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ECONOMICS THEME 3 FULL SUMMARY- EDEXCEL A LEVEL
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THEME 3 IN ECONOMICS A LEVEL; easily summarising many of the key points you will need for your economics alevel exam.
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BARRIERS TO ENTRY:Legal barriers- stops other firms from taking ideas from incumbent firms, pattern files.
Sunk costs- money can’t be recovered after leaving market – deter new firms.
internal economies of scale- reduce lrac RMFPTM- RISK, MANAGERIAL,
FINANCIAL,PURCHASING,TECHNICAL,MARKETING
brand loyalty-
anti-competitive prices- things firms might do to restrict comp.
forward vertical integration – moving forward, closer to consumer through firm, can therefore stop
other firms from using
backward vertical integration- further away from consumer backwards, further away from consumer
stop firms from using oil
control scarce resources, refuse others to use it. Stop entering.
productive efficiency = mc=ac (ac is lowest)
allocative efficiency= ar=mc welfare
x-inefficiency= above ac curve for given level of output
dynamic efficiency= ar greater than atc
natural monopoly- most efficient if one in the market; high sunk costs,huge internal eos
minimum efficient scale- lowest point
marginal cost- increases at first due to hiring employees and productivity then decreases due to the
law of diminishing returns
average costs- when mc below ac decrease when its above it decreases and when the lines intersect
ac is at its lowest
EXAMPLE- PRICE DISCRIMINATION charge different consumers different prices for the same good due
to circumstances.
Students get a discounted price this is because adult demand is inelastic compared to students as
they earn higher incomes, so they are less responsive to price change.
3 conditons:
Firm must have market power- market share.
Information – on inelastic or elastic consumers
Limit reselling!!!!!!
PERFECT COMPETITION
Opposite of monopoly
-Many small buyers and sellers- small share
, -No barriers to entry or exit.
-homogeneous goods
-Perfect information
ELASTIC DEMAND – BETWEEN -1 AND NEGATIVE INFINITY
Perfectly elastic demand is a straight line.
Market and firm diagrams: separate
Market millions
Firms 10s
Market is equilibrium supply and demand curve.
Therefore, firm graph is perfectly elastic as she can sell at the equilibrium price. If price goes up of
one firm due to perfect info – decrease to 0 HAVE TO TAKE MARKET PRICE- PRICE TAKERS
D=AR=MR (MR DAR) MC AND AC STAY THE SAME
SR AND LR EQUILIBRIUM
Supernormal profit could lead to suppliers seeing this and wanting to enter the market with greater
incentive to enter the market will mean a shift to the right in supply which will decrease the
equilibrium price and decreasing the average revenue therefore will only make normal profit.
SR price was above average cost – supernormal profit.
LR perfect info increases supply decreasing price-NORMAL PROFIT
SR LOSS- if charging small price, loss due to ac above, leave market, supply will decrease, price will
increase until normal profit can be made
MONOPOLISTIC COMPETITON: takeaway shops
Almost like perfect competition
-many buyers and sellers
-low barriers to entry and exit, low sunk costs. No eos
-slightly differentiated goods
SR MONOPOLISTIC DIAGRAM LOOKS LIKE A MONOPOLY DIAGRAM EAZY PEEZY! – supernormal profit,
however firms have greater incentive, stealing customers, normal profit- AR and MR will decrease
where ar is touching atc= to p max
No supernormal profit means potential suppliers have no reason to enter reaching long run
equilibrium.
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