chains of reasoning

Question 1

explain how firms in perfect competition become allocativley efficent in the long run

Answer 1

• This is becuase in a perfectly competitve market there are no barriers to entry.
• As a result if supernormal profit srae being made this acts as a signal for new firms to enter the market.
• This will cause an outward shift in market supply, which will lead to the market price falling to a level where price= ATC
• in the long run a price taking firm will operate at an output where AR=ATC and where price = MC, leading to an allocativley efficent firm

Question 2

assess the microeconomic impact of technologicals changes in a developed country of your choice

Answer 2

• One possible microeconomic impact is a fall in the number of jobs in logistic firms such as Amazon and DHL.
• This is because labour that complete routine tasks such as packaging and collecting can be replaced by mobile robots.
• This is an example of capital labour substitution- whereby productivity of the firm is designed to increase and the the unit costs are designed to decrease.
• If firms start replacing labour, then there will be an inwards shift in demand for labour- shown in analysis diagram,
• As a result of this employment will fall and median wages will fall.
• If people loose their jobs due to automation then this may lead to an increase in structural unemployment- caused by occupational immobility of labour.
• However, while the introduction of mobile robots can reduce the number of jobs with routines tasks, it can also lead to the creation of new jobs such as software development, robot training and mantainance. All of which these jobs offer higher median wages. However, being able to gain the skills in order to attain these jobs depends on the overall occupational mobility of labour.

Question 3

how do monopolies make supernormal profit in the long run?

Answer 3

• A monopolist maximises profits where MC=MR at a price above AC, this leads to supernormal profits being made,
• in a competitive market, this would act as a signal for new firms to enter the market but in a monopoly there are barriers to enter within the market.
• for example patents and marketing spending to build brand loyalty and make entry harder, all of which act as barriers to entry protecting supernormal profit

Question 4

explain how the level of spare capacity affects PES

Answer 4

• PES measures the responsivness of quantity supplied in reposnse to changes in price
• spare capacity exsist when the current level of production is below the maximum possible output in the short run
• This means that there are spare labour and capital inputs avaliable to use.
• if spare capacity exists, then a firm can increase output without a rise in unit costs and so supply will be price elastic if there is an outwards shift in demand
• supply is elastic if the coefficent of PES is greater than 1
• eg: a construction may have spare capacity towards the end of a recession

Question 5

Assess the extent to which monopolistic competition leads to economic efficency

Answer 5

• in monopolistic competition we assume that many firms each sell slighlty differentiated products and that barriers to entry are low.
• an example might be sandwich shops competing in a city centre
• intense compettion between firms means that demand is likley to be price elastic, which then means that prices move closer to marginal costs
• Therefore, in contrast to a monopoly prices would be lower for consumers and this would be an improvment in the allocative efficency of scarce resources
• However firms in monopolistic competiton still have some pricing power, this is shown by AR and MR being downward sloping.
• This is especially true for firms with strong brand loyalty
• Even if the entry of new firms and products mean that normal profits are made, price is still above MC and so allocative efficency is not achieved
• The saturation of many differentiated products may also lead to productive inefficency as firms are unable to fully exploit economies of scale in the long run.

Question 6

examine why price discrimination may lead to a loss in consumer welfare

paragraph 1: An+ Ev

Question 7

explain why price discrimination may lead to a loss in consumer welfare

paragraph 2: An +Ev

Answer 7

• price discrimination is when a firm charges different prices to different consumers for the exact same good/service, not for supply reasons
• For example, consider broadbrand and insurance firm charging higher to renewal customers rather than first time buyers
• This is an example of 3rd degree pricing as renewal consumers tend to have a lower coefficent of PED- due to habitual behaviour
• Consequently, firms charge higher prices above marginal cost and extract consumer surplus, leading to a loss of allocative efficency and a deadweight loss of consumer welfare
• This can then cause consumers such as older households to have less disposable income
• However, this has been deemed illegal by the UK FCA, who banned it in 2023. It is estaimted to save consumers £4bn over the next decade
• Furthermore, in defence of broadbrand companies, many of them including Sky, BT and Virgin Media are now introducing social tarrifs offering support to over 4 million households on benefits to recieve a cheaper deal. This was made possible by the proceed of price discrimination to fund a cross subsidy which has social benefits

Question 8

examine two factors which may limit monopoly power of a firm

Question 9

examine how a firm may use predatory pricing

Question 10

explain how a firm may be affected by an increase in national minimum wage?

Question 11

what is the microeconomic effect of an inctroduction of a specfic tax on plastic bottles and cups