Thursday, June 16, 2011

Highly Possible Questions in Unit 3: Business Economics and Economics Efficiency

Sorry for the late posting. Here they are:

Key concepts that will be most likely tested in Section A: MCQ

1. Perfect competition

a) Features of perfect market that must be understood-relatively very large number of firms compared to other market structure and there are no barriers to entry and exit (small and low cost businesses)

b) Firms can only make normal profits in the long run

c) Can only be both productive and allocative efficient in the long run. Short run, only allocative efficient is achieved

2. Monopoly

a) Objectives of firms such as profit maximising (MC = MR), revenue maximisation (MR = 0), sales maximisation (AC = AR) and satisficing

b) Conditions to practice price discrimination and being able to tell that people/ market with inelastic demand (willing to pay) will be charged more (PED < 1) and people/ market with elastic demand (PED > 1) will be charged less (not willing to pay)

c) Imperfect market/ price maker like monopoly will not be able to achieve productive and allocative efficiency both in short run and long run

d) Change in profits, output and price due to changes in AC and MC/ AR and MR. Maybe required to draw curve

(e) Theory of EOS especially purchasing and technical

3. Oligopoly

a) Game theory/ price fixing/ cartel/ tacit collusion to avoid damaging price war

b) Knowing that the market is not contestable, sunk cost is high and there is strong brand loyalty

(4) Monopolistic

a) Being able to tell which of the given options is monopolistic. Choose the one where it has the lowest cost and is likely to have many of them

b) Only normal profits in the long

c) Never productive and allocative efficient both in short run and long run

(5) Competition Commission/ OFT/ European Commission

a) Must know the roles

b) Will only intervene due to absence of competition which can be as a result of sharing future market information, price fixing, paying retailers to stock only their goods etc

c) Watch out for new concept in specification. They are performance target and profit capping

Section B: Data response

For this section, focus only on concepts related to monopoly, oligopoly and Competition Commission. It is highly unlikely that perfect competition and monopolistic competition will be tested for two reasons. Limited amount of issues that can be asked, less realistic and articles normally involve multinationals

Pay attention to questions like:

1. Market structure. Usually monopoly and oligopoly. Candidates have to mention one characteristic and relate this to the Extract. Careful as not all the times concentration ratio is given. They may provide information in the form of picture showing number of firms or also market capitalisation. Usually carries 4 marks

2. The contestability of the market. Usually we provide answers by saying that the market is not/ less contestable due to the features of oligopoly like high advertising costs, patents and brand loyalty. In evaluation, we argue by saying that contestability is possible by providing reasons like presence of Competition Commission, can operate in a smaller scale like online business from home, whistle-blowers are rewarded handsomely to stem immoral corporate practice and others (may carry 8-12 marks)

3. Gains from mergers. It can be horizontal, vertical and conglomerate. Evaluation we provide the problems with each type of merger (may be 8-12 marks)

4. Pricing and non-pricing strategy that can be adopted. For pricing we say revenue maximisation, sales maximisation, predatory pricing, limit pricing and buy 2 for the price of 1. For non-price we say, marketing, advertising to promote unique feature and R&D to improve product quality. Evaluation we may contradict by explaining why each strategy may have its own problem in the light of the information provided

5. Concept of game theory, how does it work and problems that might surface. It may include, sellers have the tendency to backstab one another, intervention by regulatory watchdog and might not work if influential sellers enter the market and flood the market with its product

6. Profits, output and price if firms were to face rise in revenue or/ and cost. Candidates must have sufficient practice in diagram drawing. May carry between 4-8 marks

7. Concept of price discrimination. Candidates must be familiar with the definition, conditions to conduct such practice and being able to draw the diagram. Evaluation must be in the light of the information provided. Most likely 10-14 marks

8. Concept of productive and allocative efficient. Candidates must define and provide diagram. Relate the concept to the issue, for instance banks have tendency to overcharge certain transaction fees due to price making ability and hence not being allocative efficient. Lack of competition will not encourage firms to be cost efficient. So always operate at level where costs are higher

9. Effectiveness of regulators like Competition Commission and OFT in regulating private monopolies. Must know the definition, roles and powers by referring to information in the Extract if any on actions that have been taken. Evaluation may include, regulatory capture, too long to investigate an issue and power is superceeded by European Competition Commission (may carry 10-14 marks)

I’m quite confident that the questions in my list will appear in some way or another. My only concern is candidates may work under panic and hence not being able to distinguish those questions. I give some examples here:

(a) Assess the methods by which the manufacturers of instant coffee might compete with each other in both the UK and the US (throw in the price and non-price methods)

(b) BAA charge more for landings at Heathrow than at other airports. Evaluate the reasons for and consequences of such a policy (price discrimination)

Best of luck!!

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