AQA A2 Economics Unit 3 - 12th June 2012 PM

In monopoly diagrams, is the AC curve SRAC or LRAC ?
Because my teacher, and I think the textbook, says one of the disadvantages of monopoly is that there are unexploited EoS, that would inly be true if it's LRAC but I swear is SRAC, because you can't put marginal costs (A SR concept) on a graph with an AC that doesn't apply to the same time frame ?
long run equilibrium for the individual firm in a perfectly competitive market sort of proves my point... We assume that there are no economies of scale to be had in perfect competition, thus there AC curve is in the same position in the LT as the ST (unless something shifts the AC of all the firms in a market).


I'm pretty sure they're the same thing.

Sorry for multiple posts (I'm on phone) but could someone explain why a monopolists demand curve is elastic at the top, unit elastic in the middle and inelastic toward the bottom? Surely as the gradient is the elasticity and gradient is constant, the elasticity should be the same at all positions on the curve?

Thanks in advance. If anyone needs to see a picture and has the 'Ray Powell' AQA (big) book, it is the last page of chapter 4. Cheers

In the standard monopoly diagrams I've always thought of it being the SRAC because otherwise, if this is in the long run, then there will not be diminishing returns hence the mc curve will not be increasing as it does and therefore the ac curve will not be u shaped.

Sorry for multiple posts (I'm on phone) but could someone explain why a monopolists demand curve is elastic at the top, unit elastic in the middle and inelastic toward the bottom? Surely as the gradient is the elasticity and gradient is constant, the elasticity should be the same at all positions on the curve?

Thanks in advance. If anyone needs to see a picture and has the 'Ray Powell' AQA (big) book, it is the last page of chapter 4. Cheers

the LRAC curve is usually assumed to be U shaped (with a longer flat bottom)
because there are decreasing returns to scale, then constant , then increasing.

https://www.google.co.uk/search?tbm=isch&hl=en&source=hp&biw=1600&bih=756&q=LRACC&gbv=2&oq=LRACC&aq=f&aqi=g-S1g-sS2&aql=&gs_l=img.3..0i24j0i10i24l2.1007.2189.0.2512.5.5.0.0.0.0.100.323.4j1.5.0...0.0.BiTuVkP048w#hl=en&gbv=2&tbm=isch&sa=1&q=LRAC&oq=LRAC&aq=f&aqi=g6g-S3g-sS1&aql=&gs_l=img.3..0l6j0i24l3j0i10i24.766.766.0.1381.1.1.0.0.0.0.81.81.1.1.0...0.0.GeKviaQLfbg&pbx=1&bav=on.2,or.r_gc.r_pw.r_qf.,cf.osb&fp=5d233068f80858b2&biw=1600&bih=756

Here are a list of questions that is everything you need to know in Unit 3 Micro.

Chapter 10

List examples of market failure.
How can the government intervene in markets to correct market failure.
Causes of government failure.
Problems with environmental taxation.
Ways to interven to solve environmental market failure.
Define the tragedy of the commons.
What is cost benefit analysis.
What are the limitations of cost benefits analysis.

Chapter 9

What are the two forms of wealth.
What are sources of wealth.
How to measure income inequality.
Types of poverty.
Causes of poverty.
How can the government intervene to tackle poverty and inequality.
What are the determinants of wage rates.
Explain economics rent and transfer earnings.
Draw a graph of a monopsonist market.
Draw a graph of a monopsonist market with trade union intervention.
What are the types of wage differentials.

Chapter 8

What are the factors that effect demand in the labour market.
Draw and explain marginal revenue product.
What determines elasticity of demand for labour.
Factors that effect supply and demand.
Factors that effect elasticity of supply of labour.
Explain the substitution and income effect.
what is the backward bending labour supply curve.

Chapter 6

What are imperfect markets.
How to monitor monopoly powers.
Which organisations are responsible for monitoring monopoly powers.
How to intervene in monopoly markets.
Why do mergers occur.
Types of restrictive trade practices.
What are the benefits and drawbacks of nationalisation.
Benefits and drawbacks of privatisation.
What are public private partnerships.
What is a private finance initiative.
Explain characteristics of contestable markets.
What are the types of barriers to entry in markets.
Benefits and drawbacks of the theory of contestable markets.

Chapter 5

How can incumbent firms in a market form barriers to entry.
What are competitive oligopolies.
Explain the kinked demand curve.
What are the forms of non price competition.
Explain game theory and the prisoners dilemma.
What are the types of collusion.
List anticompetitive trade practices.

Chapter 4

Draw a monopoly diagram.
Sources of monopoly powers.
What are the range of pricing techniques and draw them on a monopoly diagram.
Define natural monopoly.
Explain minimum efficient scale.
Benefits and drawbacks of monopoly powers.
Explain price discrimination.
What are the conditions of price discrimination.
Methods of price discrimination.
Types of price discrimination.
What are the benefits and drawbacks of price discrimination on both consumers and producers.

Chapter 3

What are the characteristics of a perfectly competitive market.
Define allocative efficiency.
Define productive efficiency.
Explain how a firm can make supernormal profits in the short run and normal profits in the long run.
Define static efficiency.
Draw a loss making firm in a graph, and explain it.
What is the structure, performance and conduct model.
What is dynamic efficiency.

Chapter 2

Define marginal, average and total revenue.
What are the assumptions of a perfectly competitive market.
Draw an imperfect market graph.
Define sales maximisation and draw it on a graph.
What are the problems with profit maximisation.
Explain the the theory of divorce of ownership, and the principle agent problem.
What are the ways in which a firm can grow.
What are the things to consider when planning to grow.
Define innovation and invention.

Chapter 1

Define the law of diminishing returns.
What are the main costs of production.
Explain marginal product using a graph.
Explain marginal cost using a graph.
What are the different returns to scales of production.



Thats about it I think. Trust me, if you know the answers to all of these questions, then you will be fine for the exam. If anyone has any problems with the questions, just let me know and I can tell you, I have all the answers.

can you PM me the answers please?? thanks

is it possible if you could inbox me the answers too ?

Is it possible if you could inbox me the answers too ?

Could you please pm me the answers as well. I'll really appreciate it.

I'm a external candidate so doing this unit without any help. Thanks


This was posted from The Student Room's iPad App

I've already put them up, post 47.

I've had quite a few people asking for the answers so thought it was about time to put them up. I think there is a couple that I didn't answer because im not 100% sure on the answer. If there is any topic or theory that you think I've missed out, please say.

I used the official AQA unit 3 book so it should all be correct. ENJOY!


Unit 3

Chapter 10

List examples of market failure.
- Externalities.
- Monopoly.
- Imperfect information.
- Immobility of factors of production.
- Demerit goods.
- Equality issues.

How can the government intervene in markets to correct market failure.
- Direct provision of public and merit goods.
- Subsidise the market/ business.
- Provide perfect information.
- Taxation.
- Min/Max pricing (think about drawing a graph for this one)
- Deregulation/ regulation.
- Legislation and laws.

Causes of government failure.
- Imperfect information.
- Political interests.
- Unintended consequences.

Problems with environmental taxation.
- Costs and benefits can be geographically diverse, so some people suffer more than others.
- Difficulty in accurately assigning monetary values on costs and benefits.
- Can have a regressive effect on consumers.
- Inelastic demand may prevent tax reducing consumption. (think about smoking and habitual consumption)

Ways to intervene to solve environmental market failure, (you have to be able to draw the MSC, MSB, MPC and MPB graph.
- Taxation.
- Pollution permits.
- What are the benefits and costs of both these points for evaluation.

Define the tragedy of the commons.
- When producers costs are lower than the costs to the environment and hence do not pay for the damage done.

What is cost benefit analysis.
- There are four main stages to costs benefits analysis.
- 1st: identify all benefits and drawbacks to a proposal.
- 2nd: assign a monetary value to them.
- 3rd: forecast over a long period of time.
- Calculate net benefits/ drawback.

What are the limitations of cost benefits analysis.
- Have have regional effects.
- Difficulty in assign monetary value to costs and benefits of the proposal.

Chapter 9

What are the two forms of wealth.
- Non-marketable.
- Marketable.

What are sources of wealth.
- Inheritance.
- Savings.
- Business.
- Chance.

How to measure income inequality.
- Using the lorenz curve and the gini coefficient.

Types of poverty.
- Absolute.
- Relative.

Causes of poverty.
- Unemployment.
- Disability.
- Old age.
- Lack of skills and qualifications.
- Imperfect information of state benefits.
- Poverty trap.

How can the government intervene to tackle poverty and inequality.
- Tackle unemployment (how can the government tackle unemployment, think about supply and demand side policies e.g. improving physical capital)
- Progressive taxation.
- Benefits, and child tax credits (research current government policies so that you can use these in the exam as empirical examples).
- Direct provision of public and merit goods.
- National Minimum wage.
- Exploiting trickle down effects.

Chapter 8

What are the determinants of wage rates.
- Power of trade Unions.
- Level of skill and qualifications.
- Supply side and demand side factors (analysed more later on)

Explain economics rent and transfer earnings.
- Transfer earnings is the level of payment to keep a factor of production in its current position.
- Economic rent is over and above payment of transfer earnings.

Draw a graph of a monopsonist market.
- Draw the graph, i can't on this

Draw a graph of a monopsonist market with trade union intervention.
- " " " "

What are the types of wage differentials.
- Level of skill.
- Qualifications.
- Gender.
- Race.
- Trade union power.
- Level of esteem.
- Part time, full time.

Chapter 7

What are the factors that effect demand in the labour market.
- Productivity.
- Marginal revenue product. (this is important for you to know and understand the graph)
- Wage rate.
- Expectations and confidence.

Draw and explain marginal revenue product.
- Look at the book, i cant draw it on here.

What determines elasticity of demand for labour.
- Availability of substitutes.
- Time period, in the long run the firm can reorganise hierarchal structure.
- Proportion of labour costs to total costs.

Factors that effect supply of labour.
- Monetary factors, perks, bonuses, wage rate, share equity, other financial incentives.
- Non-monetary factors, esteem, job enrichment etc etc.

Factors that effect elasticity of supply of labour.
- The level of skills required, think about how long it would take to be a doctor.
- Sense of vocation.

Explain the substitution and income effect.
- I was actually hoping you could tell me this one, I don't fully understand this.

what is the backward bending labour supply curve.
- Backward bending, looking at the relationship between number of hours worked and wage rate.

Chapter 6

What are imperfect markets.
- Barriers to entry.
- Dominant firms that dictate price level and output.
- Lack of price transparency.
- Monopoly/ Oligopoly.
- Price setters.

How to monitor monopoly powers.
- Relationship between advertising costs to total costs.
- Concentration ratios (how concentrated the market is)
- Profits compared to market size.

Which organisations are responsible for monitoring monopoly powers.
- Competition commission.
- Office for fair trading.
- Department of trade and industry.

How to intervene in monopoly markets.
- Compulsory breaking up.
- Deregulation.
- Nationalisation.
- Taxation on excess profits.
- Price controls, min max pricing.

Why do mergers occur.
- To increase market power and dominance.
- To increase profits and sales.
- Possible mergers of charities for ethical reasons.
- Increase value of the company.

Types of restrictive trade practices.
- Limit pricing.
- Cartels and collusion.
- Discriminatory pricing.

What are the benefits and drawbacks of nationalisation.
- Benefits: Increase control of economy, Provision of public and merit goods, prevents inefficient monopoly powers forming, prevents disasters such as the collapse of northern rock.
- Drawbacks: Higher burden on tax payers, public sector less efficient, government failure, crowding out, public debt, higher leakages out of economy in interest, think about greece and its problems.

Benefits and drawbacks of privatisation.
- Benefits: Efficient, profit incentive drives efficiency and innovation, promoting business culture, reduces the size of the public sector, raises finance for governments.
Drawbacks: Can cause monopoly, worsen allocation of resources.

What are public private partnerships.
- Part public, part private ownership.

What is a private finance initiative.
- When the government use private sector businesses to undertake public sector activities.

Explain characteristics of contestable markets.
- Low barriers.
- Homogeneous products.
- Price setters.
- MC=MR.
- No dominant firm that can influence price level or output.

What are the types of barriers to entry in markets.
- Strategic barriers, made by the incumbent firms.
- Innocent barriers, that are natural i.e. level of knowledge.


Chapter 5

How can incumbent firms in a market form barriers to entry.
- Through high set up costs and sunk costs.
- Limit pricing.
- Collusion.
- Product differentiation.
- R&D.
- Non-price competition.

What are competitive oligopolies.
- When firms are interdependent from each other and there is no collusion.

Explain the kinked demand curve.
- Think about the different elasticities and different price levels.

What are the forms of non price competition.
- Brand loyalty.
- Advertising.
- Loyalty cards.
- Product differentiation.

Explain game theory and the prisoners dilemma.
- How the reactive behaviour of each firm tries to reach a price level which is the best possible scenario. Nash Equilibrium. This is difficult to explain with using the diagram.

What are the types of collusion.
- Formal
- Informal.


Chapter 4

Draw a monopoly diagram.
- Draw.

Sources of monopoly powers.
- Patents.
- MES.
- High fixed costs.

What are the range of pricing techniques and draw them on a monopoly diagram.
- Sales maximisation.
- Profit maximisation.
- Average cost pricing.
- Marginal cost price.
- Make sure you can point these on the monopoly diagram.

Define natural monopoly.
- When competition would make the market inefficient. Usually operating at MES, and economies of scale have been exhausted.

Explain minimum efficient scale.
- Lowest point on the LRATC curve.
- Economies of scale are exhausted.

Benefits and drawbacks of monopoly powers.
- Benefits: Tech innovation, MES, Can lower prices, international competitiveness, Dynamic efficiency.
- Drawbacks: X-inefficient, DWL, loss in consumer surplus, high barriers to entry, higher prices, price setter, allocative and productive inefficient.

Explain price discrimination.
- The different prices are charge to different consumer irrelevant of costs associated.

What are the conditions of price discrimination.
- Have to be able to control output.
- Different elasticities.
- No arbitrage.

Methods of price discrimination.
- Age.
- Location.
- Time.

Types of price discrimination.
- First degree.
- Second degree.
- Third degree.

What are the benefits and drawbacks of price discrimination on both consumers and producers.
- Consumers benefits: More people can access the product or service, can lead to long term investment and hence better service in the long run.
- Consumer Drawbacks: Loss in consumer surplus, inequality issues, higher prices.
- Producer benefits: Higher profits, sales, market share, power.etc

Chapter 3

What are the characteristics of a perfectly competitive market.
- Homogeneous products.
- Price takers.
- Low barriers to entry.
- Perfect information on prices for consumers.
- No firm with power over price level or output.

Define allocative efficiency.
- Allocating scarce resource to meet the needs and wants of consumers, without waste.

Define productive efficiency.
- Where MC=ATC.
- There point where production is maximised and the lowest possible costs.

Explain how a firm can make supernormal profits in the short run and normal profits in the long run.
- Short run: Supernormal profits are enjoyed because supply is fixed in the market. Use the graph for market and the firms cost graph with the horizontal D, MR, AR curve to explain this further.

Define static efficiency.
- Allocatively, and productive efficiency.

Draw a loss making firm in a graph, and explain it.
- Draw.

What is the structure, performance and conduct model.
- Structure: Degree of competition, Number of sellers and buyers, barriers to entry.
- Conduct: Pricing decisions, output, dominant firms?, collusion, pricing strategies.
- Performance: Profits, Spending, market share, power etc.

What is dynamic efficiency.
- The development of new technology and innovation that increase performance of economy in the long run.

Chapter 2

Define marginal, average and total revenue.
- Pretty straight forward.

Draw an imperfect market graph.
- Draw.

Define sales maximisation and draw it on a graph.
- Point where MR=0.

What are the problems with profit maximisation.
- Divorce of ownership.
- Principle agent problem.
- Size of the company.
- Difficulty in monitoring exact marginal values.
- Other objectives.
- Corporate citizenship.

Explain the the theory of divorce of ownership, and the principle agent problem.
- The differences in objectives between shareholders and managers, and how managers would want to maximise their personal benefits and perks, so suggest to the theory of Saticificing.
- Shareholder are the principle and managers are the agents.

What are the ways in which a firm can grow.
- Organic growth through innovation and invention.
- External growth through mergers and acquisitions.
- Types of mergers: Horizontal, vertical, A-lateral, Conglomerate.

What are the things to consider when planning to grow.
- Time.
- Budget.

Define innovation and invention.
- Innovation making invention commercial.
- invention creating and making a new idea or concept.


Chapter 1

Define the law of diminishing returns.
- Short run production has at least one fixed factor of production, so there comes a point where each additional variable factor of production maximises the fixed factor and has less effect on total product, causing marginal product to fall. This also causes marginal cost to increase, as the costs of the variable factor becomes more significant.

What are the main costs of production.
- Marginal cost.
- Average cost.
- Fixed costs.
- Variable costs.
- Average, marginal, and total of all costs above.

Explain marginal product using a graph.
- Marginal product looks at the difference an additional unit of a variable factor of production has on total product.

Explain marginal cost using a graph.
- Pretty straight forward.

What are the different returns to scales of production.
- Increase, decreasing and constant returns to scale.

Here are a list of questions that is everything you need to know in Unit 3 Micro.

Chapter 10

List examples of market failure.
How can the government intervene in markets to correct market failure.
Causes of government failure.
Problems with environmental taxation.
Ways to interven to solve environmental market failure.
Define the tragedy of the commons.
What is cost benefit analysis.
What are the limitations of cost benefits analysis.

Chapter 9

What are the two forms of wealth.
What are sources of wealth.
How to measure income inequality.
Types of poverty.
Causes of poverty.
How can the government intervene to tackle poverty and inequality.
What are the determinants of wage rates.
Explain economics rent and transfer earnings.
Draw a graph of a monopsonist market.
Draw a graph of a monopsonist market with trade union intervention.
What are the types of wage differentials.

Chapter 8

What are the factors that effect demand in the labour market.
Draw and explain marginal revenue product.
What determines elasticity of demand for labour.
Factors that effect supply and demand.
Factors that effect elasticity of supply of labour.
Explain the substitution and income effect.
what is the backward bending labour supply curve.

Chapter 6

What are imperfect markets.
How to monitor monopoly powers.
Which organisations are responsible for monitoring monopoly powers.
How to intervene in monopoly markets.
Why do mergers occur.
Types of restrictive trade practices.
What are the benefits and drawbacks of nationalisation.
Benefits and drawbacks of privatisation.
What are public private partnerships.
What is a private finance initiative.
Explain characteristics of contestable markets.
What are the types of barriers to entry in markets.
Benefits and drawbacks of the theory of contestable markets.

Chapter 5

How can incumbent firms in a market form barriers to entry.
What are competitive oligopolies.
Explain the kinked demand curve.
What are the forms of non price competition.
Explain game theory and the prisoners dilemma.
What are the types of collusion.
List anticompetitive trade practices.

Chapter 4

Draw a monopoly diagram.
Sources of monopoly powers.
What are the range of pricing techniques and draw them on a monopoly diagram.
Define natural monopoly.
Explain minimum efficient scale.
Benefits and drawbacks of monopoly powers.
Explain price discrimination.
What are the conditions of price discrimination.
Methods of price discrimination.
Types of price discrimination.
What are the benefits and drawbacks of price discrimination on both consumers and producers.

Chapter 3

What are the characteristics of a perfectly competitive market.
Define allocative efficiency.
Define productive efficiency.
Explain how a firm can make supernormal profits in the short run and normal profits in the long run.
Define static efficiency.
Draw a loss making firm in a graph, and explain it.
What is the structure, performance and conduct model.
What is dynamic efficiency.

Chapter 2

Define marginal, average and total revenue.
What are the assumptions of a perfectly competitive market.
Draw an imperfect market graph.
Define sales maximisation and draw it on a graph.
What are the problems with profit maximisation.
Explain the the theory of divorce of ownership, and the principle agent problem.
What are the ways in which a firm can grow.
What are the things to consider when planning to grow.
Define innovation and invention.

Chapter 1

Define the law of diminishing returns.
What are the main costs of production.
Explain marginal product using a graph.
Explain marginal cost using a graph.
What are the different returns to scales of production.



Thats about it I think. Trust me, if you know the answers to all of these questions, then you will be fine for the exam. If anyone has any problems with the questions, just let me know and I can tell you, I have all the answers.

Could