopoly, contribute to allocate , inefficiency not, inequality

Type of G/s- necessity/ luxury= consumers may not mind paying a bit more with luxury by if monopolistic selling necessity good= can be worse off

If there’s threat of competition= if market contestable-= can be enough to reduce inefficiency such a tesco has monopoly power by other supermarkets growing such as lidl and Aldi

It it a natural monopoly