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31 Cards in this Set
- Front
- Back
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4 mark question
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Purely knowledge and application marks – remember to apply your knowledge to the industry in the extract
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8 mark question
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4 marks for identification, explanation and analysis (often seems to ask you for 2 things – with 2 marks for each). Then 4 marks for evaluation – so you need to make 2 good evaluation points.
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12 mark question
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definition (knowledge) for 1 mark, application and analysis 5 marks (explanations and diagrams) then 6 marks for evaluation so make 3 good evaluation points or 2 excellent evaluation points
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16 mark question
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Likely to be an “assess the case” or a “to what extent” so you need to come up with at least 2 points for each side of the question (for 4 marks each – identification, explanation and analysis/ diagram) then 8 marks for evaluation so you have to make 4 good evaluation points or 3 excellent evaluation points.
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Assess the advantages and disadvantages to a business of being vertically integrated.
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Define vertical integration (merger between firms at different stages of production in the same industry)
Give an example from the industry in the extract or any industry if the question says you can use it (e.g. BP owns oil wells as well as retail outlets) Advantages • Economies of scale e.g. marketing • Increase profits by merging profit margins at each stage of production • Secure market outlets by forward vertical integration – providing direct contact with customers. • Secure supplies by backward vertical integration – providing more control over quality of inputs. • Creation of barriers to entry Disadvantages • It may lead to an investigation by Competition authorities over creation of entry barriers or securing monopoly power. • Costs of funding the merger / takeover to the business. • Over dependency upon one market. • Firm may lack specialist knowledge to improve efficiency either backwards or forwards in the industry chain • Diseconomies of scale e.g. managerial. Evaluation • Judgement on whether advantages outweigh disadvantages. • Short-run V long-run implications. • Consideration of a real world example. • Vertical integration may strengthen a business in a declining market such as beer production. |
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Discuss one reason why many __________firms have become multinational companies.
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Define multinational – a firm that operates in more than one country.
• Exploits economies of scale. Note this must be linked to locating production facilities overseas e.g. risk bearing, purchasing, marketing, technical, managerial and financial. • Cheaper production costs, for example, labour, land, construction of factories. • Enter new markets – so spread risks. • Achieve higher growth. • Increase profits. • Avoid import controls e.g. tariffs or quotas • To exploit tax differences (transfer pricing) • To exploit the advantages of a single currency • Government subsidies. Evaluation Short-run versus long-run e.g. achieve higher growth to secure long term profits. • The newly industrialising countries could offer scope for new sales • Magnitude – economies of scale could be significant. |
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Analyse two likely motives for _______takeover of _______
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Increase profits
Increase market share to become a national player in supermarket sector. Increase efficiency e.g. gain economies of scale. To protect against takeover. Evaluation Which motive is likely to be most significant? How likely is the success of the motives? |
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Discuss the advantages and disadvantages to a firm such as _____________ from producing a range of goods in different markets.
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Remember to apply everything you write to the industry in the question
Advantages Economies of scale Cross-subsidisation Easy to launch due to existing distribution networks Brand name makes it easy to launch products New sales/profits when traditional product markets become saturated Disadvantages Diseconomies of scale Lack of expertise Resources spread too thinly to fully fund products Currency fluctuations if buying or selling abroad Asymmetric information in different markets A failed product can affect the whole established range Evaluation Prioritise between advantages and disadvantages (including their limitations) Magnitude – do the advantages outweigh the disadvantages? Time factor - do the long run benefits outweigh the short term costs of launching new products |
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Discuss the entry barriers _____might face when entering the ______ market
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High marketing / advertising costs to attract buyers.
Strong customer loyalty to existing brands Start-up costs Difficulty / costs in setting up an effective distribution network Difficulty in setting up a suitable network of component spare part suppliers, Limit pricing by existing motor manufacturers. Difficulty in achieving a very high level of product quality / technology Import controls placed by government of market you are trying to enter Regulation by government of market you are trying to enter Evaluation ( Prioritise or consider magnitude of the entry barriers discussed. Short-run versus long-run: it may take many years to overcome customer loyalty New firm might seek suitable partnership with major firm in market it is entering New firm may focus on the cheap end of the market and find success. Increasing environmental regulations should always be looked out for |
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Discuss the exit barriers _____might face when leaving the ______ industry
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Exit barriers include:
• Redundancy payments • Loss of marketing expenditure • Low resale value of machinery and factories Evaluation • Significance of exit barriers e.g. great or small, e.g. automated production may mean relatively few staff and so less redundancy payments. Or, highly specialised machinery so only has scrap value. • The possibility of selling well known brands could help reduce the exit costs associated with marketing. • Depends on whether firms are interested in entering the ______ industry by buying incumbents. |
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With the aid of an appropriate cost and revenue diagram analyse the reasons that might explain _______’s losses or ______’s profits
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Use Short run monopolistic competition diagram first
If demand down, shift AR and MR down and to left If demand up, shift AR and MR up and to right If costs down, shift AC and MC down and to left If costs up, shift AC and MC up and to right Make sure you label the old and new quantity Make sure you label the old and new price If question on profits Show changes in profit by shading in diagram Explain what led to demand up or down or costs up or down by relating to the actual industry in the question (e.g. airlines – fuel costs up) – info probably in extracts Make sure you relate the different movements of demand and costs to profit |
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Evaluate one pricing strategy that might be employed by ________ to maintain their market position
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Pick one of the below that you could best relate to the industry in the extract:
Predator pricing, Limit pricing, Sales maximisation, Revenue maximisation, Loss leaders, Cost plus pricing Evaluation – how likely is it to work – given the situation in the particular market (e.g. could there be a price war or is does the company in question have enough economies of scale to offer prices lower than others) Short term vs long term effects |
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Evaluate one non-pricing strategy that might be employed by ________ to maintain their market position
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Pick one of the below that you could best relate to the industry in the extract:
Quality of service, Quality of product, Marketing & advertising, New ranges Increase size of dealer network, Quality of after-sales care Evaluation – how likely is it to work – given the situation in the particular market? Cost of strategy – e.g. advertising could be high cost and is a sunk cost Short term vs long term effects Attempts to change working practices could result in opposition from unions |
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Assess the impact on consumer welfare of high profits being made in the _____ market
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Consumer welfare not damaged because
High profit margins may reflect consumers are prepared to pay for the product High profit margins create funds for investment into new product development The product may be a low proportion of income – so insignificant to consumer welfare Consumer welfare damaged because High profits in the long run suggests market not working properly and consumers exploited More consumer surplus captured by firms is a disadvantage to consumer welfare Magnitude – depends on how much the high profit is Theory – any time price is set above marginal cost there is allocative inefficiency (diagram) |
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Discuss the possible economic consequences for producers and consumers of a price war in the _____ _____ market.
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Define price war – intense competition between firms in an industry characterised by multilateral price reductions
Impact on Producers Impact on sales & revenue (use kinked demand curve to show price fall with inelastic demand) Impact on profits – losses could be made Firms may attempt to cut costs – labour and raw materials Less funds available for investment, research & development Deters market entry from others Impact on share price and shareholder dividends Reduces producer surplus (diagram) Impact on Consumers Increases consumer surplus (diagram) May change customer perception of product- if price falls too low customers may think lower quality Product quality may fall – as producers cut costs by maybe using inferior ingredients Evaluation Time – difficulty in ending price war Magnitude of price war – how large are price cuts? Do they lead to losses? Do they lead to market exit or will firms have too many sunk costs having invested heavily Consumer surplus may increase in the short run but decrease in the long run – if firms exit market Consumer choice may decrease in the long run - if firms exit market May lead to higher prices and less choice and less efficiency in the long run - if firms exit market What is the elasticity of the product - if it is a small proportion of income then could be inelastic and a price war could lead to a loss in revenue (diagram kinked demand curve) (e.g. chewing gum small proportion of income so inelastic so price war smaller effect. |
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Discuss whether the profits made by ______ companies, such as ________, can be justified.
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Remember to use examples from the industry mentioned in the question or extract
High profits are justified if: Companies need high profits to invest in merit goods and services (e.g. renewable energy sources The profits will ensure long-term supplies of whatever the company sells to the UK (e.g. energy) Profits can be used to improve product quality / safety, benefiting consumers. The company is very large with large assets and sales revenue; £1bn profits a year is a lot unless your revenue is over £10bn Price volatility in the raw materials market – firms may have to cover possible big rises in purchasing their supplies, by setting prices for households. Profits are a reward to risk taking. Shareholders should receive higher dividends too. Profits act as a signal for new entrants / increasing supply. In the long-run profits may fall to much lower levels. High profits are not justified if: Profits are a result of large price increases that cannot be justified High profits may reflect collusive practices /barriers to entry / little chance of competing them away. Profits are a result of external factors such as increased demand due to a cold winter High profits could still be normal profits – just enough to keep firms in the industry |
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Examine the ability of __________ to survive lower prices and increased competition
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Look for 3 or 4 ways to survive lower prices and increased competition
Economies of scale – look for evidence of any of these Evaluation – can they take advantage of that economy of scale? Diseconomies of scale? Strength of brand – look for evidence of this Evaluation - how important is strength of brand to customers compared to lower prices Already established ‘network’ – not having to make a large investment or get a government licence to operate Evaluation - this can be important as leads to high start up costs and fixed costs Price Discrimination – charge inelastic customers high prices to cross-subsidise elastic customers being charged low prices Evaluation – Look for monopoly power, easily separated customers, ways to stop sell-on Overall evaluation – Prioritise between these, which is the most significant? Which is the least? |
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Examine the extent to which the ________ market has achieved economic efficiency
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Define productive efficiency
If there is any evidence that the market has achieved productive efficiency, e.g. less spare capacity or lower costs or more economies of scale) – say so If there is any evidence that there is less productive efficiency (e.g. more spare capacity, or higher costs or less economies of scale) – say so Define allocative efficiency If there is any evidence that there is more allocative efficiency (e.g. prices lower and more quantity supplied or more quality and choice) – say so If there is any evidence that there is less allocative efficiency (e.g. prices higher and less quantity supplied or less quality or choice) –say so Conclude with one sentence summing up on balance of evidence whether the market is nearer or further from productive efficiency and allocative efficiency A good evaluation point is to talk about incentive to be efficient (e.g. falling prices mean incentive to be productively efficient, entry of new firms mean scope exists to achieve allocative efficiency) Remember you can also use dynamic efficiency and technical efficiency here. |
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Examine the significance of one type of economic inefficiency that is likely to affect ___________.
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Definition of a type of inefficiency and application and analysis
• Productive inefficiency (AC≠MC) - firms not producing at lowest average cost position Development of productive inefficiency, for example: not all the firm’s resources are being fully utilised or there is waste. Refer to examples from extract • Allocative inefficiency as (MC≠AR or MC≠Price) Development of allocative inefficiency, for example, firms are not producing what consumers want to purchase Refer to an example from the extract or from your knowledge of the industry Also can use X-inefficiency, dynamic or technical inefficiency Evaluation (Up to 2 marks for one factor) • Evaluate significance of the efficiency you have chosen using data from the extract • Short-run versus long-run - Long term trends • Magnitude - Inefficiency is highly significant |
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To what extent is the ________market a monopoly / oligopoly / monopolistic competition/ perfect competition?
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Define the market structure in the question then in a discussion question find some that make it whatever the market structure the question asks for then 2 or 3 that make it less that market structure. Then prioritise and conclude. For a 4 mark question of which market structure it is closest to you will need at least three of the strongest characteristics applied to the market:
What is market share of the market Extent of barriers to entry and exit Extent of economies of scale Likelihood of mergers and acquisitions Amount of abnormal profits being made Extent of productive efficiency Extent of allocative efficiency Amount of control firm has over price – evidence of price discrimination? Extent of product differentiation (For oligopoly) any sign of collusion? Relevant diagrams if possible Conclusion based upon the information |
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Assess the likely impact of collusive practices on economic efficiency and consumer welfare.
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Define Collusion – firms restricting competition between themselves in order to increase profits, or, firms acting as if they have made an agreement despite no contact
Economic efficiency • Understanding of term as productive or/and allocative efficiency • Efficiency likely to decrease due to lack of competition / long run supernormal profits / x- inefficiency / rising average costs / less investment Consumer welfare • Understanding of term e.g. value for money, product quality, firms meeting customer demand • Consumer welfare likely to decrease due to lack of competition / rising prices / capturing consumer surplus / deterioration in customer services & product quality Evaluation Consideration of the extent of decrease in economic efficiency and consumer welfare: • The impact depends upon how much prices are fixed above their free market competitive levels. • Time span – will price fixing remain in long run now that investigation under way? • Extract indicates the investigation will take long time so could mean lengthy period of abuse. • The tighter legislation and tougher penalties may discourage collusive practices. • Prioritise between economic efficiency & consumer welfare // demonstrate how they are closely linked. Argue that economic efficiency & consumer welfare could increase since: • Higher profit / revenue means more funds available for investment. • Stable environment for firms might lead to increased investment. • Non-price competition might increase – offering greater product variety and improved customer services. Remember to use the industry in the extract unless you are told you can use any industry |
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Assess the likelihood that collusion is taking place in the ______ market
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Define Collusion – firms restricting competition between themselves in order to increase profits, or, firms acting as if they have made an agreement despite no contact
Use the information provided in the extracts and the figures and your knowledge of the industry Collusion may have taken place due to: Similar prices in the industry Firms in the industry raising prices at the same time The market structure is an oligopoly with significant barriers to entry (so profits from collusion cannot be competed away) High profits are being gained The regulators are investigating what is going on Collusion unlikely because Different prices in the industry Firms have different costs structure – so less incentive to collude Firms may have similar cost structures hence price changes are similar Severe penalties exist for collusion, for example, fines up to 10% of annual sales revenue / prosecution of directors (with jail sentences). – e.g. BA £300m +current court case The regulators encourage whistle-blowing as the main informant is treated leniently e.g. Virgin Many consumers have switched suppliers – suggesting healthy price competition No evidence of collusion so will be hard to prove Could it just be tacit collusion – with others following a price leader? Firms may have just been reacting to changes in the markets for their raw materials There is a large incentive to cheat (see game theory matrix) so collusion agreements can break down There are a lot of companies in the market who could expand their market share if the major companies undertake price-fixing |
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To what extent is it possible to use price discrimination in the ________ market?
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Define price discrimination (charging different prices to different customers for the same service for reasons other than cost)
Explain objectives of price discrimination (Profit maximisation, increase market share, increase profits in short or long run, limit pricing to keep out competitor entrance) Go through each condition for price discrimination to work and see if there is evidence in the extract to show it might work (or your own knowledge) Some degree of monopoly power – which enables prices and supply to be set Different price elasticities of demand in sub-markets – enough information about the market to know how can/will pay the higher price and how to target them Ability to prevent arbitrage between markets – can you stop people who buy at low prices selling to people who would buy at high prices Evaluation – overall to what extent is it possible to use price discrimination? Prioritise the magnitude of how the market meets each condition Distinguish between whether price discrimination can be used in the short run and long run Separating the markets needs to cost less than the increases in revenues Will the regulator reduce their freedom to set prices (e.g. price capping)? Examples - Airline prices depending on time of booking. Car dealers eating consumer surplus Diagram to include Different elasticities of demand (different AR & MR gradients) Different prices shown – with a higher price where demand is inelastic Marginal cost or average cost line shown Areas of profit shown |
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To what extent is ___________ market contestable?
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Define contestability – the threat of potential entry into an industry
Explain characteristics – low barriers to entry and low barriers to exit, the possibility of “hit and run” entry Explain why it is important – the threat of potential entry means that prices are kept low and output high, firms make normal profits and are incentivised to deliver productive and allocative efficiency Look for evidence that the market is contestable Barriers to entry – does the extract mention that other firms are poised to enter the market? Does the extract mention any ways in which barriers to entry can be reduced (e.g. leasing instead of buying important equipment), customers being able to book on the internet? Are the firms looking to enter the industry large? Will the government subsidise entry? E.g. Microsoft constantly looking to enter mobile phone handset market. Barriers to exit – what kind of sunk costs exist in the industry – does the extract mention firms exiting the industry? Can equipment be sold easily when the firm exits the industry? ‘Hit and run entry’ – does the extract mention firms entering and exiting the market quickly? E.g. airlines being able to start and stop flying certain routes quickly. Existence of low profits or losses - normally a sign of a contestable market Look for evidence that the market is not contestable Economies of scale - the existence of these suggest large barriers to entry Strong branding – the existence of these suggest high barriers to exit (sunk costs) Established network – e.g. landing slots for airlines, suppliers for supermarkets Overall Evaluation – Given the evidence is the market more contestable or non-contestable Overall Evaluation – Prioritise the factors you have discussed with justification Overall Evaluation – If you think you don’t have enough information to make a decision, say what you would want to know Overall Evaluation – Is its contestability different in the long run than the short run? Overall Evaluation – Magnitude - what is the size of the barriers to entry and exit? Remember to use the evidence in the extract and the figures and relate to the industry |
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Assess the extent to which opening up competition in the __________ market is in the interests of customers
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Competition may bring the following benefits to customers:
Greater choice – as more products are brought to the market Evaluation – greater choice can bring confusion for consumers over prices and products Lower prices – as companies compete for market share Evaluation – it depends on whether there is collusion to keep prices high or non-price competition exists (draw kinked demand curve). Also short term price wars can push companies out of the market Increased consumer surplus – as the difference between what consumers are willing and able to pay is greater than the equilibrium price (do a diagram) Evaluation – depends on whether price actually goes down and the nature of demand in the market Improved quality – companies may compete on quality of product or service Evaluation – this may happen at the expense of having higher prices – it depends on what matters to consumer more Overall evaluation – benefits to consumers depend on How much competition actually enters the market – what are the barriers to entry in the market (e.g. start up costs) and the barriers to exit (e.g. sunk costs) (apply this to the market in question) Will the added competition stop cross – subsidisation – being able to charge higher prices for some customers subsidises lower prices for others or subsidises less profitable services (e.g. royal mail would have to stop service rural communities without this) Actions of incumbents – will they use limit pricing to keep out predators? Will they increase advertising to raise sunk costs? How the competition is increased – is it simply by lifting regulation that stopped competition entering - how is regulator going to deal with other barriers to entry |
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Explain the functions and powers of the Office of Fair Trading in the regulation of UK firms.
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Functions:
• To investigate allegations of abuse of monopoly power / anti-competitive practices • To promote competition in markets • To protect consumer interests • Block mergers / takeovers which might lead to monopoly power / significant reduction in competition. • Refer cases to Competition Commission for further investigation. Powers: • Fine guilty firms up to 10% of sales revenue • Prosecute directors – leading to individual fines / imprisonment . Veto or accept mergers and takeovers – force ‘remedies’ to make a takeover fairer on competition Examples – Approval of Morrisons-Safeway takeover with remedy of selling off certain shops. Veto of Sky takeover of Man Utd as would reduce competition for premier league rights |
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Explain the aims of an industry regulator such as ___________
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Encourage ______firms to increase efficiency
Improve or maintain the quality of the good or service for the customer Set price limits on what _____ firms can charge to customers Ensure companies carry out sufficient investment to make improvements Promote competition and or reduce entry barriers Make sure you relate it to the industry in questions |
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Examine the likely impact/effectiveness of price capping on ___________
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Define price capping – the regulator setting an upper limit on price rises
Explain why price capping is used – privatised industries sold off by the government have limited competition as they may be natural monopolies so regulator needs to act as ‘surrogate competition’ to keep prices down in the interests of consumers Explain how price capping is used - RPI-X is retail price inflation minus the expected efficiency improvements that should be made by the company over the year. RPI+K is retail price inflation plus the capital spending that should happen to improve efficiency Go through likely effects and evaluate how likely they are May reduce the amount of supernormal profits made - as revenue is being controlled Evaluation – supernormal profits could still be high as the company may work hard to reduce costs, increasing their profits May increase productive efficiency – as the only way to increase profits is to cut costs, either by cutting production costs, investing in technology or reducing employment Evaluation – may already have taken advantage of all economies of scale, may run into union problems when changing working practices or reducing employment, may invest in the wrong technologies – investment a long term solution not short term May decrease allocative efficiency – emphasis is on cutting unit costs to maintain profit may affect quality and choice of service (e.g. stopping 2nd post – Royal Mail) Evaluation – Cutting costs may be achieved by increasing quantity supplied (economies of scale) and therefore prices can be cut further in the long term, increasing allocative efficiency Overall evaluation – likely impact/effectiveness depends on Regulatory capture – the regulator may have worked in the industry and is regulating his friends, so may make X lower or K higher – companies have public affairs executives who are constantly talking to regulators and MPs. E.g. Thames Water executives may persuade the regulator that the pipes are in such a bad state that they need a higher K figure. This just leads to more profit. Extent of asymmetric information – how does the regulator know how much efficiency savings can be made or how much capital spending is needed – the company knows a lot more than the regulator Regulatory failure – inappropriate price caps could make the services less efficient, or mean not enough investment is done, or if the company is fined it could have an adverse effect on employment Compare to the success of other regulatory measures – such as performance targets or deregulation or increased competition Natural monopoly – (you get evaluation marks for critical distance) - the government shouldn’t have privatised a natural monopoly – where the minimum efficient scale is so high the entrance of competition is impossible – so the need to do price capping at all signifies a government failure in itself. |
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Examine the likely impact/effectiveness of performance targets on ___________
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Define performance targets – regulator attempting to improve standards of customer service – acting as surrogate competition
Examples – next day delivery target for Royal Mail of 92.5% or reduction in missing mail - % of trains on time for rail companies Likely Impacts May need to change working practices – in order to achieve performance targets Evaluation – can run into union problems (as has happened with Royal Mail recently May need to increase investment – in new technology or more capital Evaluation - high costs in the short run may lead to benefits in the long run. However, investment may not be in the right technology at the right time – need to train workers in new technology May lower productive efficiency – improving customer service may require extra spending Evaluation – if the extra spending is investment it could increase productive efficiency in the long run. May increase allocative efficiency – because customers get a higher quality service Evaluation – some customers might value lower prices more than a quality service. In the long run if less productive efficiency may lead to higher prices May reduce profits – due to the higher costs incurred to meet performance targets Evaluation – if company was already meeting performance targets won’t need to increase spending so won’t affect profits Overall evaluation – likely impact/effectiveness depends on Regulatory capture – the regulator may have worked in the industry and is regulating his friends, so may make performance targets too easy Extent of asymmetric information – how does the regulator know what performance is possible – the company knows more Regulatory failure – inappropriate performance targets could make the services less efficient, or mean not enough investment is done, or if the company is fined it could have an adverse effect on employment Compare to the success of other regulatory measures – such as price capping or deregulation or increased competition Natural monopoly – (you get evaluation marks for critical distance) - the government shouldn’t have privatised a natural monopoly – where the minimum efficient scale is so high the entrance of competition is impossible – so the need to do performance targets at all signifies a government failure in itself. Real world example – National express weren’t meeting performance targets on East Coast line – the line has been re-nationalised. |
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Examine one advantage and one disadvantage a _________ company might experience from a regulatory price control period which lasts for five years
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Advantages:
Revenue estimation: can accurately forecast revenue streams for five years Cost savings: the company gets a good idea of how much efficiency improvements need to be made Easier to create company plan: as you know what revenue and cost will be for 5 years Possibility of huge profits: if the price control is generous (large price increases permitted) Disadvantages Regulatory price control too severe: firm may suffer a major fall in profits and revenues Generous price control: might mean a much tougher price cap in the next round of controls External shocks or technological change: Five years may be too long a period to set prices for given environmental pressures or technological changes that could take place Evaluation: Make a judgement on whether advantages outweigh disadvantages Severe price controls could affect share price and ability to get loans to fund investment Generous price controls could be OK if used to fund investment to increase efficiency but not if profits simply paid out to shareholders Depends on how costs savings are achieved – jobs cuts bad, efficiency savings good Depends if regulator can adjust the cap during the five year period Use real-world example of water companies – who have a 5 year price control so that they can plan for the maintenance required of their network – using RPI+K |
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Evaluate the decision by the OFT to allow the purchase/takeover/merger of _________ by/with __________
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Explain the role of the Office of Fair Trading (OFT) – to make sure markets work well for consumers
Why would the OFT allow it to take place: Results in lower prices through economies of scale – draw diagram Increased consumer surplus through lower prices through economies of scale – draw diagram Greater levels of consumer convenience – through only having to go to one place Evaluation – Will it be in the best interests of the public? Will it create competition? Will economies of scale actually occur? Will cost savings be passed onto customers (is their demand inelastic?) |
