GCSE Economics Paper 1 Revision 2021-22 PDF

2.5 Competition 2.6 Production GCSE ECONOMICS PAPER 1 REVISION 2021-22 2.5 Competition MARKET STRUCTURE What is competition? Competition is where different firms are trying to sell the same or similar product to a buyer. Competition can take the form of both price and non-price factors (such as qual...

2.5 Competition 2.6 Production GCSE ECONOMICS PAPER 1 REVISION 2021-22 2.5 Competition MARKET STRUCTURE What is competition? Competition is where different firms are trying to sell the same or similar product to a buyer. Competition can take the form of both price and non-price factors (such as quality, marketing and customer service). Competition means that no single seller or group of sellers can decide how the market operates. Similarly, no single consumer or group of consumers can determine equilibrium price and quantity. Why do producers compete? To enter a market If a producer wants to enter a market, it must devise ways of persuading customers to purchase its product; e.g., advertising or offering the product at a very low price. This forces existing producers to respond by lowering their price (competition). To survive in a market Firms will often extend their range of products to compete for customers and market share. Example: supermarkets such as Tesco started selling electronic goods, clothing, mobile plans, banking etc. To make a profit Businesses use their profits to expand their business and to innovate so that they can offer new products. Examples: Apple and Samsung entering the mobile phone market, car companies entering market for electric / hybrid cars Characteristics of a competitive market 1. Many sellers in the market 2. Many buyers in the market 3. Few barriers to entry 4. Goods/services are very close substitutes 5. No single seller (or buyer) has control over the market How does competition affect price? Increased competition leads to lower prices because there is a greater number of sellers (supply curve shifts to the right). The extent to which prices fall depends on the price elasticity of demand. The more inelastic demand is, the greater will be the fall in price. BUT, increased competition may NOT lead to lower prices if: ◦ There is increased advertising which raises the cost of production. Producers pass on these costs to consumers. ◦ Producers innovate and offer new and better products for which consumers are willing to pay a higher price at first. As more and more producers enter the market, the price is likely to fall. ◦ There are cost advantages to producing something on a large scale – ‘economies of scale’. But if there are many sellers, it is hard for any one of them to enjoy economies of scale. Evaluation: effect of competition on producers 1. It encourages firms to improve efficiency and productivity. ◦ Productivity means being able to produce more output using the same number of inputs. More efficient producers can make more profit as the demand for goods and services increases. 2. It encourages firms to innovate and offer new products to stay ahead of their competitors and attract more customers. 3. BUT… Producers who are slow to adapt to changing technology will be forced out of business. This also hurts their workers who may lose their jobs due to new methods of production. Evaluation: effect of competition on consumers 1. Consumers benefit from lower prices (because sellers compete for market share). 2. Competition forces producers to innovate and improve the quality of their products. This gives consumers a bigger range of goods and services of better quality. 3. Competition leads to consumer sovereignty as producers compete to keep up with consumer tastes and preferences for new/better products. 4. HOWEVER… a) While offering a bigger range, producers may introduce goods that are (directly or indirectly) harmful to consumers b) Misleading advertising can cause consumers to buy products they don’t need or they end up paying more than they thought they would. Monopoly: sole producer of a good or service Characteristics of a monopoly: One seller High barriers to entry No close substitutes Seller can set its own price Examples of barriers to entry Existence of large economies of scale – small producers cannot enter the market because they cannot operate on a large enough scale. Patents and copyrights Location – especially true in small towns/ villages/ along a motorway Legal barriers to entry – for example, only Royal Mail can deliver post Consequences of monopolies Reduces consumer choice (only one seller) Reduces incentives to innovate ◦ BUT monopolies may need to introduce new technology in order to maintain their monopoly status Consumers have to pay a higher price ◦ BUT a monopoly can produce a greater quantity and take advantage of economies of scale Higher profits for monopoly firm Oligopoly An oligopoly is where a small number of firms control the majority of market share and the actions of one firm have a significant effect on other firms. There are barriers to entry, but these are not sufficient to prevent other firms from entering. Firms use product differentiation, advertising, customer loyalty Examples: supermarkets, airlines, crude oil Summary of differences in market structure Control of prices ◦ Monopoly: Can set price, but not quantity ◦ Oligopoly: Can influence price… but faces competition from rivals. May try to collude. ◦ Competition: Price determined by supply and demand Price and output ◦ Monopoly: charges a higher price for a smaller quantity ◦ Oligopoly: price and quantity depend on number of firms ◦ Competition: likely to have lower price and higher quantity Economic Efficiency ◦ Monopoly: usually not efficient, unless large economies of scale ◦ Oligopoly: not efficient ◦ Competition: usually economically efficient 2.6 Production COSTS, REVENUE AND PROFIT Costs Total Cost is the cost of actually producing something. It consists of: ◦ Variable Costs: costs that vary with units of output produced. Examples: wages, buying raw materials ◦ Fixed Costs: costs that are incurred irrespective of the level of output Examples: renting premises, buying machinery, advertising Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC) Average Cost (AC) is the cost of producing one unit. 𝑨𝑪 = 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 (𝑻𝑪) 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 (𝑸) Revenue Total revenue is the total income of a firm from the sale of its goods and services. Total Revenue (TR) = Price x Quantity Average revenue (AR) = Total revenue/output (TR/Q) AR = TR/Q Note: Average Revenue is the same as price Since TR = P x Q , we know that P = TR/Q Thus, P = AR Profit and Loss Profit is when firms earn more revenue than they pay in costs. Profit = Total Revenue – Total Costs Profit = TR – TC Loss is where a firm’s revenue is less than its costs. Loss means (TR – TC) is negative Why are Costs important? As output increases, the costs of production rise. Firms therefore need to raise price in order to generate more revenue (otherwise they would be making a loss!) In other words, there is a positive relationship between price and quantity. This is why the supply curve is upward sloping. Why is Revenue important? If revenues are low/insufficient to cover costs, a firm might go out of business. If revenues are high, then Investors might be willing to lend the firm more money to expand their business The firm might be able to secure bank loans more easily and at lower interest rates Workers/ suppliers/ business partners will have greater confidence in the business. Why are profit and loss important? In a market economy, profits act as a signal for scarce resources to be allocated to those firms that are making the most profit Profits act as a signal for other producers to move into a particular market Profits can be put back into the business to finance investment Loss plays the opposite role to profit. A firm cannot continue making losses over a long period of time as they will be unable to pay their factors of production. Thus, scarce resources will move from a firm making a loss to one making a profit. Economies of Scale In economics, the short run is the period of time over which at least one factor of production is fixed. In the long run, ALL factors of production can be varied and the firm can change its scale of production. Economies of scale occur when the average cost of production falls as output increases. Economies of scale only occur in the long run, because the firm needs to scale up all its factors of production. Productivity Productivity is one measure of the degree of efficiency in the use of factors of production in the production process. It is measured in terms of output per unit of input (labour hours or amount of capital) Productivity = Total Output / Total input Capital and labour are both scarce resources. Therefore, maximizing their impact is a core concern of modern business How can productivity be improved? Specialization improves productivity because workers can become experts in one task and do not waste time switching between tasks. This means they can produce more by working the same number of hours. Substitution of capital for labour means that for the same level of inputs, more can be produced with machinery More training for workers will increase their productivity Better quality raw materials would make workers more productive Evaluation: importance of production for the economy An increase in production is likely to bring about: 1. An increase in employment, unless it is driven by increased productivity 2. An increase in profits for firms and the industry 3. Larger economies of scale 4. An increase in market share if the production of one firm increases relative to that of other firms 5. Overall economic growth 6. A rise in the standard of living, as consumers have a bigger range and quantity of goods and services to buy Evaluation: Importance of productivity for the economy For workers ◦ Likely to be rewarded with higher wages and an increased standard of living For firms ◦ Lower average costs and increasing economies of scale, leading to improved competitiveness ◦ Greater profits For governments ◦ Increase in total output of the economy, leading to higher employment and therefore more tax revenue ◦ More competitive firms will lead to greater exports and therefore create further economic growth Potential costs of increased productivity If firms replace labour with capital, this may increase unemployment, while also increasing productivity. If unemployment increases, governments will earn less tax revenue and likely spend more on benefits Firms who cannot increase productivity may find themselves unable to compete and thus go out of business Firms may spend more on training and buying new capital than is covered by the increase in productivity Other countries may put trade restrictions on exports to protect against lower prices caused by increasing productivity Consumers may end up with lower quality standardised goods