IJC_H2_ECONS_Essay_Q2_SuggestedSolution

IJC 2014 H2 Prelim 2 Paper Question 2 As the growth of online shopping cont inue, shoppers are focused on purchasing electronics, books, music, apparel and s porting goods. On the other hand, food and beverages, supermarkets, luxury fashion and healthcare tend to be less affected by the shift towards online retail and continued to perform well. (a) Explain how economies of scale determi ne the type of market structure in different industries. [10] Suggested Outline:  Define economies of scale, minimum effici ent scale. Explain that the extent of economies of scale reaped by firms determine the size of firms and hence the type of market structure.  Firm where MES is small relative to industry demand means that the optimal size of the firm is small and thus there are many small siz ed firms in the industry. These firms will experience lowest average costs at a low level of output only and are thus remain small in size. For exam ple, fashion boutique and barber shop. Hence, such industries are likely to ex ist in monopolistic competition where there is a large number of small firms.  Firm where MES is large relative to industry demand means there may be room for only one or a few large sized firms. T hese industries tend to have high capital cost and is more likely to exploit technical economies of scale. Examples of such industries include telecommunication, public utilities and aircraft production. In these industries, there is no possibility of com petition from withi n the country. Even if a firm were large enough to produc e the whole output of the industry in the country, it would still not be lar ge enough to experience the full potential economies of scale. As a result, the LRAC curve falls continuously over the entire output range sufficient to supply th e entire market. Such industries are likely to be oligopolistic, with a few lar ge firms dominating the market. In the extreme case, with only one firm in the market it might exist as a monopoly.  In some industries, the firms’ LRAC curve may have a horizontal portion due to constant returns to scale. These firms can enjoy lowest average costs over a range of output. It is possible for small and large firms to be equally cost efficient and co-exist in the same industry. For exam ple, in the retail industry, there exist small grocery stores and lar ge supermarkets. Hence fi rms in these industries can be either oligopolistic (e.g. superma rket chains) or monopolistic competitive (e.g. grocery stores).

Marking Descriptor Level Descriptor Marks L3 Clear attempt to address question. Well-developed analysis of how economies of scale determine the size of firms, number of firms and market structure in different industries with the good use of relevant examples. 7-10 L2 Some attempt to address question. Less developed analysis of how economies of scale determine the size of firms, number