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A2 Edexcel Unit 3 12th June 2012 Megathread

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    (Original post by Tsunami2011)
    How do you find the AVC on the diagram for the shut down of a firm in the short run?!
    The point where AR=AVC is the shutdown-point.

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    (Original post by ezioaudi77)
    The point where AR=AVC is the shutdown-point.

    That has completely baffled me

    do you know of any youtube tutorials? I don't understand why MR=AR is drawn in that way, unless it is a diagram of perfect competition...
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    (Original post by Tsunami2011)
    That has completely baffled me

    do you know of any youtube tutorials? I don't understand why MR=AR is drawn in that way, unless it is a diagram of perfect competition...


    The diagram above is a simplified version of the below diagram. In the above diagram, it assume average revenue is constant, making marginal revenue constant as well. This means there is only one line for both MR and AR, so explanation is much simpler.



    In the short-run, as long as a firm can cover its variable cost, it will continue production, even if fixed costs are not covered.
    IF the firm shuts down, it will incur a greater loss than if it continues production. The firm will at least make a little contribution to covering fixed costs if it continues production, but if it shuts down, all fixed costs are lost.
    So the firm stays in the industry as long as its AR is even a little greater than AVC.

    But, if a firm isn't able to cover the variable cost, it will cease production. This is because all the fixed cost cannot be covered anyway, and remaining in business would yield greater losses.
    So the shutdown point is when the firm earns less than its variable cost.
    So:
    Shutdown point => AVC=AR


    In the diagram, average revenue(P2) is less than average variable costs(P3) so it will cease production.

    However this is in the short run, so the firm is only interested in covering up fixed costs. But in the long run, the firm will shutdown even if it earns less than the Total Cost. Just remember that. But if you want an explanation, see the spoiler.

    Spoiler:
    Show
    A profit maximiser wants to make profits. So even if no profits are made in the short run, at least in the long run it should be able to make profits (AR-AC).But if AC>AR, i.e. abnormal losses are incurred, so there is no point in remaining in business.


    To sum up,

    In the short-run, the firm will shutdown if AVC>AR

    In the long-run, the firm will shutdown if AC>AR.

    I don't know how to simplify this further, so anyone else is welcome to do better explanation or point out any flaws in mine.
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    (Original post by ezioaudi77)
    x
    Thanks alot! I did understand the concept before, just not the expression on the diagram!
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    Hey does anyone know how to draw the diagram for the Jan 2012 paper Q8 it’s really difficult?
    I would really appreciate some help with it, as its stressing me out!
    THanks a lot.

    The question ishttp://htmlimg3.scribdassets.com/5eox21ckao1ms0d8/images/26-0c35e76682.jpg

    the answer is C
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    (Original post by ezioaudi77)


    The diagram above is a simplified version of the below diagram. In the above diagram, it assume average revenue is constant, making marginal revenue constant as well. This means there is only one line for both MR and AR, so explanation is much simpler.



    In the short-run, as long as a firm can cover its variable cost, it will continue production, even if fixed costs are not covered.



    IF the firm shuts down, it will incur a greater loss than if it continues production. The firm will at least make a little contribution to covering fixed costs if it continues production, but if it shuts down, all fixed costs are lost.
    So the firm stays in the industry as long as its AR is even a little greater than AVC.

    But, if a firm isn't able to cover the variable cost, it will cease production. This is because all the fixed cost cannot be covered anyway, and remaining in business would yield greater losses.
    So the shutdown point is when the firm earns less than its variable cost.
    So:
    Shutdown point => AVC=AR


    In the diagram, average revenue(P2) is less than average variable costs(P3) so it will cease production.

    However this is in the short run, so the firm is only interested in covering up fixed costs. But in the long run, the firm will shutdown even if it earns less than the Total Cost. Just remember that. But if you want an explanation, see the spoiler.

    Spoiler:
    Show
    A profit maximiser wants to make profits. So even if no profits are made in the short run, at least in the long run it should be able to make profits (AR-AC).But if AC>AR, i.e. abnormal losses are incurred, so there is no point in remaining in business.


    To sum up,

    In the short-run, the firm will shutdown if AVC>AR

    In the long-run, the firm will shutdown if AC>AR.

    I don't know how to simplify this further, so anyone else is welcome to do better explanation or point out any flaws in mine.

    Hey would you know how to draw the diagram for the Jan 2012 paper Q8 it’s really difficult?
    I would really appreciate some help with it, as its stressing me out!
    THanks a lot.

    The question ishttp://htmlimg3.scribdassets.com/5eox21ckao1ms0d8/images/26-0c35e76682.jpg ..

    the answer is C
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    (Original post by bhavikrajani)
    Hey would you know how to draw the diagram for the Jan 2012 paper Q8 it’s really difficult?
    I would really appreciate some help with it, as its stressing me out!
    THanks a lot.

    The question ishttp://htmlimg3.scribdassets.com/5eox21ckao1ms0d8/images/26-0c35e76682.jpg ..

    the answer is C
    Do you have the full examiner's report/question paper for that series?
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    Can't believe I'm asking this, but what is meant by constant average costs?
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    (Original post by Tsunami2011)
    Do you have the full examiner's report/question paper for that series?
    The examiner report: http://www.scribd.com/nathan_silva_8...-6EC03#page=36

    But the paper only a hard-copy and i dont own a scanner?
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    (Original post by Tsunami2011)
    Do you have the full examiner's report/question paper for that series?
    Ohhh just saw on your profile you got into LSE next year what are you studying? Iv firmed it too
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    (Original post by Tsunami2011)
    Can't believe I'm asking this, but what is meant by constant average costs?
    Thats what i didnt get. I dont know if it means constant cost for both firms i.e same AC and MC

    Or a constant MC=AC curve. But if it did mean MC=AC how would you get to seperate outputs hence profits?
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    Been a while since someone posted on this thread and with the exam tomorrow (in one hour) is everyone feeling okay about this exam?

    This learning resource has helped me a lot
    http://getrevising.co.uk/resources/e...it_3_economics
    you might have to sign up for it with an e-mail address which is always annoying but it's well worth it

    A look at the spec is always helpful too
    http://www.edexcel.com/migrationdocu...4%20210510.pdf page 35
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    If anyone can help me with this question i'd be very appreciative! It's about the questions regarding falls/rises in profits,output and price

    http://www.thestudentroom.co.uk/show....php?t=2027532
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    What is the difference between rationalisation and synergies?
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    (Original post by bhavikrajani)
    Hey would you know how to draw the diagram for the Jan 2012 paper Q8 it’s really difficult?
    I would really appreciate some help with it, as its stressing me out!
    THanks a lot.

    The question ishttp://htmlimg3.scribdassets.com/5eox21ckao1ms0d8/images/26-0c35e76682.jpg ..

    the answer is C

    (Original post by Tsunami2011)
    Can't believe I'm asking this, but what is meant by constant average costs?
    As the question says there were constant average costs, AC will increase at a constant rate, or by the same amount as the earlier output. So AC will be horizontal. If AC is horizontal, MC will be horizontal as well and therefore AC and MC overlap.

    As this is a monopolist and the sole supplier, it will be supplying to the whole industry. Therefore, average revenue will be downward sloping and MR twice as steeply.



    When the industry was perfectly competitive, all the small firms had to be price takers, and so nobody could earn profits because consumers could easily shift to another supplier. Therefore, all small firms produced where, AC=AR ie output Q1 and price P1. But now that, it is a monopoly, there is no such fear that customers will shift to another supplier, because the monopolist is the sole supplier. So it can profit maximise, and there will produce where MC=MR ie output Q2 and Price P2.

    So this will increase price(from P1 to P2) and reduce output(from Q1 to Q2). Option E.
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    Paper 3. Do I get a mark if I knock out a wrong multiple choice option with reasoning?
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    Hi All,

    On the Edexcel A2 Economics Unit 3 I always get stuck with the output/price/profit questions, for example:


    January 2010 Paper Q5

    A profit maximising monopolist facing constant average costs experiences a decrease in demand. Other things being equal, which of the following is likely to happen?

    Output Price Profit

    A stays constant falls falls
    B rises rises stays constant
    C stays constant rises falls
    D falls rises falls
    E falls falls falls

    The answer is E however I thought it was D as the firm has monopoly power it can raise the price due to the inelsatic demand to recover some of the fall in profit.

    If anyone can give me any general advice on this type of question I would be extremely appreciative

    Many thanks
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    (Original post by mike_17590)
    If anyone can help me with this question i'd be very appreciative! It's about the questions regarding falls/rises in profits,output and price

    http://www.thestudentroom.co.uk/show....php?t=2027532
    You just draw a normal monopoly curve where the firm is making supernormal profits. Then shift the AR and MR curves inwards. Draw the new equilibrium at profit maximisation and you should see everything falling. Simple!
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    Just starting revision nooww
    I really hope I can remember everything from jan
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    (Original post by mike_17590)
    Hi All,

    On the Edexcel A2 Economics Unit 3 I always get stuck with the output/price/profit questions, for example:


    January 2010 Paper Q5

    A profit maximising monopolist facing constant average costs experiences a decrease in demand. Other things being equal, which of the following is likely to happen?

    Output Price Profit

    A stays constant falls falls
    B rises rises stays constant
    C stays constant rises falls
    D falls rises falls
    E falls falls falls

    The answer is E however I thought it was D as the firm has monopoly power it can raise the price due to the inelsatic demand to recover some of the fall in profit.

    If anyone can give me any general advice on this type of question I would be extremely appreciative

    Many thanks
    As the question says there are constant average costs, AC will increase at a constant rate, or by the same amount as the earlier output. So AC will be horizontal. If AC is horizontal, MC will be horizontal as well and therefore AC and MC overlap and AC=MC.
    Also remember, monopolists operate on MC=MR ie the profit maximising output.



    • Before the demand fell equilibrium price and quantity are P1 and Q1, respectively.
    • When demand falls, revenue falls. This is shown by the AR curve(AR is also the demand curve) shifting to the left(moving from AR1 to AR2). MR will fall too as a result shown by MR1 to MR2.
    • Therefore the new profit maximising output and price will be Q2 and P2, respectively.
    • The earlier profit is shown by the less shaded area (OQ1 x OP1). This will fall to the darker shaded area (OQ2 x OP2).

    .
    So price falls from P1 to P2, output has falls from Q1 to Q2, and profit falls as well.

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