MJC_H2_ECONS_EQ3

Answers for Essay Question 3 Disruptive technologies include the advent of e-commerce retailing which has led to consumers buying cheaper products online rather than going to a physical location. (a) Explain how survival of firms is affected by disruptive technologies. [10] (b) Discuss whether increasing competition faced by large retail firms is desirable for the society. [15] Part a) Explain how survival of firms is affected by disruptive technologies. [10] Introduction • A firm’s survival is dependent on whether they are able to cover its variable costs in the short run and long run. If they are unable to do so, they will not survive and will need to shut down and exit the industry. • Define short run – time period with at least one fixed factor and long run – time period with all factors that are variable. • Disruptive technology could allow more competition on firms and firms can also tap on the technology to differentiate itself and gain larger market share. • In this essay, we will look at the impact of more competition as consumers turn to online platforms stated in the preamble. Development 1 – Analysis of disruptive technology on firm’s profit • Disruptive technology reduces demand of goods and services from physical retail outlets because prices of goods and services from online store are relatively cheaper. Demand will also be more price elastic because there are more substitutes that are available. Figure 1: Impact of disruptive technology on firm o Initially, the firm maximizes profits at MC=MR1 at output Q1. When outpiut is less than 0Q1, the revenue gained is greater than the cost for an additional unit of good, profits increases with higher output. The converse holds true. Producing one more or one less unit will lead to a fall in total profit. o Disruptive technology  ↓demand  ↓AR  may result in subnormal profits (AR<AC) where profits have fallen from supernormal profits of P1abC1 to P2edC2.

[Note] However, disruptive technology may prove opportunity for firms to tap on large markets through e-commerce and hence demand may increase. o As explained earlier, firms will consider their variable costs to decide if they are able to survive. Development 2 – Survival of Firm in SR • A firm will survive in the short run if its average revenue is able to cover its average variable costs. • In the short run, a firm incurs both fixed and variable costs. o Fixed costs are incurred regardless of the level of output produced by a firm. Even if a firm produces no output i.e. shuts down it will still incur fixed costs. o Variable costs are incurred based on the level of production. o Provide examples of fixed and variable costs. • The assumption is that the firm’s AR have fallen to an extent that it is making subnormal profits. The firm is also assumed to be a profit motivated firm which intends to minimise its loss. • A firm cannot survive and will shut down if AR<AVC o If