Essay planning - Christmas HW
1. HOME FARM IS ONE OF MANY SMALL FIRMS PRODUCING LETTUCES AND
ATTEMPTING TO MAXIMISE PROFITS.
EXPLAIN THE CIRCUMSTANCES IN WHICH HOME FARM MIGHT MAKE SUPERNORMAL
PROFITS IN THE SHORT RUN, BUT ONLY NORMAL PROFITS IN THE LONG RUN. (15)
INTRODUCTION
• SUPERNORMAL PROFIT: excess pro t a rm makes above
minimum return necessary to keep a rm in business. Total
revenue - total costs.
• NORMAL PROFIT: minimum level of pro t necessary to
keep a rm in business. Average revenue=average cost.
• Supernormal pro t is the extra pro t above the level of
normal pro t.
PARAGRAPH 1
• Fruit/vegetables are homogenous products, so Home
Farm operates in a perfectly competitive market. Firms are
price takers due to large number of buyers and sellers +
have little market power due to no di erentiation, so
consumers have perfect information. Freedom of entry
• In SR supernormal pro t is made because market sets a
price, allowing them to make pro t when working at the
bottom of AC curve.
PARAGRAPH 2
• In LR, rms will be encouraged to enter the market
due to the pro t made + no barriers to entry, easy
entrance and being able to take portion of pro ts.
• Market supply shifts outwards due to new rms
entering, so new equilibrium created + market price
decreases.
• So, normal pro ts made as price decreases and
rms are already producing at the bottom of the AC
curve.
EVALUATE THE ARGUMENT THAT MANAGERS CONTROLLING LARGE COMPANIES MIGHT
FOLLOW POLICIES WHICH DO NOT NECESSARILY MAXIMISE THE PROFIT OF THE
OWNERS. (25)
INTRODUCTION
• Pro t: di erence between revenue and cost. Maximised when at output when MR=MC.
• Pro t is an incentive to take risks, provides funds for investment in new technologies +
innovation, provides sources of income eg. dividends, signalling device for high growth in
industries, key source of tax revenue for gov.
PARAGRAPH 1 - SOCIAL/ETHICAL CONCERNS
fi fi fififf fi fifi fi fi fi fi fffi fi fifi fi
, • Companies may not be motivated by money but may seem to o er a service to local
community. May voluntary take decisions to help the environment. Large companies now place
a key role in promoting their ethical policies. EXAMPLE: Patagonia encourages to buy less.
• BUT market bene ts to promoting ethical and social concerns, could have a tie-up with pro t
maximisation.
PARAGRAPH 2 - GROWTH MAXIMISATION
• Companies try and increase market share +
increase size of rm by cutting price and
increasing sales. This may come at expense
of lower pro ts.
• EXAMPLE: starting a price war (competition
in which traders cut prices in attempt to
increase their share of market) can lead to
lower pro t but enable higher sales.
• BUT increasing market share can be a way
to increase pro ts in LR.
• EXAMPLE: rms like Walmart/Amazon have
pursued goal of maximising market share.
Gives them a strong position to dominate
the market in the future.
PARAGRAPH 3 - OWNERSHIP OF FIRM AFFECT BEHAVIOUR AND PERFORMANCE
• DIVORCE OF OWNERSHIP FROM CONTROL : separation of ownership + control in a rm.
Owners/shareholders wish to maximise pro t, but managers + workers don’t feel same incentive
(may prefer to obtain satisfactory amount of pro t instead) so they don’t do enough to keep
owners happy and pursue other objectives.
• EXAMPLE: Amazon/Apple/Microsoft are large cooperation with numerous shareholders.
Shareholders are not able to control companies’ everyday decisions.
• BUT this can be avoided by rewards and incentives. Directors/managers o ered nancial
bonuses/other incentives when they have worked in compliance with shareholders’ interests +
have contributed to reaching shareholders goals.
2. ‘IN THE MIDDLE OF THE 20TH CENTURY, THE UK HAD MORE THAN 20 LARGE CAR
PRODUCING COMPANIES, AND COUNTLESS SMALL, LOCAL MANUFACTURERS, MANY
OF WHICH ALSO PRODUCED MOTORBIKES AND PEDAL CYCLES. NOW THERE IS NO
SINGLE CAR PRODUCER THAT IS PURELY ‘BRITISH’, AND GLOBALLY, THERE ARE
PROBABLY FEWER THAN 20 SIGNIFICANT CAR PRODUCERS IN THE WORLD.’
EXPLAIN HOW ECONOMIC THEORY SUGGESTS THAT PERFECT COMPETITION AMONG
MANY SMALL FIRMS LEADS TO AN EFFICIENT ALLOCATION OF RESOURCES. (15)
INTRODUCTION
• Perfect competition: companies sell identical products, market share does not in uence prices,
companies are able to enter/exit without barriers, perfect information, companies don’t
determine prices.
• EFFICIENT ALLOCATION: using resources as productively + e ciently as possible. Resources
are allocated e ciently when it’s not possible to produce more of a good/service without giving
up other ones that are valued more highly.
PARAPGRAPH 1
• Under perfect competition, rms are price takers so cannot in uence market price. To maximise
pro t, rms must produce at lowest possible cost. To do this they must use their resources
e ciently and use optimal combination of inputs (labour, capital, raw materials.) so allocative
e ciency occurs - quantity of each good produced is the optimal level where MC equals
ffi fi fi fi fifi ffi
fifi fi
fi fi fi flffiff ff flfi fi fi
1. HOME FARM IS ONE OF MANY SMALL FIRMS PRODUCING LETTUCES AND
ATTEMPTING TO MAXIMISE PROFITS.
EXPLAIN THE CIRCUMSTANCES IN WHICH HOME FARM MIGHT MAKE SUPERNORMAL
PROFITS IN THE SHORT RUN, BUT ONLY NORMAL PROFITS IN THE LONG RUN. (15)
INTRODUCTION
• SUPERNORMAL PROFIT: excess pro t a rm makes above
minimum return necessary to keep a rm in business. Total
revenue - total costs.
• NORMAL PROFIT: minimum level of pro t necessary to
keep a rm in business. Average revenue=average cost.
• Supernormal pro t is the extra pro t above the level of
normal pro t.
PARAGRAPH 1
• Fruit/vegetables are homogenous products, so Home
Farm operates in a perfectly competitive market. Firms are
price takers due to large number of buyers and sellers +
have little market power due to no di erentiation, so
consumers have perfect information. Freedom of entry
• In SR supernormal pro t is made because market sets a
price, allowing them to make pro t when working at the
bottom of AC curve.
PARAGRAPH 2
• In LR, rms will be encouraged to enter the market
due to the pro t made + no barriers to entry, easy
entrance and being able to take portion of pro ts.
• Market supply shifts outwards due to new rms
entering, so new equilibrium created + market price
decreases.
• So, normal pro ts made as price decreases and
rms are already producing at the bottom of the AC
curve.
EVALUATE THE ARGUMENT THAT MANAGERS CONTROLLING LARGE COMPANIES MIGHT
FOLLOW POLICIES WHICH DO NOT NECESSARILY MAXIMISE THE PROFIT OF THE
OWNERS. (25)
INTRODUCTION
• Pro t: di erence between revenue and cost. Maximised when at output when MR=MC.
• Pro t is an incentive to take risks, provides funds for investment in new technologies +
innovation, provides sources of income eg. dividends, signalling device for high growth in
industries, key source of tax revenue for gov.
PARAGRAPH 1 - SOCIAL/ETHICAL CONCERNS
fi fi fififf fi fifi fi fi fi fi fffi fi fifi fi
, • Companies may not be motivated by money but may seem to o er a service to local
community. May voluntary take decisions to help the environment. Large companies now place
a key role in promoting their ethical policies. EXAMPLE: Patagonia encourages to buy less.
• BUT market bene ts to promoting ethical and social concerns, could have a tie-up with pro t
maximisation.
PARAGRAPH 2 - GROWTH MAXIMISATION
• Companies try and increase market share +
increase size of rm by cutting price and
increasing sales. This may come at expense
of lower pro ts.
• EXAMPLE: starting a price war (competition
in which traders cut prices in attempt to
increase their share of market) can lead to
lower pro t but enable higher sales.
• BUT increasing market share can be a way
to increase pro ts in LR.
• EXAMPLE: rms like Walmart/Amazon have
pursued goal of maximising market share.
Gives them a strong position to dominate
the market in the future.
PARAGRAPH 3 - OWNERSHIP OF FIRM AFFECT BEHAVIOUR AND PERFORMANCE
• DIVORCE OF OWNERSHIP FROM CONTROL : separation of ownership + control in a rm.
Owners/shareholders wish to maximise pro t, but managers + workers don’t feel same incentive
(may prefer to obtain satisfactory amount of pro t instead) so they don’t do enough to keep
owners happy and pursue other objectives.
• EXAMPLE: Amazon/Apple/Microsoft are large cooperation with numerous shareholders.
Shareholders are not able to control companies’ everyday decisions.
• BUT this can be avoided by rewards and incentives. Directors/managers o ered nancial
bonuses/other incentives when they have worked in compliance with shareholders’ interests +
have contributed to reaching shareholders goals.
2. ‘IN THE MIDDLE OF THE 20TH CENTURY, THE UK HAD MORE THAN 20 LARGE CAR
PRODUCING COMPANIES, AND COUNTLESS SMALL, LOCAL MANUFACTURERS, MANY
OF WHICH ALSO PRODUCED MOTORBIKES AND PEDAL CYCLES. NOW THERE IS NO
SINGLE CAR PRODUCER THAT IS PURELY ‘BRITISH’, AND GLOBALLY, THERE ARE
PROBABLY FEWER THAN 20 SIGNIFICANT CAR PRODUCERS IN THE WORLD.’
EXPLAIN HOW ECONOMIC THEORY SUGGESTS THAT PERFECT COMPETITION AMONG
MANY SMALL FIRMS LEADS TO AN EFFICIENT ALLOCATION OF RESOURCES. (15)
INTRODUCTION
• Perfect competition: companies sell identical products, market share does not in uence prices,
companies are able to enter/exit without barriers, perfect information, companies don’t
determine prices.
• EFFICIENT ALLOCATION: using resources as productively + e ciently as possible. Resources
are allocated e ciently when it’s not possible to produce more of a good/service without giving
up other ones that are valued more highly.
PARAPGRAPH 1
• Under perfect competition, rms are price takers so cannot in uence market price. To maximise
pro t, rms must produce at lowest possible cost. To do this they must use their resources
e ciently and use optimal combination of inputs (labour, capital, raw materials.) so allocative
e ciency occurs - quantity of each good produced is the optimal level where MC equals
ffi fi fi fi fifi ffi
fifi fi
fi fi fi flffiff ff flfi fi fi
