A2 Economics Unit 3 Revision : Graphs

Transcription

1 TheRevisionGuide.com Accelerating your potential Economics Revision Short Notes A2 Economics Unit 3 Revision : Graphs Revision Notes by: Apsara Sumanasiri Student Name : Date:. TheRevisionGuide ( is a free online resource for Economics and Business Studies. Don t forget to visit our website as part of your revision by Apsara Sumanasiri Page 1

2 Summary of Graphs In the examination candidates are encouraged to annotate diagrams or draw diagrams to support their answers, and remember to refer to them in the answer to ensure the examiner gives you full credit for your work. This section provides a summary of all graphs that students should be familiar with when sitting for their A2 Economics Unit 3 paper by Apsara Sumanasiri Page 2

3 COSTS SHORT RUN COST CURVES LONG-RUN AVERAGE COST CURVE POSSIBLE SHAPES OF LRAC MC intersects with AC at the minimum point of AC, therefore, MC = AC PRODUCTIVE EFFICIENCY 2014 by Apsara Sumanasiri Page 3

4 REVENUE Where MR = 0, PED = 1 on the AR curve, And also TR reaches it maximum point! therefore, MR = 0 REVENUE MAXIMISATION 2014 by Apsara Sumanasiri Page 4

5 PROFITS When MR = MC, the gap between TR and TC is at their maximum, therefore, MR = MC PROFIT MAXIMISATION 2014 by Apsara Sumanasiri Page 5

6 PERFECT COMPETITION SHORT RUN PROFITS SHORT RUN LOSSES 2014 by Apsara Sumanasiri Page 6

7 PERFECT COMPETITION LONG RUN Long-run equilibrium position of a firm in an industry facing short-term super normal profits Long-run equilibrium position of a firm in an industry facing short term losses 2014 by Apsara Sumanasiri Page 7

8 LONG RUN EQUILIBRIUM MC = P ALLOCATIVE EFFICIENCY In perfect competition allocative efficiency is achieved in the short-run as well as in the long- run AC = MC PRODUCTIVE EFFICIENCY In perfect competition allocative efficiency is achieved only in the long-run 2014 by Apsara Sumanasiri Page 8

9 MONOPOLY THERE IS NO ALLOCATIVE OR PRODUCTIVE EFFICIENCY IN A MONOPOLY. HOWEVER, PRODUCTIVE EFFICIENCY CAN BE ACHIEVED BY COINCIDENCE 2014 by Apsara Sumanasiri Page 9

10 NATURAL MONOPOLY If the monopoly chooses to maximise profits, it will set MR=MC, choose output Qm and set price at Pm. If such firms are forced to set a price equal to MC, they would make losses by Apsara Sumanasiri Page 10

11 PERFECTLY COMPETITIVE INDUSTRY Vs. PROFIT MAXIMISING MONOPOLY Monopoly Perfect Competition Profit Maximisers Yes Yes Allocatively efficient No Yes Productively efficient No Yes Price Prices are higher under monopoly compared to perfect competition Prices are lower under perfect competition compared to monopoly Quantity Quantity is lower under monopoly compared to perfect competition Quantity is higher under perfect competition compared to monopoly 2014 by Apsara Sumanasiri Page 11

12 MONOPOLISTIC COMPETITION SHORT-RUN Profits made in the shortrun attract more firms into the market, which will: LONG-RUN Reduce demand (i.e. AR) Increase PED (i.e. flatten the AR line) Increase ATC due to higher advertising and promotion as a result of competition Up until supernormal profits are driven away by Apsara Sumanasiri Page 12

13 OLIGOPOLY Suppose, Price is currently set at P1 and Output at Q1, in the industry, and a firm is trying to decide whether to alter price If the firm increases price to P2 they will face an elastic demand curve (Dig) and thus a large fall in Output to Q1, as the other firms in the industry would ignore the action of the firm (as it is a non-threatening move that gives market share to the other firms) and as a result the firm would lose its existing customer base to its competitors. If the firm decreases its price to P3 they will face an inelastic demand curve (Dcop) and thus a small fall in Output to Q3, as the other firms in the industry would copy the action of the firm (as it is a threatening move that takes away market share from the other firms, and they are likely to copy in order to preserve their market position) and as a result the firm would not gain too many customers from its competitors. Putting these two demand curves together the firm in an oligopoly would face a kinked demand curve shown by the continuous line AR by Apsara Sumanasiri Page 13

14 PRICE DISCRIMINATION How to draw the Price Discrimination diagram: 1. Draw: (i) Market A with inelastic demand i.e. a steep AR and MR (ii) Market B with elastic demand i.e. a flat AR and MR (iii) Combined Market combine AR and MR of Market A and Market B 2. Draw MC in the combined market MC must cut the MR after the kink 3. Find MR=MC in the combined market to find MC* and Q* - extend Q* to AR to find P* 4. Extend P* to market A (PA*) and B (PB*) and find Q* in market A(QA*) and B(QB*) 5. Extend MC* to market A and B 6. Find the point where MC* line cuts MR in each market to find the market Q and P 7. If drawn correctly: PA > PA* QA < QA* in the Inelastic Demand Market PB < PB* QB > QB* in the Elastic Demand Market i.e. a higher price is set in the inelastic market (Market A) and a lower price is set in the elastic market (Market B) 2014 by Apsara Sumanasiri Page 14

15 THINGS TO REMEMBER 2014 by Apsara Sumanasiri Page 15

16 MC AC P1 MR = MC 0 Q1 MR AR=D Output 2014 by Apsara Sumanasiri Page 16