Exam Q O1 Flashcards
(36 cards)
Evaluate the microeconomic effects of mergers in a market of your choice (25)
Horizontal integration is where 2 firms merge that are in the same industry and same stage in production process eg Jaguar and Landrover
One microeconomic effect of a merger of Jaguar and landrover is an increase in productive efficiency because merger firms are better placed to tap into the economies of scale that exist in the car market. Economies of scale are where a firms LRAC are falling as output rises. For example they can exploit purchasing economies of scale where they can bulk buy raw materials like tyres, engines and steel also also tap into financial EOS = lower IR = loans can be invested in new tech= further decrease costs. This would enable the firm to operate closer to its MES so the firm will be more productively efficient. These lower costs can therefore be passed onto customers in the form of lower prices so allocative efficiency increases
EVAL:
-May lead to firm becoming x-inefficient as if 2 firms merge, the market becomes more concentrated so the firm will have more dominance so they will have less incentive to minimise costs as they dominate the market
-managerial diseconomies of scale= decrease communication+ cultural clash= merger in LR may result in demerger
DIAGRAM for x-inefficinecy. LRAC should be at point A but lack of comp= they produce at B with higher costs
Another effect is that the merger may also result in the firm becoming more dynamically efficient because when 2 firms merge they will have combined customer base so MR and AR shift out
DIAGRAM
> Sales increase from Q1 to Q2, price increases from R1 to R2 and profits increase from R1ABC1 ro R2DEC2.
These profits can then be invested into new technology like wide range of electric cars or self driving cars and as a result dynamic efficiency should increase
EVAL: Merger might result in exploitation of consumers as market is now more concentrated, so less firms in market means less choice. Also PED is becoming inelastic due to lack of substitutes, so if prices rise then there will be a less than proportionate decrease in demand so profits will increase but allocative efficient will fall and consumer surplus will fall
3) Also when firms join together they have higher degree of monopsony power = decreased variable costs =reduces how much they pay for steel or tyres so MC and AC fall and prices the charge consumers fall so allocative efficiency increases as decreased costs so cars become cheaper for low income households eg electric is cheaper so ppl switch= better for environment
Eval
-Cma May interven to limit monopsony power
-market becomes more concentrated as lack of substitutes
Judgement:
For car market, MES is hard to reach and needs alot of output to fully tap into all economies of scale , so its only a good idea to merge if it means low prices for consumers, but CMA should monitor their activities to ensure consumers are not exploited
6b) With reference to extract A discuss the likely effectiveness of measures to open up and increase competition in the uk energy market
One method to increase comp is to increase database which will reduce information gaps and makes the market more contestable so it will be easier for consumers to switch between suppliers and new firms have incentive to enter as if they lower prices, consumers more incentivised to stitch to thema nd so incumbent firms are more likely to reduce their prices and act as if there was more competition because of threat of entry becomign real
EVAL- CMA acts as surrogate to competition by monitoring the market
- However consumers tend to exhibit habitual behaviour eg inertia is the idea that you know you can save money but dont want to change. Also elderly may be less likely be able to use the technology like the database so not efficiency at promoting comp
Another way is using price caps
Explanation: Price caps are a direct way of increasing competition by limiting how much suppliers can charge consumers, ensuring that firms do not exploit their market power.
How it helps: Price caps protect consumers from excessive pricing and prevent dominant firms from taking advantage of less competitive markets. They encourage firms to be efficient and innovate while staying within price limits.
Evaluation:
Advantages: Ensures that prices remain affordable for consumers and prevents monopolistic behavior.
Disadvantages: If set too low, price caps can reduce suppliers’ profitability, leading to reduced quality of service, or discourage new entrants if they perceive the market as unprofitable. Additionally, firms may not have enough incentive to innovate or reduce costs if prices are capped.
Discuss policies businesses and governments might implement to reduce labour immobility to benefit the energy sector (15)
GOV
- Invest in training and education programmes= helps occupational immobility, by providing education schemes= develop skills necessary to take up job in that sector to fill shortage
EVAL-time lag
Business
- want to encourage ppl to move so provide housing subsidies = improves geographical imbolity of labour as incentivises more ppl to move where job shortages = attract skilled workers from overseas
EVAL- family ties= difficult to relocate and move also language barriers
Analyse the effect of imposing a maximum wage in the market
A maximum wage is a ceiling wage that a firm can pay its workers on an hourly basis;
-Less supply of high skilled labour as there is a contraction in supply of labour from A-B because less incentive for individuals to work at lower wage= brain drain, where high skilled labour leaves to other countries where there is no maximum wage. In the long run, this could reduce productivity and innovation in high-skilled industries
-Demadn for labour increases, demand extends from A-C as high skilled worker are now cheap= excess demand
Firms may struggle to attract top managerial talent at lower wages.
→ This prevents firms from accessing managerial economies of scale (e.g., better leadership, improved business processes).
→ Without these, firms may become less productively efficient, raising long-run average costs.
EVAL
However,labour is a variable cost.
→ With a lower maximum wage AC and MC fall= increased profits= increased output= decreased prices= benefit consumers through lower prices
If other countries offer higher pay (no wage caps), workers from abroad have less incentive to migrate to the UK.
→ This increases geographical immobility of labour—even if vacancies exist, firms may struggle to fill them because the wage cap makes it unattractive to relocate.
Re-nationalising the railway
-Railway market i UK- natural monopoly where sunk costs are so high its only rational for one firm to provide all output
-If a lot of firms provide train services=Q1
Access whether Netflix behave rationally (10)
Rationaly behaviour- where individuals make decisions that maximise or increase their utility
Irrational behaviour is where they don’t maximise their utility
-they cancel subscriptions= rational as prioritising essentials
-Intertia-where ppl know they can save money by switching company but stay with what they know - don’t want o change habits e elderly exhibit inertia
-Herding behaviour- following crowd
-Unrealsistic expectations regarding future behavour
-Computtional problems- can’t do maths,can’t comprehended what is best for them as too much numbers involved
-Irrational if think its cheaper but isnt
With reference to the information provided, discuss the impact on the market for newspapers of the issues raised by the article. Use a demand and supply diagram to support your answer. (25)
The rise in price of newsprint [K] which
“surged by over 50%” [Ap] will cause a rise in the cost of producing of newspapers [An]. This will lead to a fall in supply from Sl to S2 [An] increasing the price form Pl to P2 and contracting demand from Q1 to Q2 [An]. This reduces consumer surplus and the sales revenue for newspapers [An]. in response to this crisis, some publishers may need to shift further towards digital platforms to reduce their reliance on expensive newsprint [Ap]
However, the extent to which this affects price and quantity of newspapers depends upon the price elasticity of demand [E]. In recent years digital platforms have emerged as appealing substitutes to printed newspapers, so this makes demand more price elastic over time. It also reduces the necessity of a printed newspaper, as consumers find online sources more convenient and up-to-date [E]. Therefore the price elastic demand ensures that the rise in price is likely to be relatively small and the fall in quantity is likely to be relatively large
Another impact is as “people working from home reduced newspaper purchases” [Ap] this led to a fall in demand for newspapers [K]. This fall in sales [Anl combined with rising costs will have reduced the profitability of newspapers [An]. Paper mills “are now shutting down newsprint capacity and diversifying their products. Some are converting their machines to produce packaging for e-commerce” [Ap].
Firms are spreading their risks to reduce their over reliance on a declining market
However, some impacts are temporary and some are more permanent [E]. It remains to be seen whether people will return to the previous level of demand or whether their habits and preferences have permanently changed [E]. Furthermore, since newspapers have a short production period, supply is relatively price elastic, so it is possible for newspapers to respond to the change in demand by cutting the quantity supplied relatively easily. Therefore the fall in quantity is likely to be relatively large and the fall in price is likely to be relatively small
Evaluate the likely microeconomic consequences of consumers shifting from vehicles powered by fuel obtained from oil to electric-powered vehicles (25)
One effect is lower demand for petrol cars and petrol itself, reducing fuel retailers’ revenue [K]. As demand for petrol falls, the average revenue (AR) curve for fuel firms shifts left from ARl to AR2. This lowers the price from Pl to P2 and reduces output from Q1 to Q2 [An]. Less revenue may force fuel companies to close petrol stations, leading to job losses in fuel retail and distribution [An]. As profits shrink (shaded area in Diagram 1), investment in fuel infrastructure may fall, harming efficiency [An]. This may shrink the sector, affecting oil-exporting economies [An].
But the size of this fall depends on how fast consumers switch to electric vehicles (EVs) and if fuel companies invest in renewables [E]. Hybrid vehicles may slow the switch, keeping fuel demand high in the short term [E].
Lower oil demand could cut prices, making petrol cars cheaper to run, which may delay EV adoption [E].
Higher petrol taxes or more subsidies for EVs could speed up the shift
Another effect is the growth of the EV industry, helping EV makers, battery firms, and charging networks [K].
Higher EV demand shifts the demand curve outward, raising revenues and allowing firms to benefit from economies of scale [An]. More profits mean more research and development, improving batteries, and lowering costs over time [An]. Better production efficiency could cut EV prices, boosting adoption and leading to positive externalities like lower carbon emissions and cleaner air [An].
More jobs in EV and battery production could raise incomes
Yet, there are downsides. EV battery production has negative externalities, such as environmental harm from lithium and cobalt mining [E]. More electricity demand could mean higher fossil fuel use, reducing EVs’ environmental benefits [E]. High costs and limited charging stations may slow adoption, especially in poorer nations
In conclusion, if EV adoption happens quickly and governments support it with strong policies, then petrol markets will decline sharply, making it harder for oil firms to adjust. If the transition is more gradual, then traditional fuel companies will have time to diversify, reducing the negative impact. If infrastructure development and affordability remain issues, then adoption may slow, limiting the effect on petrol markets. The significance of these effects will depend on government intervention-if policymakers introduce bold incentives and regulations, then the shift will accelerate, increasing efficiency but intensifying the decline of fuel-based industries.
Discuss the likely success of policies to reduce the consumption of single-use plastic bags in cities such as Istanbul (12)
One policy to reduce single-use plastic bags is indirect taxation or charges [K]. The Turkish government is considering raising taxes on plastic products, which could lead to supermarkets charging for bags [Ap].
This would discourage consumption by increasing the price, making
consumers more likely to reuse bags or switch to alternatives. The
effectiveness of this depends on the price elasticity of demand (PED) for plastic bags-if demand is inelastic, the impact may be limited
Another approach is banning plastic bags or enforcing regulations [K]. The extract states that some areas of Turkey have completely banned plastic bags and imposed heavy fines on consumers and businesses [Ap]. This method directly limits supply, ensuring a sharp reduction in plastic waste. In areas where carcinogenic black bags are banned, the policy may improve both environmental and public health outcomes. However, enforcement is crucial-without strong monitoring and penalties, the policy may not be effective
However, the success of these policies depends on economic factors [E]. In emerging economies like Turkey, many people face financial hardship, meaning environmental concerns may be secondary to affordability [E]. If consumers cannot afford alternatives like canvas bags, they may resist these policies or seek cheaper, unregulated plastic bags from informal markets
Additionally, habitual behaviour may limit effectiveness [E]. The extract suggests that plastic bags are widely used for even small purchases, meaning many consumers may not immediately change their behaviour despite new taxes or bans. The UK plastic bag charge was successful, but similar policies may take longer in Turkey due to cultural differences in consumption habits
Evaluate the likely microeconomic effects of such a tax. (25)
VAT diagram
One microeconomic effect of the tax is an increase in price and a reduction in the quantity demanded for sugary soft drinks [K]. As shown in the diagram, the tax shifts the supply curve leftward from S to S+ tax, increasing the price from Pl to P2 and reducing quantity from Q1 to Q2 [An]. The tax burden is shared between consumers (area A) and producers (area B), with the division depending on the price elasticity of demand [An]. If demand is relatively inelastic, then consumers will bear a larger share of the tax burden, meaning a smaller reduction in consumption [An]. Conversely, if demand is elastic, then firms may bear more of the tax, leading to greater reductions in sales and revenues
Additionally, firms producing sugary drinks may experience lower profits as costs rise and demand falls. Some producers may respond by reformulating their products with lower sugar content to avoid the tax, leading to increased investment in healthier alternatives [An]. A substitution effect may also occur, with consumers switching to lower-taxed or untaxed beverages such as water, diet drinks, or fruit juices [An]. The tax may also increase government revenue, which could be reinvested into public health services to address obesity-related illnesses
However, the effectiveness of the tax depends on price elasticity of demand. If demand is inelastic, then the tax may raise significant government revenue but have a limited impact on consumption patterns [E].
The regressive nature of the tax is another concern, as lower-income households spend a larger proportion of their income on food and beverages, meaning they are disproportionately affected [E].
Additionally, some consumers may respond by seeking cheaper alternatives or purchasing sugary drinks from informal markets, undermining the effectiveness of the policy
The effectiveness of the tax also depends on the availability and attractiveness of substitutes-if healthier drinks are perceived as too expensive or less appealing, then the tax may not significantly alter consumer behaviour [E]. Additionally, the time lag in observing health benefits means policymakers must be patient in assessing its full impact
In conclusion, if demand for sugary drinks is elastic and consumers respond by switching to healthier alternatives, then the tax could be an effective tool in reducing sugar consumption and improving public health. However, if demand is inelastic and consumers continue purchasing despite higher prices, then the tax will primarily function as a revenue-raising measure rather than a deterrent. The long-term impact will depend on whether firms reformulate their products, how government revenue is reinvested, and whether consumer behaviour shifts in response to price changes
Profit maximisation is assumed to be the business obiective of most firms. With reference to Extract A, assess whether this is the case for coffee shop owners (10)
Profit maximisation occurs when marginal cost equals marginal revenue
(MC=MR), meaning firms operate at the most profitable level [K]. Large coffee chains, such as Costa Coffee, may aim to maximise profits to satisfy shareholders. Costa’s £3.9 billion takeover by Coca-Cola suggests a focus onlong-term shareholder returns [Ap]. As a major brand, Costa continues to expand despite tough market conditions, indicating a commitment to profitability over short-term costs
However, some coffee shops may prioritise sales maximisation (AC=AR) or revenue maximisation (MR=0) over profit maximisation [K]. The extract states that independent coffee shops focus on offering a premium, luxury experience rather than competing on price [Ap]. By providing better atmosphere, customer service, and high-quality products, they may accept lower profits to build a loyal customer base and maintain market share
However, profit maximisation may not be the sole objective [E]. Investing in higher-quality coffee raises costs, but this may build a stronger brand and increase profits in the long run [E].
Some firms also sacrifice profits for ethical or sustainability goals, as seen with Coca-Cola’s commitment to sustainable communities
The objective also depends on ownership structure [E]. While Costa’s corporate owners focus on shareholder returns, independent coffee shop owners may prioritise survival, customer satisfaction, or lifestyle goals over maximising profits
Evaluate the view that price discrimination benefits consumers in market of your choice (25)
1) One reason why consumers benefit is firm may become more dynamically efficient. Demand amongst students is likely to be price elastic because less likely to have incomes or jobs therefore a decrease in price by rail company for students would lead to a more than proportionate increase in demand and a higher revenue for the rail company. For adults market demand is inelastic as adults more likely to have an income therefore an increase in price will lead to a less that proportionate decrease in demand so revenue will rise
By price discriminating they can generate more profit than if they were selling at one universal price of p3. These higher profits can be invested into improving services eg faster trains or comfy seats= consumers benefit cos of dynamic efficiency going up also better quality
Eval
-high chance of seepage eg adults may buy student tickets. Rail company lose profits also expensive to hire inspector to check everyone’s ticket = increased costs and decreased profits so quality may not increase
2) Students benefit through lower prices. If no price discrimination then can’t offer these lower prices. By offering lower prices= improved geographical immobility of labour eg ppl may live outside of London but travel to London to take up a job
Eval
-Adults worse off as not all adults have income as many unemployed so many low income households priced out of using trains
-Train services likely to be an inferior good with negative YED. Ppl with high income likely to travel by car if income falls you typically demand more rail travel but now can’t cos of high price = worsens income inequality can’t access trains so may actually increase geographical immobility
Judge
Beneficial or not depends on which sun market they’re in
Evaluate the possible economic effects of a minimum price in the alcohol market (25)
Minimum price is a floor price producers can charge below.
Negative externalities are costs which affect third parities outside the market mechanism.
Minimum price will increase the price of alcohol . Higher price = less alcohol can be bought so overconsumption falls. Reduced consumption = decreases alcohols external costs eg illness. This will reduce gov spending on police officers and healthcare helping gov reduce deficit and increase spending on other sectors like education
Minimum price set at pmin which will lead to a contraction in demand and extension in supply= reduces overconsumption of alchol
However demand for alcohol is inelastic so even if minimum price increases quantity demanded may only fall by a small percentage so alcohol may still be overconsumed this can be seen in diagram 2 where quantity demanded is inelastic so amount of ppl drinking alcohol won’t fall
Also min price = increased price of which consumers can sell for = increased revenues of alcohol producers increasing their profits and can invest into expanding more workers
Also better health= increased productivity and less sick = increased output and increase firms profits
However u t intended consequences and black markets
Info
Social cost = private cost+external costs
Social benefit = private benefit plus external cost
Social optimum = MSC= MSB
Ways to solve negative production externality
-Min price
-tax
-tradeable pollution permit
-regulation eg set legal age requirements
Ways to solve positive consumption externality
-subsidy
-max price
-regulation
Info
Non excludable is can’t stop other form using it
Non rival =your consumption doesn’t stop other using it
Public goods= flood defences=police,parks, street lights
How gov intervenes to protect market failure by incomplete info
-regulation eg warning label on tobacco
-subsidies
-Providing info
-indirect taxation
Profit cap
Profit cap= decreased prices for consumers
Eval
-Less profits and less investment and less dynamic efficiency
-depends on profit ceiling
-x in efficiency so price may not fall
Price discrimination to rail service
-more affordable
-increase dynamic efficiency= invest in better services or chairs = increased allocative effiiency
-eval
-ppl priced out
-Labour becoming geo immobile
-seepage if adults buying student tickets
Evaluate the case for nationalisation for an industry of your choice (25)
Nationalisation private sector company brought under state control to be managed by gov
Private company want to maximise profits at MC=MR while gov wants to maximise welfare at MC= AR
Nationalisation is likely to result in higher levels of allocative efficiency , gov would want to prioritise consumer welfare rather than maximising profits liek the private sector will so move from MC=MR to MC=AR , price of train services is likely to fall = good for consumers and low income households = can now afford and use train services , trains are cheaper so easier for ppl to move from one area to another = reduces geographical immobility of labour. Gov would also provide more train services from Q1 to Q2, in order to do this they now need to hire more workers= more jobs created = more job security. Also a private company east coast line were doing so badly that gov had to step in and bail them out if it wasn’t for that then there would have been major job losses
Eval
-gov can exert high levels of monopsony power so gov may reduce wages they pay workers= bad for workers eg nurses get paid significantly lower in public sector than private
2
Comp is not good as if multiple firms provide good then each firm will only have small segment of market output so operate at Q1 so then AC will be high at C1, the minimum price producers would need to charge is C1 therefore many consumers will be priced out and won’t be able to afford it. However if nationalised then will have one producers so will produce at Q2 with costs lower at C2, costs lower as can be spread out over large level of output = can tap into EOS eg as rail network made up of 32000km and 2500 stations they can bulk buy trains,steel or ticket machines= lower costs so increased productive efficiency and lower prices for consumers
Also when private sector makes profits they they are given to shareholders in the form of dividends if nationalised then gov more likely to reinvest profit back into train services like air conditioning on trains therefore higher levels of dynamic efficiency
Eval
-decreased competition = x-inefficiency as no incentive to minimise costs so many not have profits to invest so no dynamic efficiency
Judgement
Gov should renationalise rail network because it’s a natural monopoly and competition may not work because train services have been characterised by delays and stikes and it’s a natural monopoly so makes sense for one provider to provide all output .Therefore gov should renationalise but whatever profit is made from rail network needs to be re invested back into train services to ensure dynamic efficiency
With reference to info provided and own knowledge to what extent might regulations on the sale of cigarettes and high taxes of cigarettes lead to gov failure (12)
Define gov failure
1-ppl switch to hidden economy + decreased tax revenue for gov which could’ve been used on eg healthcare also products not regulated= so things ppl consumer are more harmful than cigarettes
Eval- gov failure may not be due to gov intervention and may be that it would occur even if gov didn’t intervene as smuggling occurs without gov intervention so not failure as happens regardless
2-Indirect taxes= regressive more impact on low incomes = widen inequality
3-Unintended consequences = eg increase cost for firms so may close down
Eval- wasn’t gov failure as it was necessary as there was a large external cost and was effective as % of smokers fell
= tax internalises external cost= increased gov revenue = hypothecate revenue to spend back on cigarettes market failure
