PJC_H2_ECONS_P2_Q2_Suggested_Ans

PJC 2018 H2 P2 Question 2: Industries, from transport to retail, are being disrupted by new technologies and digital applications. Digital entrants are challenging the incumbents and threatening their bottom lines. a) Explain how advancement in technology may affect a firm’s profits. [10] b) Discuss the extent to which the behaviour of firms is affected by contestability of market. [ 1 5 ] Suggested answers: A firm’s total profit is derived from total revenue minus total cost. With advancement in technology, it can affect both total revenue and total costs. Advancement in technology like that of digital applications can disrupt the businesses and reduce their total revenue. Advancement in tec hnology have allowed digital applications like that of rail-hailing booking applications of U ber to be developed. It has reduced the demand of traditional taxi service of Comfort Delgro. At the same time, there are more substitutes available for Comfort Delgro’s taxi and its demand will become more price elastic. Thus, Comfort Delgro will see its AR and MR curves shifting downwards and becoming flatter. Since TR = P X Q, a fall in DD will reduce both P and Q and TR will fall. [students can insert a dd/ ss or cost/ revenue diagram showing the effect on TR.] As a result, its total revenue will decrease from advancement of technology that disrupt business with digital technologies. On the other hand, technological advancement can also make a firm’s product more differentiated and increases the firm’s total revenue. With the development of technology eg with the development of internet and mobile devices, small firms can tap on more low cost avenues to market their products and reach out to their customers. Product information and review can be shared via social media or blog post. Large firms can tap on improvement in technology to conduct R & D on their product, allowing them to design more sophisticated products that improve on consumer satisfacti on and stand out from its competitors. These strategies made with advancement in technology can increase demand of the firm’s product. At the same time, PED and CED can also be reduced as the firm’s product’s perceived and/ or actual differences are emphasized. With the firm’s demand curve shifted outward and made steeper, the firm will see an increase in total revenue. In addition, the firm can increase the price of its product and the quantity demanded of its product will fall less than proportionately, increasing the firm’s total revenue. Even if the price of the substitute product were to fall, the fall in demand for the firm that has tapped on technology to brand its product will be by a small extent. Thus, total revenue can incr ease if firm position itself well to ride on the advancement in technology by differentiating itself better from its rivals. Technological advancement can reduce costs of firm. Technology improvement has increases co