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A Level Economics – Year 2 (A2) Revision Workshop
Session one – Presentation to go with Workbook
A Level Economics – Year 2 (A2) Revision Workshop
Today’s event:
02
Session Topic
1 Costs, Revenues, Business Objectives and Competition
2 Concentrated Markets and Government Intervention
Break (back for 12:15)3 International Trade and Exchange Rates
Lunch (back for 13:55)
4 Economic Development
5 Current UK Policies and Global Economic Performance
A Level Economics – Year 2 (A2) Revision Workshop
Your download link:
www.tutor2u.net/a2econ2016.pdf
A Level Economics – Year 2 (A2) Revision Workshop
Session 1Costs, Revenues, Business Objectives and Competition
03
A Level Economics – Year 2 (A2) Revision Workshop
Session 1 outline03
Distinguishing between the short run and long run
Theory of costs
Theory of revenues
Profit maximising and business objectives
Evaluating perfect competition
Evaluating contestability
A Level Economics – Year 2 (A2) Revision Workshop
Short Run and Long Run
Short run
• Definition: The period of time over which at least one factor of production is fixed
• Example: A coffee shop in a week can only increase the number of coffees made by employing more labour, because capital and land is fixed
Long run
• Definition: The period of time over which all factors of production are variable
• Example: Over the course of 6 months, a coffee shop could increase the number of coffees made by employing more labour, AND expanding the premises and buying more coffee machines and fridges
03
A Level Economics – Year 2 (A2) Revision Workshop
Cost curves
Output
Cost
s
04
Average cost• Cost per unit
Marginal cost• Additional cost of producing one more
unit
Fixed cost• Costs incurred even when output is zero
Variable cost• Costs varying directly with output
AC
MC
AFC
AVC
A Level Economics – Year 2 (A2) Revision Workshop
Explaining the shape of cost curves
04
Gains from specialisation and division of labour as more workers are added
Scarcity of capital and other fixed factors of production
For example, technical economies, financial economies, purchasing economies
Coordination issues, low morale, principal-agent problem
A Level Economics – Year 2 (A2) Revision Workshop
Revenue – key concepts
Total revenue
• The total value of sales• Price x Quantity (or Profit + Total Costs)
Average revenue
• Revenue per unit sold ( = price)• Total Revenue ÷ Quantity Sold
Marginal revenue
• The additional revenue earned from selling one more unit
04
A Level Economics – Year 2 (A2) Revision Workshop
A firm’s revenue curve05
Output
Reve
nue
Output
Reve
nue
Perfect Competition
Imperfect Competition
AR = MR
AR
MR
A Level Economics – Year 2 (A2) Revision Workshop
Bringing it all together: profit05
•The minimum amount of profit that a business can earn to remain in the industryNormal Profit
•Any profit earned above normal profitSupernormal (abnormal) Profit
•Marginal Revenue = Marginal CostProfit Maximising Condition
A Level Economics – Year 2 (A2) Revision Workshop
Profit maximising condition04
Q
PSUPERNORMAL
PROFIT
A Level Economics – Year 2 (A2) Revision Workshop
The role of profit05
Provides funds for reinvestment / R&D
Rewards shareholders for risk-taking
Saved for the future Acts as a signal to existing and new businesses
The role of profit
A Level Economics – Year 2 (A2) Revision Workshop
Alternative Business Objectives06
Revenue Maximisation
Productive Efficiency
Product Differentiation
Normal Profit / Limit Pricing
Dynamic Efficiency
Satisficing Behaviour
Social Responsibility
Predatory Pricing
Allocative Efficiency
MR = 0 Lowest AC
AR = AC
AR = MC
Now indicate these points on the diagram:
• Revenue max
• Productive efficiency
• Normal Profit
• Allocative efficiency
Remember that these conditions simply give you
the LEVEL OF OUTPUT
You need to read UP to the AR
/demand curve to work out the PRICE for that level of output
A Level Economics – Year 2 (A2) Revision Workshop
Alternative Business Objectives – Revenue max
06
Q
P
A Level Economics – Year 2 (A2) Revision Workshop
Alternative Business Objectives – Productive Efficiency
06
Q
P
A Level Economics – Year 2 (A2) Revision Workshop
Alternative Business Objectives – Normal Profit
06
Q
P
A Level Economics – Year 2 (A2) Revision Workshop
Alternative Business Objectives – Allocative Efficiency
06
Q
P
A Level Economics – Year 2 (A2) Revision Workshop
Charity Shop
Energy Firms
Tech Startups
Nationalised Firms
Possible objectives – time to think
06
Charity Shop• Social responsibility? Revenue maximising? Productive efficiency?
Energy Firms• Market share? Profit maximisation?
Tech Startups• Dynamic efficiency? Social responsibility?
Nationalised Firms• Allocative efficiency? Productive efficiency?
A Level Economics – Year 2 (A2) Revision Workshop
Perfectly competitive markets - characteristics
07
No dominant firms
Many buyers & sellers
Perfect information
Homogeneous goods
No barriers to entry / exit
Firms are price-takers
A Level Economics – Year 2 (A2) Revision Workshop
Perfect competition diagrams: SR to LR
07
S1
P1AR1 = MR1
Q1
P1
Q1
A Level Economics – Year 2 (A2) Revision Workshop
Should the government aim to make all markets perfectly competitive?
07
Arguments in favour
• Productively efficient: in the long run (in theory!), thereby minimising waste
• Allocatively efficient: in the short run and long run (in theory!), thereby ensuring resources are used appropriately
• Welfare gains: maximise consumer surplus, lowest possible prices• Internationally competitive: low prices can boost export volumes
A Level Economics – Year 2 (A2) Revision Workshop
Should the government aim to make all markets perfectly competitive?
07
Arguments against
• Productively inefficient: many small firms reduces the chance of growth and achieving economies of scale and scope
• Allocatively inefficient: consumers like choice – homogeneity does not allow this
• Dynamically inefficient: lack of LR supernormal profits minimises R&D and investment opportunities, limiting economic growth
• Information free-riders: perfect knowledge prevents profit being earned from good ideas or ideas that are costly to develop
A Level Economics – Year 2 (A2) Revision Workshop
Should the government aim to make all markets perfectly competitive?
07
General Points
• Unrealistic characteristics / assumptions e.g. always some barriers to entry/exit, no such thing as perfect information
• Unachievable aim - too costly for government as well as unrealistic; impossible if an industry requires networks
• Transaction costs: too costly for consumers• International dimension: domestic competitive firms may be
undercut by low-cost monopolies from abroad
A Level Economics – Year 2 (A2) Revision Workshop
Contestable markets – characteristics & outcomes
08
Very low barriers to entry
Very low barriers to exit
Potential for competition
Any number of firms
No sunk costs / economies of scale
Making markets more contestable is a keystone
of competition policy
Contestable markets may be susceptible to hit and
run competition
The threat of competition forces incumbent firms to
behave competitively
Incumbent firms tend to operate at the normal
profit point
A Level Economics – Year 2 (A2) Revision Workshop
Contestable markets – a possible diagram
08
Q
P
A Level Economics – Year 2 (A2) Revision Workshop
Types of barriers to entry08
Economies of scale
Vertical Integration
Control of Technology
A Level Economics – Year 2 (A2) Revision Workshop
Types of barriers to entry08
Licences
Patents
Public franchise
A Level Economics – Year 2 (A2) Revision Workshop
Types of barriers to entry08
Brand proliferation
Predatory pricing
Brand loyalty
A Level Economics – Year 2 (A2) Revision Workshop
08
What do YOU
think?
No professional qualificationsAny locationMinimal start-up costsEasy to exit the industry
Hire rather than buy planesLow pricesReduced costs – out of the way locations, few staff
Evidence of new firms e.g. Tesco Bank, Atom Bank
Industry dominated by large companies with brand loyalty
Start-up costs high: pilots, groundcrew, licences, landing slots etcSunk costs: advertising
Strong consumer loyalty due to high switching costs / inconvenience
A Level Economics – Year 2 (A2) Revision Workshop
Discuss the impact on consumers of the mobile network market becoming more contestable.
09
POINT•Increasing contestability forces firms to operate at a point where normal profits are earned - this lowers prices and raises output, therefore increasing consumer surplus
THIS IS BECAUSE…•Firms must aim for normal profit so as not to attract new firms to the market risking "hit and run" competition and a loss of market share. There is a strong battle to gain market share amongst UK mobile network providers
A Level Economics – Year 2 (A2) Revision Workshop
Discuss the impact on consumers of the mobile network market becoming more contestable.
09
IN THE CASE OF THE UK MOBILE NETWORK MARKET…•There is a small number of network providers, each of which has brand loyalty due to lengthy contracts - this allows prices to be high. A more contestable market could lower prices for consumers and make contracts less confusing
HOWEVER…•It is difficult to see how barriers to entry in this market could be lowered, and the market made more contestable, because handset prices may be dictated by phone manufacturers such as Sony and Apple
A Level Economics – Year 2 (A2) Revision Workshop
Discuss the impact on consumers of the mobile network market becoming more contestable.
09
FURTHERMORE…•There are large economies of scale needed for good national network coverage - so consumer experience could be worse with increased contestability
LINK BACK TO THE QUESTION…•Consumer satisfaction may actually be reduced rather than increased as a result of increased contestability in the mobile network provider market
A Level Economics – Year 2 (A2) Revision Workshop
Additional Activities10
Calculating costs
Applications of barriers to entry
Profit maximisation - essay frame
Efficiency in perfect competition – essay frame