A2 econ session 1

A Level Economics – Year 2 (A2) Revision Workshop

Session one – Presentation to go with Workbook


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


Your download link:

www.tutor2u.net/a2econ2016.pdf

http://www.tutor2u.net/asecon2016.pdf


Session 1Costs, Revenues, Business Objectives and Competition

03


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


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


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


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


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 firm’s revenue curve05

Output

Reve

nue

Output

Reve

nue

Perfect Competition

Imperfect Competition

AR = MR

AR

MR


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


Profit maximising condition04

Q

PSUPERNORMAL

PROFIT


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


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


Alternative Business Objectives – Revenue max

06

Q

P


Alternative Business Objectives – Productive Efficiency

06

Q

P


Alternative Business Objectives – Normal Profit

06

Q

P


Alternative Business Objectives – Allocative Efficiency

06

Q

P


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?


Perfectly competitive markets - characteristics

07

No dominant firms

Many buyers & sellers

Perfect information

Homogeneous goods

No barriers to entry / exit

Firms are price-takers


Perfect competition diagrams: SR to LR

07

S1

P1AR1 = MR1

Q1

P1

Q1


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



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



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


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


Contestable markets – a possible diagram

08

Q

P


Types of barriers to entry08

Economies of scale

Vertical Integration

Control of Technology



Licences

Patents

Public franchise



Brand proliferation

Predatory pricing

Brand loyalty


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


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



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



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


Additional Activities10

Calculating costs

Applications of barriers to entry

Profit maximisation - essay frame

Efficiency in perfect competition – essay frame

A2 econ session 1

Education

Transcript of A2 econ session 1