Unit 3 - Business behaviour and the labour market (9EC0)
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Summary A Level Economics - A/A* Grade Microeconomics Models, Analysis and Evaluation
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Unit 3 - Business behaviour and the labour market (9EC0)
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PEARSON (PEARSON)
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Edexcel A level Economics A Book 1
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A Level Economics - A/A* Grade Macroeconomics Models, Analysis and Evaluation
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Economics A
Unit 3 - Business behaviour and the labour market (9EC0)
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Microeconomics A* Analysis/Evaluation
1. Kinked Demand Curve
Summary:
The Kinked Demand Curve explains sticky price in an oligopolistic market. Firms will not change their
prices if competitors raise their price and have no incentive to lower prices. Even when MC changes,
firms will keep their prices the same.
Explanation:
1. In an oligopoly, if a firm raises their prices, they will lose market share and since demand is
elastic, they will lose total revenue.
2. This means that competing firms will not follow the price increase in order to keep their own
customers and also steal the consumers who switched their brand, increasing market share.
3. Rivals are also likely to match a fall in price to avoid a loss in market share. As demand is
inelastic, total revenue will fall.
4. Firms have no incentive to reduce their total revenue so they will not want to decrease their
prices.
5. So, firms have price-setting power (due to their not being many firms in the market) but may
be reluctant to use it because of interdependence.
,Microeconomics A* Analysis/Evaluation
Additional Points:
If there is an increase in MC from MC1 to MC2, the
output and price that the firm sells out will not
change. This makes prices even more sticky!
Effects:
Price stability → Firms are likely to focus on non-price methods of competition → E.g. Loyalty cards
→ Increased brand loyalty → Demand becomes more inelastic → Increased sales → Increased profit
→ Use profit for research and development →→ Increase barriers to entry e.g. with free delivery
which new firms cannot match → Decreased contestability → Reduced likelihood of new firms
joining the market and stealing profits.
Where can this be used?
- “Evaluate strategies that petrol retailing firms could use to increase profit.”
- “Assess reasons why supermarkets are not increasing the retail price of eggs to cover the
increased production costs of egg farmers. Use game theory to support your answer”
- The Kinked Demand Curve can be used to evaluate price competition. The curve can also be
used to evaluate the idea that an increase in costs will result in an increase in prices.
, Microeconomics A* Analysis/Evaluation
2. Payoff Matrix
Summary:
The Payoff Matrix is a tool used to show the outcomes of an economic decision e.g. high/low price
or advertise/don’t advertise.
Explanation:
1. To best understand a Payoff Matrix, then you should be familiar with some terms first.
2. The dominant strategy is the best strategy for an individual no matter how other players
acts.
3. In the example above, if Firm B uses low price, then Firm A using low price is also the best
outcome. If Firm B uses a high price, using a low price is again the best option. Low price is
the dominant strategy.
4. The Nash Equilibrium exists when each player understands the other player's optimal
strategies and takes those into consideration when optimizing his own strategy.
5. In the example above, we have established that Firm B’s optimum strategy is to use low
price. Since Firm A knows this, they will also use a low price to avoid getting undercut. This
means that the Nash equilibrium is low-low.
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