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Edexcel Economics: Unit 3 Business Economics and Economic Efficiency (June 2014) EC03 Watch

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    (Original post by Livaren)
    What's BOGOF?

    You could also mention the fact other firms may utilise similar non-price strategies, rendering them ineffective.
    Buy One Get One Free, it's one of the listed answers accepted by Edexcel apparently.

    When you say similar non-price strategies, do you mean it like in terms of advertising, rival firms may be investing as heavily in perceived product differentiation? Therefore, brand awareness is equally wide-spread and thereby negating the potential benefits of advertisements?
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    (Original post by areddishherring)
    Buy One Get One Free, it's one of the listed answers accepted by Edexcel apparently.

    When you say similar non-price strategies, do you mean it like in terms of advertising, rival firms may be investing as heavily in perceived product differentiation? Therefore, brand awareness is equally wide-spread and thereby negating the potential benefits of advertisements?
    Precisely.
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    Could anyone give me any feedback for my general points/evaluation? They are in no context, purely as a strategy to benefit the firm. I think it's perhaps most applicable to oligopolies?

    Predatory Pricing:

    One form of pricing strategy is predatory pricing. This is when the dominant firm sets price below the average unit cost of its rivals. Hence, to maintain market share, rival firms will be forced to price match and thus earn subnormal profit (AR<AC). The dominant firm is likely to enjoy greater economies of scale due to larger output or market share, and therefore rival firms will eventually be driven out of the market as they unable to sustain subnormal profit as long. In the long-run, the dominant firm would have reduced competition and increased its market power.

    However, predatory pricing is firstly illegal. Predatory pricing drives out competition and bullies smaller firms.Employing this strategy will attract the attention and investigation of the regulators and may result in a hefty fine. This could offset any potential profit made in the long-run. Moreover, it requires large capital to sustain subnormal profit. Hence, it is not practical for smaller firms that do not benefit from economies of scale.

    Limit Pricing:

    Limit pricing is when firms set a price below profit maximising (MR=MC) level. As prices are lowered, the profit margin of the market decreases and thus profitability falls. Potential entrants will, as a result, see little incentive to enter the market as it is less lucrative. This allows existing firms to retain market share; it may also help increase market share if rivals leave the market due to lower economic profits.

    However, it would have to depend on what type of profit is being made. If price is set above costs, there would still be supernormal profit to be earned. Hence, despite reduced profitability, the market remains lucrative. New entrants may still join eventually. Furthermore, in the long-run, price will be raised back to profit maximising level and profitability will return. Therefore, this strategy is only effective in the short-run.

    Sales Revenue Maximisation:

    Another method firms can compete is through sales maximisation, or growth maximisation where price is set at AR=AC. At this price level, only normal profits can be earned. It enables the firm to sell its good/service as the lowest price without making a loss. This helps by increasing output and raising brand awareness in the market, and eventual market share. In the long-run, with greater market dominance, the firm will have a stronger price-setting ability and earn higher supernormal profits.

    The downside however, is that in the short-run, the firm's dynamic efficiency will fall. As only normal profits can be earned, the firm lacks available resources to re-invest and innovate. This may cause slowed or stunted growth for the firm in the long-run, particularly for industries which has high emphasis on product innovation such as the computer industry. Thus, it may be likely that the firm could lag behind its competitors in terms of technological progress.

    Advertising:

    Advertising is a type of non-price competition. Through commercials and bulletins, a firm can spread brand awareness within the economy. This is a form of perceived brand differentiation. In this way, the firm can distinguish itself from its rivals, thus establishing brand loyalty and a stronger market foothold.

    This however, comes at great cost to the firm. Advertising are immensely expensive, which could strain the firm's operating cost. Additionally, there is an opportunity cost as the firm could use it to re-invest and innovate. Moreover, if rival firms engage in similar advertising methods, and as heavily, such as Coke and Pepsi, it may prove to be ineffective. Lastly, for some industries, like electricity or water, advertising is not very applicable or necessary.

    After-sales Service:

    Firms can improve the quality of their after-sales customer service to compete. By providing a more efficient, attentive and comprehensive service to consumers, consumers will enjoy greater utility and satisfaction from their purchase. This increases the value for money on the product, enabling successful real product differentiation for the firm. In the long-run, it will aid to retain consumers and strengthen brand loyalty as customers will feel more secure and possess a higher level of trust.

    Nonetheless, this form of non-price competition has little certainty of success. Firstly, if the firm does not originally offer after-sales service, resources has to be set aside to establish one. Secondly, workers must be trained to adequately attend to complaints, which could take time. Thirdly, the help-desk may vary in standard from one worker to another, hence repeated complaints from consumers may be met with inconsistent quality of service.

    Loyalty and Discounts:

    Firms can also create a loyalty programme. For example, consumers may be given a loyalty card to record repeated purchases. Over a certain number of transactions, loyal consumers will be rewarded with specialised gifts, be given discounts or points to offset their purchases. Thus, customers would feel an incentive to return and thereby establishing brand loyalty.

    This strategy, like advertisement, can be very costly due to the large expense on gifts and losses from discounts. The degree of effectiveness will depend on the number of purchases customers require to redeem rewards. If it is set too low, the firm may see a greater outflow of resources dedicated to the loyalty scheme. If it is too high, customers may not feel incentivised to purchase from the same company continually.
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    (Original post by thestudentoffram)
    Hello could anyone explain why firms in monopolistic competition are allocatively inefficient and productively in the LR and SR? Also could you explain contracting out is
    thank you
    In the long run their prices aren't at either the lowest point of the AC curve or where AC=AR

    Contracting out is when several private firms all put proposals forward for a project in hope to try and get the project and earn a profit on their work
    Most commonly PPP and PFI schemes
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    (Original post by peter qwert)
    Do you have to know natural monopoly diagram?
    You don't have to know the natural monopoly diagram its not on the spec

    Its good to know the definition is
    And that natural monopolies are generally utility companies such as water gas electricity because of the barrier to entry of INCREDIBLY high sunk costs (infrastructure)

    Or natural monopolies are when firms are public
    e.g. previously Royal Mail or BT
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    (Original post by areddishherring)
    ...
    Those are some really nice evaluation points, I've noted them down .
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    (Original post by areddishherring)
    Could anyone give me any feedback for my general points/evaluation? They are in no context, purely as a strategy to benefit the firm. I think it's perhaps most applicable to oligopolies?

    Predatory Pricing:

    One form of pricing strategy is predatory pricing. This is when the dominant firm sets price below the average unit cost of its rivals. Hence, to maintain market share, rival firms will be forced to price match and thus earn subnormal profit (AR<AC). The dominant firm is likely to enjoy greater economies of scale due to larger output or market share, and therefore rival firms will eventually be driven out of the market as they unable to sustain subnormal profit as long. In the long-run, the dominant firm would have reduced competition and increased it's market power.

    However, predatory pricing is firstly illegal. Predatory pricing drives out competition and bullies smaller firms.Employing this strategy will attract the attention and investigation of the regulators and may result in a hefty fine. This could offset any potential profit made in the long-run. Moreover, it requires large capital to sustain subnormal profit. Hence, it is not practical for smaller firms that do not benefit from economies of scale.

    Limit Pricing:

    Limit pricing is when firms set a price below profit maximising (MR=MC) level. As prices are lowered, the profit margin of the market decreases and thus profitability falls. Potential entrants will, as a result, see little incentive to enter the market as it is less lucrative. This allows existing firms to retain market share; it may also help increase market share if rivals leave the market due to lower economic profits.

    However, it would have to depend on what type of profit is being made. If price is set above costs, there would still be supernormal profit to be earned. Hence, despite reduced profitability, the market remains lucrative. New entrants may still enter eventually. Furthermore, in the long-run, price will be raised back to profit maximising level and profitability will return. Therefore, this strategy is only effective in the short-run.

    Sales Revenue Maximisation:

    Another method firms can compete is through sales maximisation, or growth maximisation where price is set at AR=AC. At this price level, only normal profits can be earned. It enables the firm to sell its good/service as the lowest price without making a loss. This helps by increasing output and raising brand awareness in the market, and eventual market share. In the long-run, with greater market dominance, er the firm will have a better ability to set price and earn higher supernormal profits.

    The downside however, is that in the short-run, the firm's dynamic efficiency will fall. As only normal profits can be earned, the firm lacks available resources to re-invest and innovate. This may cause slowed or stunted growth for the firm in the long-run, particularly for industries which has high emphasis on product innovation such as the computer industry. Thus, it may be likely that the firm could lag behind its competitors in terms of technological progress.

    Advertising:

    Advertising is a type of non-price competition. Through commercials and bulletins, a firm can spread brand awareness within the economy. This is a form of perceived brand differentiation. In this way, the firm can distinguish itself from its rivals, thus establishing brand loyalty and a stronger market foothold.

    This however, comes at great cost to the firm. Advertising are immensely expensive, which could strain the firm's operating cost. Additionally, there is an opportunity cost as the firm could use it to re-invest and innovate. Moreover, if rival firms engage in similar advertising methods, and as heavily, such as Coke and Pepsi, it may prove to be ineffective. Lastly, for some industries, like electricity or water, advertising is not very applicable or necessary.

    After-sales Service:

    Firms can improve the quality of their after-sales customer service to compete. By providing a more efficient, attentive and comprehensive service to consumers, consumers will enjoy greater utility and satisfaction from their purchase. This increases the value for money on the product, enabling successful real product differentiation for the firm. In the long-run, it will aid to retain consumers and strengthen brand loyalty as customers will feel more secure and possess a higher level of trust.

    Nonetheless, this form of non-price competition has little certainty of success. Firstly, if the firm does not originally offer after-sales service, resources has to be set aside to establish one. Secondly, workers must be trained to adequately attend to complaints, which could take time. Thirdly, the help-desk may vary in standard from one worker to another, hence repeated complaints from consumers may be met with inconsistent quality of service.

    Loyalty and Discounts:

    Firms can also create a loyalty programme. For example, consumers may be given a loyalty card to record repeated purchases. Over a certain number of transactions, loyal consumers will be rewarded with specialised gifts, be given discounts or points to offset their purchases. Thus, customers would feel an incentive to return and thereby establishing brand loyalty.

    This strategy, like advertisement, can be very costly due to the large expense on gifts and losses from discounts. The degree of effectiveness will depend on the number of purchases customers require to redeem rewards. If it is set too low, the firm may see a greater outflow of resources dedicated to the loyalty scheme. If it is too high, customers may not feel incentivised to purchase from the same company continually.

    I think this is really good. I would say don't go into too much detail though, remember the best approach is to give short points to pick up two marks.
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    (Original post by aminkaram)
    I think this is really good. I would say don't go into too much detail though, remember the best approach is to give short points to pick up two marks.
    That's what I'm worried about. The examiner reports are not very useful to gauge how much and how detailed I should write to gain the 2 marks. I'm always tempted to elaborate but I'm often pressed for time.

    Hopefully I have good points to negate any points I might omit.
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    Interesting question that's not as easy as it might at first seem. How would you show the higher costs under monopoly on a revenue-cost diagram? It would not be a shift in the AR curve like I thought it would be because AR=Demand and so demand would not increase. You could produce at a lower point on the curve but you would not do so as you produce at profit maximizing output. Can't get my head around this one, any help much appreciated.
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    (Original post by CWE)
    Interesting question that's not as easy as it might at first seem. How would you show the higher costs under monopoly on a revenue-cost diagram? It would not be a shift in the AR curve like I thought it would be because AR=Demand and so demand would not increase. You could produce at a lower point on the curve but you would not do so as you produce at profit maximizing output. Can't get my head around this one, any help much appreciated.
    If it's variable cost, both MC and AC curve will shift. Find the new intersection where MR = MC to determine new output and price.

    If it's fixed cost, only AC will shift. Output and price remain unchanged.


    Posted from TSR Mobile
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    (Original post by areddishherring)
    If it's variable cost, both MC and AC curve will shift. Find the new intersection where MR = MC to determine new output and price.

    If it's fixed cost, only AC will shift. Output and price remain unchanged.


    Posted from TSR Mobile
    Thank you for your reply. So am I correct in thinking that the reason price increases in a monopoly is because the costs actually increase, which leads to the change in output at a higher cost?
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    When calculating concentration ratios, do you include the % given for 'others'?
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    (Original post by areddishherring)
    Could anyone give me any feedback for my general points/evaluation? They are in no context, purely as a strategy to benefit the firm. I think it's perhaps most applicable to oligopolies?

    Predatory Pricing:

    One form of pricing strategy is predatory pricing. This is when the dominant firm sets price below the average unit cost of its rivals. Hence, to maintain market share, rival firms will be forced to price match and thus earn subnormal profit (AR<AC). The dominant firm is likely to enjoy greater economies of scale due to larger output or market share, and therefore rival firms will eventually be driven out of the market as they unable to sustain subnormal profit as long. In the long-run, the dominant firm would have reduced competition and increased its market power.

    However, predatory pricing is firstly illegal. Predatory pricing drives out competition and bullies smaller firms.Employing this strategy will attract the attention and investigation of the regulators and may result in a hefty fine. This could offset any potential profit made in the long-run. Moreover, it requires large capital to sustain subnormal profit. Hence, it is not practical for smaller firms that do not benefit from economies of scale.

    Limit Pricing:

    Limit pricing is when firms set a price below profit maximising (MR=MC) level. As prices are lowered, the profit margin of the market decreases and thus profitability falls. Potential entrants will, as a result, see little incentive to enter the market as it is less lucrative. This allows existing firms to retain market share; it may also help increase market share if rivals leave the market due to lower economic profits.

    However, it would have to depend on what type of profit is being made. If price is set above costs, there would still be supernormal profit to be earned. Hence, despite reduced profitability, the market remains lucrative. New entrants may still join eventually. Furthermore, in the long-run, price will be raised back to profit maximising level and profitability will return. Therefore, this strategy is only effective in the short-run.

    Sales Revenue Maximisation:

    Another method firms can compete is through sales maximisation, or growth maximisation where price is set at AR=AC. At this price level, only normal profits can be earned. It enables the firm to sell its good/service as the lowest price without making a loss. This helps by increasing output and raising brand awareness in the market, and eventual market share. In the long-run, with greater market dominance, the firm will have a stronger price-setting ability and earn higher supernormal profits.

    The downside however, is that in the short-run, the firm's dynamic efficiency will fall. As only normal profits can be earned, the firm lacks available resources to re-invest and innovate. This may cause slowed or stunted growth for the firm in the long-run, particularly for industries which has high emphasis on product innovation such as the computer industry. Thus, it may be likely that the firm could lag behind its competitors in terms of technological progress.

    Advertising:

    Advertising is a type of non-price competition. Through commercials and bulletins, a firm can spread brand awareness within the economy. This is a form of perceived brand differentiation. In this way, the firm can distinguish itself from its rivals, thus establishing brand loyalty and a stronger market foothold.

    This however, comes at great cost to the firm. Advertising are immensely expensive, which could strain the firm's operating cost. Additionally, there is an opportunity cost as the firm could use it to re-invest and innovate. Moreover, if rival firms engage in similar advertising methods, and as heavily, such as Coke and Pepsi, it may prove to be ineffective. Lastly, for some industries, like electricity or water, advertising is not very applicable or necessary.

    After-sales Service:

    Firms can improve the quality of their after-sales customer service to compete. By providing a more efficient, attentive and comprehensive service to consumers, consumers will enjoy greater utility and satisfaction from their purchase. This increases the value for money on the product, enabling successful real product differentiation for the firm. In the long-run, it will aid to retain consumers and strengthen brand loyalty as customers will feel more secure and possess a higher level of trust.

    Nonetheless, this form of non-price competition has little certainty of success. Firstly, if the firm does not originally offer after-sales service, resources has to be set aside to establish one. Secondly, workers must be trained to adequately attend to complaints, which could take time. Thirdly, the help-desk may vary in standard from one worker to another, hence repeated complaints from consumers may be met with inconsistent quality of service.

    Loyalty and Discounts:

    Firms can also create a loyalty programme. For example, consumers may be given a loyalty card to record repeated purchases. Over a certain number of transactions, loyal consumers will be rewarded with specialised gifts, be given discounts or points to offset their purchases. Thus, customers would feel an incentive to return and thereby establishing brand loyalty.

    This strategy, like advertisement, can be very costly due to the large expense on gifts and losses from discounts. The degree of effectiveness will depend on the number of purchases customers require to redeem rewards. If it is set too low, the firm may see a greater outflow of resources dedicated to the loyalty scheme. If it is too high, customers may not feel incentivised to purchase from the same company continually.
    Very good - alot of detail - nice
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    (Original post by HannahGolton)
    When calculating concentration ratios, do you include the % given for 'others'?
    No. :P
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    Could someone give me a guide on how many points and evaluative marks to make for each of the written answers, and is there a guide to the length of each evaluative/analysis point?
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    [QUOTE=Edward Cullen;47777011]
    (Original post by shankpink)
    Yehh!! have you been revising well for the exam? which websites are you using for revising..??
    ya!!!!!
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    anyone got the jan 2010 mark scheme for unit 3. It was the one sat on the 29th january 2010. Regards
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    Can someone explain to me

    Loss leader pricing
    Penetration pricing
    Price skimming

    Thanks.
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    (Original post by Trilo9y)
    Can someone explain to me

    Loss leader pricing
    Penetration pricing
    Price skimming

    Thanks.
    I believe penetration pricing is when a new entrant sets a price below the market equilibrium. This is to quickly establish brand awareness and consolidate market share. Eventually prices will be raised to the market price.

    Price skimming is when the firm sets the highest price consumers are willing and able to pay. Over time, price will be slowly adjusted and reduced to capture more price-sensitive consumers. For example, a high price iPod when it first comes out and slowly gets cheaper.

    I'm not too sure about loss leadership pricing though.
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    (Original post by areddishherring)
    I believe penetration pricing is when a new entrant sets a price below the market equilibrium. This is to quickly establish brand awareness and consolidate market share. Eventually prices will be raised to the market price.

    Price skimming is when the firm sets the highest price consumers are willing and able to pay. Over time, price will be slowly adjusted and reduced to capture more price-sensitive consumers. For example, a high price iPod when it first comes out and slowly gets cheaper.

    I'm not too sure about loss leadership pricing though.
    Thanks
 
 
 
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