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Edexcel Economics Notes

Edexcel Economics Notes

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Published by AY6061
Edexcel Economics Unit 3 Business Economics and Efficiency
Edexcel Economics Unit 3 Business Economics and Efficiency

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Published by: AY6061 on Jan 23, 2011
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08/17/2013

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Monopoly
Supernormal profits
-L
 
ess incentive to be efficient/innovative/produce new products-More resources to protect market dominance by raising barriers to entry+More funds for investment and R&D+Reserves to overcome short term difficulties (eg: stability to employment)
Monopoly Power
-Higher prices, lower output for domestic consumers+Financial muscle to compete effectively against multinational firms
Productive Efficiency
-Productively inefficient(MCAC)+Economies of scale: AC likely lower than most efficient perfectly competitive firms (MC=AC)
AllocativeEfficiency
-Misallocation of resources (PMC) (Less choice/Lower quality)+Avoid unnecessary duplication of capital (eg: airport runway / railway track / electricity/waterdistribution network)
Cross-subsidisation
-Wastes resources as profits from one sector is used to finance losses in another+Increased range of goods (eg: provision of essential loss-making services: rural bus/mail services)
Price Discrimination
-Raise producer surplus, reduce consumer surplus/welfare+Raise firms total revenue(TR) to allow survival of essential services
Barriers to Entry/Contestability
-Complacent monopoly raises entry barriers by limit/predatory pricing+Supernormal profit acts as incentive for rival firms to breakdown monopolies through creativedestruction by investing in R&D and innovations
 
Collusion
Def 
: Firms agree to restrict competition between themselves by fixing prices and restricting outputto secure joint profit maximisation.
Type
Price fixing, restrict output (allocating market share)Limit advertising budgetShare market/technical info
Tacit collusion
Firms have an understanding on pricing and output decisions often through price leadership (eg:Other firms follow pricing decisions of market leader)
Conditions
Oligopolistic market structure (so few major firms to reach an agreement)Effective monitoring system to prevent cheatingNo potential competition (eg: hit-and-run) /no effective competitionSimilar cost structure for similar pricing decisionsStable, mature industries (eg: steel)
Indication/signs
Same pricesRaise prices by same amount at the same timeHigh supernormal profitsHigh share prices
Evaluation
Collusion unlikely
:-Competition Commission: -Fines up to 10% of annual revenue/ Imprisonment for directors-Whistle blowers protected by competition law-
Evaluate Conditions
:-Cartels tend to breakdown due to cheating-Independent firms (competition) gain market share at expense of cartel members-Similar cost structures: firms are innocent, just responding to increases in production costs-technological change (internet) undermines price/output agreements-Tacit collusion: - hard to prove-long investigation means collusion still goes on-opportunity cost of investigation: funds/time-Welfare loss depends on magnitude of price fixing
Pro
+Share R&D costs=wider range of products, higher quality, more choice+Less wastage on advertising+Share technical info=improve safety of products/ safety of workers
Cons
-higher producer surplus, prices- lower consumer surplus, quality, choice=welfare loss
 
N
on-price strategies
 
1.Rationalisation
Cut costs:-wage cuts-staff cuts-reduce pension benefitsIncrease efficiency:-combine head offices-rationalise supply chain- invest in new technology (increase productivity to lower unit costs)2.Close down/
sale of unprofitable stores
/services
3.Back to basics
:-concentrate on core activities to compete more effectively
4.Diversify:5.Advertising:
Increase/ decrease advertising
6.Try to End price war
Evaluation
(Turn answer on its tail)
1. Rationalisation: -Less staff=worse consumer experience-Wage cuts=lower productivity-Rationalise supply chain=less products=less choice-Benefits of technology takes time (retraining of staff/installation)2. Sale: -Reduced market share-Short-term solution since reduced scope for economies of scale3. Too dependent on one market4. Asymmetric information: Insufficient market info/
N
o expertise in management5. Advertising: Increase=expensive/may be unsuccessful: Decrease=Weaker brand/lower market share6.Difficult to end price war

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