RVHS_H2_ECONS_P2_Essay_Q3_Soln

RVHS Preliminary Exam 2. Y6H2 Economics, 2017. Question 3 ‘There is little difference between perfect and imp erfect markets. They all have profit maximisation as an aim, they all are subject to com petition and they all exploit resources to benefit the producers rather than the consumers.’ Discuss the validity of this statement. [25] LORMS Knowledge, Application / Understanding and Analysis L3 Developed discussion of all 3 aspects of the proposition (i) objectives of firms, (ii) exposure to competition, (iii) benefits to economic agents (consumers vs producers) with a consideration of the similarities and differ ences of both perfect and imperfect markets. “Developed” answers are expected to show economic a nalysis and exemplification of situations when (aspects of) the statement might be valid or invalid. 15 -20 L2 Undeveloped discussion or Developed explanation which concentrated probably on the differences with limited discussion of the comparability. 9-14 L1 Knowledge of the 3 aspects of the proposition but largely unexplained. 1-8 E3 Analytically well-reasoned judgement about the relative validity of the 3 aspects of the proposition, drawing to a clear conclusion. 4-5 E2 Some attempt at a judgement about the validity of the 3 aspects in the proposition. 2-3 E1 Unsupported statement about the validity of the proposition. 1

‘There is little difference between perfect and imp erfect markets. They all have profit maximisation as an aim, they all are subject to com petition and they all exploit resources to benefit the producers rather than the consumers.’ Discuss the validity of this statement. [25] Introduction: o Perfect markets: firms operating under the market structure of perfect competition o Imperfect markets: firms operating under monopolis tic competition, oligopoly and monopoly o Perfect and imperfect markets possess both similar ities and difference on the three aspects flagged out in the question: (i) objectives of firms, (ii) exposure to competition (iii) benefits to economic agents (consumers vs producers). (i) Profit maximisation vs alternative objectives Proposition is valid: all firms whether in perfect or imperfect markets are similar in that they all have a profit maximisation as an objective. o Marginalist principle: rational firms make output and pricing decision based on profit- maximising condition MR=MC. o At profit-maximising level of output, Qe, the addi tional revenue generated for every extra unit of output produced (MR) equals the additional cost incurred from producing each extra unit of output (MC). o This would be true across firms in both perfect an d imperfect markets. Proposition may be invalid: firms may have alternative aims other than the profit motive. o These include objectives to (a) protective or gain market share or (b) objectives based on the managerial theories of firms. o (a) Some firms may choose