Questions theme 3 Flashcards
- Examine measures the government might use to restrict the monopsony power of supermarkets.
formation of independent companies that aim to provide power to the supermarket’s suppliers i.e. farmers. In 2015, the government created a Groceries code adjudicator who independently ensures that large supermarkets treat their direct suppliers lawfully and fairly investigate complaints and arbitrates in disputes.
However large opportunity cost
Subsidies fair trade products or invest into trade unions
COMPETITION AND MARKETS AUTHORITY
- Problems of suggested merger Sainsbury’s and Morrison’s
example of horizontal integration where two firms in the same industry and the same stage of production merge
disagreements in the key objectives - tension and inefficiency
diseconomies of scale - rising LRACs, unwieldness (more difficult to manage as decisions take longer to implement), lack of engagement (larger chain of command, less productive and de-motivates them
Inefficient allocation of resources - duplications of labour and capital, combined disadvantages of both firms
However - reduction in market competition, exploit benefits of monopolistic competition but could bring attention of competition commission
Economies of scale - LRACs fall, bulk-buy cheaper price cheaper goods, wider range of credit as more collateral, afford better employees, encourages internal economies of scale
Evaluate microeconomic effects of a 20% tax on the sale of soft drinks that contain high levels of sugar.
A tax is a compulsory levy by governments on individuals or firms. An indirect tax is a tax on expenditure – done on sugary drinks to internalise the externality. Soft drinks containing high levels of sugar tend to be overconsumed (they are demerit goods) and cause many health implications such as obesity and diabetes
Diagram - cost and benefit + quantity of sugary drinks consumers. Supply curve shape: MSC=MPC, shift to the left MSC+Tax, lower gradient MPB like demand, higher gradient MSB below, free market allocation where MPB=MSC=MPC, socially efficient allocation Q1 where MSB=MSC+tax
Welfare loss triangle bottom right
decrease in the negative consumption externality, decrease cost to NHS and less productive workforce,
In the diagram, the marginal social benefit is less than the marginal private benefit due to these negative externalities caused by the consumption of sugary drinks. In a free market people ignore the external costs to others and so output will be at Q, the free market allocation. This is socially inefficient because the social cost is greater than the social benefit. The implementation of the tax causes the price to increase and the quantity consumed to fall to the socially efficient allocation Q1 where social cost is equal to the social benefit. The taxing of alcohol reduces the welfare loss (triangle ACB) which indicates the area of overconsumption.
However depends on size of tax, if too small not be socially efficient, may not affect firm’s revenue so no incentive to invest into a healthier product range - if too large, acts as barrier to entry to new firms so only largest firms can prosper causing monopolistic market
Decrease firms revenue (S+D diagram), reduce consumer and producer surplus, act as an incentive to invest in a range of healthier drinks improving living standards
Depends on elasticity, lack of substitutes so fairly inelastic so still welfare loss and firm pass burden of tax to consumers so not less revenue
Increase tax revenue to spend on negative externality - revenue for government rectangle in between surplus to Q1 - information failure
However no guarantee this is where the money will be spent plus large administrative/oppoturnity costs
Profit =
Q(P-V) - F
Supply and demand diagrams and market equilibrium
Look for column where S=D
• Drawing and analysing changes in cost and revenue diagrams
Shift MR and AR curves to the left
Make the AC curve flat and long
Cross to the left of centre
Both cost curves overlap
Draw quantities where MR=MC
Difference between fixed and variable costs
- Fixed costs do not change as output varies (costs or overheads e.g. rent or advertising).
- Variable costs increase when output increases. Variable costs are the cost per unit e.g. cost of raw materials for making a product.
- Information and irrationality as Market failures
Information gaps exist when either the buyer or seller does not have access to the information needed for them to make a fully-informed decision.
Irrational behaviour is when decisions are made which don’t maximise utility but can cause a loss of economic welfare
Asymmetric information – one party has more information leading to a misallocation of resources – do not no impact of throwing away food
Irrationality due to:
Consideration of the influence of other people’s behaviour,
habitual behaviour – the frequency of our past behaviour influences our current behaviour,
inertia – consumers might not make an active effort to change their behaviour due to too much choice, complexity of information, information overload, consumer weakness at computation
- Possible impact of supermarket Monopsony power on food suppliers and consumers
Monopsony is a market form in which only one buyer faces many sellers – example of imperfect competition – the monopsonist may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers
Negotiate lower prices, farmers lose out and gain less revenue, could make less than normal profit and shutdown reducing supply of food raising prices in the long run for consumers
Barrier to entry for new firms, farmers then cant broaden their selling potential, less choice for consumers
However - reduced costs, lower prices for consumers for competition, increased consumer surplus and less poverty - but trade unions and fairtrade
- One reason for a change in the concentration ratio of the supermarket industry
The 4-firm concentration ratio consists of the total market share of the 4 largest firms in the industry (expressed as a percentage)
Following the rise of discounted-supermarkets such as Aldi and Lidl, there has been a large change in the concentration ratio of the supermarket industry. Previously, the market has been dominated by the likes of Tesco’s, Sainsbury’s and ASDA, however the rapid growth of these firms has seen the concentration ratio decrease as Aldi and Lidl because some of the largest supermarkets in the industry.
- Subsidy diagram and effects
- Vertical distance between the supply curves shows the value of the subsidy per unit
- Producer rectangle - P3-P2 * output
- Consumer rectangle - P2-P1 * output
Supply shift to the left
Draw up from Q1 to both supply curves then left to axis. Split at Q=S=D
Price, cross and income elasticities of demand and elasticity of supply
- PED = %change in QD/%change in P (depends on availability of substitutes, proportion of income spent on good)
- XED = % change in QDY / % change in QDX (+ve = subs, -ve = comps)
- YED = %change in QD / % change in Y (+ve = normal, -ve = inferior)
- PES = % change in QS / % change in price (depends on time, stocks, spare capacity)
