Flashcards
Microeconomic ESSAY PLANS - In depth
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Perfect competition results in a more efficient outcome than monopoly
Perfect competition results in a more efficient outcome than monopoly
Perfect competition consists of a market where products are homogenous therefore there is perfect knowledge within the industry. This means firms are price takers and have no price-setting power. This could include agricultural industries.
POINT 1: Productively efficient, PC in the LR benefits from producing where costs are the lowest (MC=AC), given the level of output and technology. Firms use resources in the most efficient way possible. Monopolies do not produce at the lowest cost (due to a lack of competition, there is no incentive to reduce costs)
DIAGRAM: PC showing Productively efficient output.
EVAL: Monopolies are dynamically efficient whereas PC cannot invest retained profits to R&D, this allows Monopolies to be dynamically efficient. Firms can develop technology which improves the production process (reducing costs) or improves the quality of goods/services. This can be passed to consumers through lower prices or better quality goods.
POINT 2: PC benefits from allocative efficiency (where P=MC), this maximises social welfare from consumers and producers. It ensures resources satisfy the highest number of wants in society. Enabling producers to make profits as well as ensuring consumers benefit from low prices. In Monopolies, firms have price setting power hence they influence the industry price leaving consumers with little choice on alternate options. This could reduce consumer surplus and not benefit society.
DIAGRAM: Comparison of high monopoly prices and low PC prices.
EVAL: However, as monopolies have a large control of the market they can enjoy economies of scale which PC can't benefit from. E.g. Purchasing economies like bulk buying and Technical economies like research and development. Transport costs can also reduce due to containerize. This can allow monopolies to lower LRAC costs.
discuss the possible reasons for demergers
discuss the possible reasons for demergers
POINT 1: To enhance strategic focus and simplify operations. E.g. Barclays announced its demerger of Absa Group Limited, in 2016, it aimed to focus more on its core banking operations in the UK and the US.
EVAL: It can lead to increased operational complexity and costs as systems and processes are separated. The demerger process incurred restructuring costs of £1.2 billion for Barclays, which included expenses related to separation and system changes.
POINT 2: Prevent regulatory pressures and risk management concerns. E.g. Post 2008 crisis Lloyds banking underwent a demerger process.
EVAL: Reduce the firms market share which may have allowed them to previously dominate the market. Which may have boosted sales and widening consumer base.
POINT 3: In order to reduce diseconomies of scale. Firms may be experiencing high costs. This demerger would allow costs to fall and reduce prices and increase shareholder returns. Increasing consumer surplus
DIAGRAM: ToF
EVAL: Market volatility and valuation risks can impact shareholder returns post-demerger. For example, after RBS demerged Direct Line Group through an IPO in 2012, the market valuation of Direct Line Group fluctuated. Direct Line Group's shares experienced volatility in the initial months following the demerger, reflecting uncertainties in market perception and valuation.
Discuss the advantages and disadvantages of specialisation and division of labour in organising production
Discuss the advantages and disadvantages of specialisation and division of labour in organising prod...
Point: It increases efficiency and productivity. By focusing on a particular task or aspect of production, workers can become highly skilled and efficient, leading to greater output per unit of input. The efficiency can drive down costs and improve quality (dynamic efficiency). E.g. In the UK automotive industry, specialised workers on assembly lines can lead to faster production rates and higher-quality vehicles due to their expertise in their respective tasks
Eval: It can be inefficient as there is a risk of overdependence on a particular skill market. If demand shifts or new technologies emerge specialised firms may struggle to adapt, leading to reduced competitiveness. E.g. UK’s coal mining, overreliance on coal production led to difficulties when demand declined due to environmental concerns and the shift towards renewable energy sources.
Point: Firms can benefit from economies of scale. When firms specialise in a particular product they can benefit from producing at a larger scale, which often leads to lower average costs per unit. This can occur due to factors such as bulk purchasing of raw materials and better utilisation of specialised equipment. E.g. In UK aerospace companies, specialised manufacturers of components such as turbine balances can achieve economies of scale by producing these parts in large quantities, reducing costs for aircraft manufacturers.
Eval: It can contribute to economic inequality and regional disparities. Certain regions or industries may become highly specialised, leading to uneven development across the country. E.g. In the UK, London’s financial sector has experienced significant growth and specialisation, while other regions have struggled to diversify their economies. The concentration of resources can exacerbate inequalities and create social tensions.
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