TMJC 2023 A Level H2 EQ3_AP Answers

2023 A Level H2 Economics (9570) Suggested Answers to Paper 2 EQ3 © TAMPINES MERIDIAN JUNIOR COLLEGE 1 Question 3 A firm’s decisions and strategies are influenced by the level of competition in the industry. Its decisions and strategies might also be affected by consumers’ cognitive biases and concerns about the environment. (a) Explain why a firm consider s the level of competition in the industry when making decisions about the price and output level of its product. [10] (b) If markets fail due to lack of competition, discuss whether consumers will be disadvantaged and what might be the most appropriate form of government intervention. [15] Suggested answers to (a) Introduction There are various factors that would affect a firm’s decision about the price and output level of its product, and one of it would be the level of competition. This is because the differing levels of competition would affect the firm’s market power and thus , its ability to set prices above its marginal cost. Development Requirement 1: Explain how firms in industries with high levels of competition make decisions about the price and output level of its product both in the SR & LR (perfectly competitive markets) In markets with low/ no barriers to entry, firms will be faced with high levels of competition. An example would be the case of perfectly competitive markets such as agricultural products. In such cases, where there are many firms in the market, each firm holds on to insignificant amount of market share and thus market power. In this case, the firms are price takers, with no ability to influence the price. As such, the firm will charge the market price, which in turn is determined by the market demand and supply of the good. Thus, the firm faces a perfectly elastic demand curve , as seen in the diagram below. Figure 1: PC Industry and Firm

2023 A Level H2 Economics (9570) Suggested Answers to Paper 2 EQ3 © TAMPINES MERIDIAN JUNIOR COLLEGE 2 As seen above, the firm’s output will be determined by the profit maximising condition. Assuming the firm seeks to maximise profits, it will be producing at the output where MC=MR. If the firm produces at an output level where MR > MC, then producing the last unit of output adds more to revenue than to cost. i.e. total profit will increase. Hence, as long as MR exceeds MC, profits can be increased by increasing production. OR If the firm produces at an output level where MR < MC, then producing the last unit of output adds more to cost than to revenue. This implies that the firm should reduce its output to increase profits. The firm’s profits are maximised when the firm produces at an output level where MC = MR, and MC cuts MR from below. However, the perfectly competitive firm’s price and output would change in the long run. A