THE FIRM AND ITS CUSTOMERS (Unit 7&8 Part 1)

Question 1

4 Reasons for the law of demand

Answer 1

1. Willingness to pay (WTP) decreases as quantity acquired increases:
   People get less utility from another unit of a product if they’re
   already consuming a lot of it.
2. If there are good substitutes available, price increases result in
   some consumers rather buying from a competitor (loss of market
   share)
3. Especially if the product is expensive, price increases may mean
   people are less able to afford the product (income effect)
4. If the product is indivisible (something large like a car) more people
   may decide not to buy it at all when the price rises

Question 2

Check out the non price determinants of demand and supply from IGCSE textbook

Question 3

exercise on slide 38 of unit 7&8 part1

Question 4

MR and MC in relation to profit maximisation

Answer 4

If MR > MC (e.g. B), an extra
unit would increase 𝜋 so
produce more

If MR < MC (e.g. D), one unit
less would increase 𝜋 so reduce
production

Max profit: MR = MC

Question 5

ask for comparison of exercise on slide 64

Question 6

economies of scale

Answer 6

cost advantages that companies experience when they increase production (as production increases, the cost per unit decreases)

Question 7

Causes of economies of scale

Answer 7

Technological advantages: when
large scale production requires
fewer inputs per unit of output.

Cost advantages: when large
firms purchase inputs at lower
cost.

Network economies of scale, refer to the phenomenon where the value of a product or service increases as more people use it. In other words, the more users a network has, the more valuable it becomes to each user.

Question 8

Diseconomies of scale

Answer 8

Diseconomies of scale are situations where increasing output comes with increasing per-unit costs

Question 9

why do higher prices arise in the face of increased demand?

Answer 9

Higher prices provide individuals and firms an incentive to conserve society’s scarce resources

Question 10

what are the Monopoly barriers to entry?

Answer 10

1. Exclusive ownership of a resource - (De Beers)
2. Legal - (Telkom)
   * Patents, copyright (artificial)
3. Cost of production (economies of scale) – (Eskom)
   * Natural Monopoly