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Thursday 23 October 2014

Assess the view that diminishing returns can always be eliminated by a firm increasing its level of output (25)

AQA Economics U3 – Post-assessment outline for improvements

Assess the view that diminishing returns can always be eliminated by a firm increasing its level of output (25)

Intro
Define diminishing returns.

Analysis P1
1.    Explain what is meant by the short-run.
2.    Explain that diminishing returns are caused by increasing the level of output by using more labour, whilst maintaining other fixed factors of production; thus in the short-run diminishing returns are not eliminated by increasing output.

(Use a simple example where you add additional labour to other fixed resources such that use of capital or land leads to inefficiencies – e.g. waiting time).

Analysis P2
Use LRATC/SRATC envelope curve – reference the diagram in your answer.

uploaded image

1.    Explain what is meant by the long-run.
2.    Explain how firms can eliminate diminishing returns by increasing the scale of production in order to increase output i.e. increasing the amount of capital, and not just increasing the amount of labour.
(Use the same simple example, where the inefficiency is eliminated in the SR, and the scale of output rises)

Evaluation P3
Comment that increasing capital is not necessarily easy, owing to finance constraints (work the example from before), planning permissions (only if your expanded the premises), legal barriers (e.g. prevention of monopoly power, patents etc.) and so firms cannot (eventually) guarantee that they can eliminate diminishing returns.

(The direct answer: agree/disagree – this is essential to the L5 response, as is the support argument and the example/s)


This answer has been developed from the mark scheme from A2 Economics text book and the diagram lifted from: http://www.chegg.com/homework-help/questions-and-answers/1refer-graph--difference-sratc-curves-lrac-curve-sratc-curves-show-optimal-plant-size-fact-q1584425

Sunday 11 May 2014

Inter-related markets

http://tutor2u.net/economics/revision-notes/as-markets-interrelationships.html

Joint supply - slaughtered cows make meat and leather, more deal cows affect supply and price in both markets. 

Composite demand - where goods have more than one use so that an increase in the demand for one product leads to a fall in supply of the other eg cereal crops can be used to make food or bio-fuel

Derived demand - eg labour to make goods

Tuesday 6 May 2014

More model answers

Economics Factory http://www.economicsfactory.com/#/samples/4563317042

Essay Stuff redone....

http://sgsmicroblog.blogspot.co.uk/search/label/essay%20technique

Contestability Essay for Wednesday 7th

This is a decent if dated piece from tutor2u.

http://www.tutor2u.net/economics/content/revessay/contestability.pdf
Contestable Markets

A contestable market occurs when there is freedom of entry and exit into the market. Thus in a contestable market, there will be low sunk costs.(Costs which can’t be recovered when leaving the market)

Factors which determine the contestability of a market
When considering the contestability of markets it is important to consider the different barriers to entry a new firm may face
  1. Sunk Costs. If Sunk costs are high this makes it difficult for new firms to enter and leave the market. Therefore it will be less contestable. For example, if a new firm had to purchase raw materials, that it wouldn’t be able to resell on leaving the market, this may act as a deterrent.
  1. Levels of advertising and brand loyalty. If an established firm has significant brand loyalty such as Coca Cola, then it will be difficult for a new firm to enter the market. This is because they would have to spend a lot of money on advertising which is a sunk cost. Even if they spend money on advertising it may not be sufficient to change customer loyalty to very strong brands. It depends on the industry, customer loyalty would be fairly low for a product like petrol because it is quite homogenous. But, for soft drinks people have greater attachment to their ‘brand’
  2. Vertical Integration If a firm does not have access to the supply of a good then the market will be less contestable. E.g. Oil firms could restrict the supply of petrol to petrol stations, making it difficult for new firms to enter. If you wish to sell electricity to domestic customers, a big issue is whether you can gain access to the electricity grid. The national electric grid is a natural monopoly, but government regulation can make sure firms have a fair access to the grid. Giving access to different stages of production can make the market more contestable.
  3. Access to technology and skilled labour For some industries like car production it is difficult for new firms to have the right technology. Nuclear power may require skilled labour that is difficult to get. This makes the market less contestable. If you wished to compete with Google, you may find it hard to employ the best software engineers because Google pays its employees a very good wage and is seen as an attractive company to work for.
  4. Vertical barriers to entry in the airline industry - If you want to set up an airline company, you may be able to rent some planes and employ pilots and air stewards. This makes the sunk costs relatively low. Therefore, in theory, this market should be reasonably contestable. However, a barrier to entry may be gaining access to landing slots at major airports.
If you wanted to set up an airline company flying from London Heathrow to JFK, I’m pretty certain you wouldn’t be able to fly from Heathrow. All the landing slots are taken, there is no space at Heathrow for new companies. Therefore, this is a kind of vertical barrier to entry, you can’t have access to the infrastructure (airport) necessary for entering the market.
Low cost airlines have tended to fly from less popular airports, like Stanstead and Luton, there are more landing slots available here.

As well as looking at barriers to entry, there are other factors that might indicate the competitiveness of a market.
  • The level of profit. If the market is highly profitable, this suggests the market is less contestable. In theory, if firms are making supernormal profit, it would attract new firms into the market. The persistence of supernormal profits suggests that hit and run competition is not possible and there are barriers to entry.
  • The number of firms. A contestable market could have a low number of firms – as long as there is the threat and possibility of new firms entering. However, if there are only a few firms and it has been many years since any new firms have entered, then it is likely to be less contestable. If there are recent examples of firms entering the market, then it is likely to be more contestable.
It is important to remember that contestability is not a clear cut issue, there are degrees of contestability, some markets having more capacity for new firms to enter. In practice, few industries are perfectly contestable.

Example – UK Banking industry
  1. There are high sunk costs in getting a network of banks set up around the country..
  2. Brand loyalty to existing banks is high. Customers are not so willing to switch. Therefore a new firm may have to spend a lot on advertising to attract new customers, which is a sunk cost, therefore not contestable.
  3. Existing banks make very high profits, suggesting hit and run competition does not occur.
These issues suggest banking is not contestable. However, other factors may suggest greater contestability.
  • The introduction of the internet has reduced set up costs and enabled new firms to enter the market for online banking e.g. EGG, Virgin business.
  • The government is trying to introduce regulation to reduce the time and costs of switching to another current account.
Contestable Markets and the public interest
Contestable markets can bring the benefits of competitive markets such as
  • Lower prices
  • Increased incentives for firms to cut costs
  • Increased incentives for firms to respond to consumer preferences
However there could also be significant economies of scale because the theory of contestable markets doesn’t require there to be 1000s of firms
  • Therefore policy makers should not just look at the degree of concentration, but also the degree of contestability and how easy it is to enter the market.
  • Regulators in the privatised industries have often focused on removing barriers to entry, rather than breaking up big firms
Methods to Increase the Contestability of Markets
  1. Remove legal barriers to entry. Royal Mail used to be a legal monopoly but now firms are allowed to enter the market for sending letters and parcels.
  1. Force firms to allow competitors to use its network For example when BT was privatised, OFTEL forced BT to allow other companies to use its network. This has also occurred in the Gas and Electricity industries and has made them more contestable. A firm can now gain access to the national network of gas / electricity infrastructure
  1. Legislation against Predatory Pricing If a firm can engage in predatory pricing it can force new firms out of business and make it less contestable.
  1. OFT can legislate against abuse of Monopoly power. If a firm abuses its monopoly power by restricting supply to certain firms the OFT can intervene to overcome this restriction on contestability.
  2. A government firm. In the banking industry, the government has even toyed with creating its own company to help increase competition and increase bank lending to small firms. This could be a last resort where private firms face insurmountable barriers to entry.
Note, there are many barriers to entry that the government can’t solve. The government can’t alter the economies of scale in an industry.



Monday 5 December 2011

Competion or not?

Great video from the Beeb.

Monday 28 November 2011

Saturday 26 November 2011

Who, What, Why: How could Reebok sell trainers for $1?


The answer

  • High volume with very slim profit margins
  • Locally sourced materials and labour
  • There are no guarantees of breaking even - a pilot in Bangladesh made losses
  • But it's a social venture and the company stands to establish a foothold in a big market