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

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    Some one explain Shut down point in detail for me. Im really confused. Thanks.
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    (Original post by Swaany)
    Well, the specification states that we need to be able to compare and evaluate the strengths and weaknesses of methods of regulation. In this case, I will be talking about price capping and the strengths and weaknesses for price capping.

    What is regulation?

    Regulation is the direct control by government of firms, and is used when market forces are inadequate to ensure that monopoly firms do not abuse their market dominance. The government acts as a 'surrogate' for competition by making firms cut prices, or take legal action If the regulation is not followed, the firm can be fined.


    What is price capping?

    Price capping is a form of regulation and is used to regulate price utilities e.g. water companies, train-operating companies in the UK.
    It is the upper limit for the price increase that firms can add to prices and it takes into the account of level of RPI inflation.
    Although price capping has been phased out as most utility markets have become more competitive.


    RPI - X

    'X' is the factor determined by the regulator, and it represents the efficiency gains that the regulator has determined can be achieved by the firm.
    So for example, if inflation is 5%, and X is 3%, than an industry can raise their prices on average by only 2% per year.


    RPI + K

    'K' accounts for the additional capital spending that the firm has agreed with the regulator. For example, it is used by water regulators e.g. Ofwat to determine the price for each of the regional water companies in the water industry. K factor is different for each of the water companies e.g. Thames Water's K factor could be 2.5%, whereas Bristol Water's K factor could be 3%. The K factor depends on how much they need to spend to maintain and improve water quality of service. The same concept applies for train-operating companies.


    Advantages of price capping:

    - Firms can keep the profits it makes through bringing about greater efficiency gains.

    - Because the 'X' or 'K' factor is usually in place for a period of time, say 5 years, firms are able to plan ahead and know that they will not be penalised for making further efficiency gains.

    - Price capping is also an appropriate way of preventing monopolies making excessive profits at the expense of consumers.

    - Firms have more of an incentive to achieve other motives for the firm.

    - Cuts in the real price levels are good for household and industrial consumers (leading to an increase in consumer surplus and higher real living standards in the long run).


    Disadvantages of price capping:

    - If the regulator underestimates the efficiency gains a firm can be expected to make, then firms can produce what appear to be excessive profits, although often these profits are used to invest in areas outside the regulator's remit and therefore generate even greater profits in the future.

    - Setting different price capping regimes for each industry distorts the price mechanism.

    - Price caps have lead to a large number of job losses in the utility industries.

    - There have also been suggestions that the regulator and the regulated industry have built up a close relationship, resulting in the regulator being less strict on the firms under its control - this type of close relationship is called 'regulatory capture'.
    Why is this a disadvantage? Well, because if there are less strict controls, the firm could potentially increase their prices (exploiting consumers) and make excessive profits in the long run. Is this an act of government failure?
    Hi Swaany - do we use the advantages and disadvantages as evaluation then? thanks
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    (Original post by Trilo9y)
    Hi Swaany - do we use the advantages and disadvantages as evaluation then? thanks
    Well depends on the question so for example 'assess the advantages of using price capping', your points would be the advantages and the evaluation points (you need to evaluate because the question says assess) would be the disadvantages
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    (Original post by Swaany)
    Well depends on the question so for example 'assess the advantages of using price capping', your points would be the advantages and the evaluation points (you need to evaluate because the question says assess) would be the disadvantages
    Oh okay thanks
    Could you send me notes on Shut down point - i dont get it tbh
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    (Original post by Trilo9y)
    Oh okay thanks
    Could you send me notes on Shut down point - i dont get it tbh
    That's probably like one of the things in unit 3 I dont understand, havent gone over it yet but when i do i'll hopefully explain it to you, but it might not be anytime soon
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    (Original post by Swaany)
    That's probably like one of the things in unit 3 I dont understand, havent gone over it yet but when i do i'll hopefully explain it to you, but it might not be anytime soon
    Oh okay. Thanks.
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    For a game theory question, what are people going to right. All I can think of is a payoff table explaining why and why not collude and then the kinked demand curve. Would that be enough if it asks to refer to game theory?

    Thanks
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    ewww this unit stinks
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    (Original post by AdzyN)
    ewww this unit stinks
    na bro - unit 4 is the one that stinks lol
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    (Original post by Trilo9y)
    na bro - unit 4 is the one that stinks lol
    They both do LOL. I hate economics
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    (Original post by Trilo9y)
    Oh okay thanks
    Could you send me notes on Shut down point - i dont get it tbh
    In the short run:
    shut down point will be when average variable costs (AVC) cannot be covered. But even if a loss is making (even if FC cannot be covered) they will continue if short run AVC can be covered.
    In the LOng run:
    All the costs are variable in the long run. so if AC cannot be covered business will shut down
    check this one http://www.slideshare.net/slideshow/...2276292?rel=0#
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    (Original post by Trilo9y)
    na bro - unit 4 is the one that stinks lol
    But dem low unit 4 grade boundaries makes up for it somewhat .
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    (Original post by Dilzo999)
    But dem low unit 4 grade boundaries makes up for it somewhat .
    i didnt know they were low - that wud be awesome lol
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    (Original post by Trilo9y)
    i didnt know they were low - that wud be awesome lol
    You only need around 75-80 marks for an A* so you can lose around 20-25 out of 100 . Which is pretty generous to be honest.
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    (Original post by Dilzo999)
    You only need around 75-80 marks for an A* so you can lose around 20-25 out of 100 . Which is pretty generous to be honest.
    decent but i suck at unit 4- most of that paper is evaluation - i suck at evaluation :l
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    (Original post by Edward Cullen)
    In the short run:
    shut down point will be when average variable costs (AVC) cannot be covered. But even if a loss is making (even if FC cannot be covered) they will continue if short run AVC can be covered.
    In the LOng run:
    All the costs are variable in the long run. so if AC cannot be covered business will shut down
    check this one http://www.slideshare.net/slideshow/...2276292?rel=0#
    thanks edward!
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    (Original post by Trilo9y)
    Oh okay. Thanks.
    Shut down point is the point at which a firm does not cover average variable cost i.e. it will only shut down if AR is below AVC. This is because as long as the firm is covering AVC it will be making a contribution to fixed costs (which have to be paid for by default in the short run), so shutting down would be unwise.
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    (Original post by Guren)
    Good notes guys What do you think is likely to come up/ predictions? Everyone is saying regulation??
    Well regulation (price capping) came up last year and the 16 marker was to discuss other forms of regulation which could improve economic efficiency. The other data response was on monopsony power. Going by this, I would doubt that either of those will come up. Especially seeing as monopsony had come up on January as well. I would put bet on question 9 being competition/contestability in a market (maybe fast food) and then question 10 being some sort of monopoly power asking about price discrimination and the role of the competition commission.
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    Hello is there any relevant research we have to beforehand for this exam?
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    (Original post by MrWise)
    Have you tried private tuition? With a couple of weeks to go you might find this a valuable boost. I'm at Econacademy.co.uk and it costs me £8 per hour. I'm studying A2 Economics and I was awful at evaluation questions. I'm A/A* level now so it's helped me.

    lucky, i tried finding a good tutor - tried like 2-3 ppl out - they were sh*t lol - its too late now man
 
 
 
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