criptonight
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AQA Microeconomics Exam Monday 20th May. Please, Tell me what you think of my essay and what you'd give it out of 25 and what I would do to improve. I am typing it EXACTLY how I wrote it so there are GRAMMATICAL ERRORS (bc that's how the examiner will see it, but I have included some bold bits which are for guidance bc its a lot more difficult to judge without the paper and extracts) I am aware of the errors but I just want to gauge the standard of the essay.

FIGURE 1 in bold IS THE MONOPOLY DIAGRAM
FIGURE 2 in bold IS THE NEGATIVE EXTERNALITY DIAGRAM
FIGURE 3 in bold IS THE AGGREGATE SUPPLY SHIFT DIAGRAM

https://filestore.aqa.org.uk/sample-...1-QP-JUN17.PDF
Extract C (line 2) states that ‘Many competitors are using digital technology to drive innovation’. Use the extracts and your knowledge of economics to assess whether the benefits outweigh the costs when the Government privatises organisations such as Royal Mail and opens up the market to competition.

Privatisation is the sale of government assets to the private sector. It is done with aim to improve economic outcomes and efficiency.

One reason the government may privatise royal mail is because it will
lead to increases in efficiency. In FIGURE 1, we can see the behaviour of Royal Mail once it has been privatised. Typically a firm with 32.8% market share would produce at the profit maximising level, Qmax and charge price Pe. However, because Royal Mail has been privatised and faces fierce competition, it will be more likely to meet the needs of society to remain profitable and successful. Because there is 'fierce competition' of DPD with 10.3% market share and 10.4% market share of UPS, it is very likely that Royal Mail will charge a price Pc due to the fact it has become allocatively efficient. If it wishes to retain this market share of 32.8%, then they must continue to satisfy the needs of this huge 32.8% hence why the must produce (or post parcels) at the competitive level of Qc. Furthermore, the growing competition means Royal Mail have huge incentive to be X efficient and not incur unnecessary costs like a publicly owned Royal Mail use to when it had no profit incentive. Lastly, we can infer from figure 2 (on the extract in the AQA link btw) that the privatisation has led to dynamic efficiency due to the increased revenue from less labour input.
This may work in theory but we must consider whether these events may follow. Royal Mail has a market share of 32.8%, x3 larger than the next biggest competitor (this info is in the AQA extract in the link) . This means that although they face competition, it is difficult to tell whether the level of competition from UPS and DPD is significant enough to provide incentive to produce at the competitive level and charge the market price. The low profits could suggest that although there is dynamic efficiency, perhaps it is not as good as it would be if the monopoly charged the profit maximising price or if the government didn't nationalise it and used the taxpayers money. So the benefit could outweigh the cost providing competition is truly 'fierce' and profits are significant.

One reason the government may not wish to privatise Royal Mail is that the firm may ignore externalities. Extract C (In the AQA link) tells us about DPD, and its construction of the 'largest parcel distribution service in Europe' that can process and sort '70,000 items in an hour'. This highlights the productive potential of postal firms and shows the scale they can achieve. However, DPD building would've required vast amounts of electricity and oil to 'process more than one million parcels'. The need of this natural resource can lead to negative externalities in production due to a depletion of oil and pollution caused from this distribution centre. From FIGURE 2 we can see a negative externality in production where MSC > MPC indicating society suffers more than DPD would. So by privatising Royal Mail, they too would have to innovate to create systems like this in order to be dynamically efficient and give lower prices. But FIGURE 2 shows us that at this level of production, parcels are actually being over-delivered and they are too cheap. This would lead to market failure where resources are actually misallocated and firms like Royal Mail and DPD are actually producing too much and charging too little for it. This market failure would require government intervention to try and fix this which is costly and tiring. This may be a significant cost from the privatisation of Royal Mail.
This may seem logical but there are other factors to consider. One of which being that FIGURE 2 shows us that parcels are actually being delivered too cheap. So if Royal Mail were to innovate and provide at the socially optimal equilibrium, they would have to produce less. This would decrease their profits and lead to less dynamic efficiency in the long-run due to low profits. Furthermore, a price of P2 (socially optimal level at the socially optimal equilibrium) is actually higher than the free market level would mean that higher delivery costs to consumers could have regressive effects or lead to unequal income distributions. Lastly, a restriction on parcel delivery to the socially optimal level would actually discourage innovative procedures and inventions which could harm GDP growth in the long run. So perhaps in this case, privatisation may not be as good and the costs could outweigh the benefits when social outcomes are considered.

Overall the privatisation of Royal Mail is probably more beneficial than costly. We have discussed the impact on society due to private firms ignoring external costs, but if we consider figure 2 (AQA extract) we can see that there is dynamic efficiency. This means Royal Mail are gaining profit to innovate in the long run, and this innovation funding could be spent in the future on more 'green procedures'. If we consider the macroeconomic outcomes, Royal Mail's privatisation increases competition in the postal market and, as said in the first paragraph, leads to firms producing MORE at the competitive levels increasing GDP.
This is shown in FIGURE 3
*I labeled the diagram showing the shift is because postal firms are producing more now*
*however I was in a hurry as my time was running out so I did a demand shifting right and supply extending but labeled them the wrong way round, so AS is downward sloping and AD is upward sloping - what impact would this have on the essay?

Also, we evaluated that Royal Mail producing at a competitive level depends on the extent of competition. Well, this is why we consider time periods. In the long-run due to the internet and 'rise in online shopping' markets are becoming more contestable. This means that firms like Royal Mail are facing more threat and have to act on it. This would lead to them producing more at Qc and charging lower price at Pc (in FIGURE 1) whilst being allocatively efficient. It would also encourage them to be more efficient making workers more efficient and increasing MRP across the economy

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Thanks A lot guys
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Ben___
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I think overall your response would be put into mark band 4 (16-20 marks).

Introduction - Just a definition? Maybe add some context to why privatisation happened in 2013 and the changes in the industry.
Point 1 - Allocative Efficiency is where P=MC, A contestible price would be where AC=AR. My approach would be that a government-owned organisation would be welfare maximizing and hence be producing at the allocatively efficient price. The top answers on this paper were from students who were able to differentiate the letter market compared to the parcel market. In the letter market, Royal Mail is a dominant monopoly, it is parcel delivery where it is losing market share. I think you would have been better developing the point around reduced average costs from x-inefficiency being removed, to develop your logical chains of reasoning you could have given an example of a characteristic of x-inefficiency. Also, I don't know whether that was the actual diagram you drew but it is missing the AC curve. Evaluation for this paragraph was good, bringing in data from the extracts made it supported but you could have supported the evaluation of dynamic efficiency by showing the area on the diagram that is supernormal profits, and bringing in shareholder dividends as an evaluation point would have developed the response more. Your reference to the efficiencies was good throughout this paragraph as that is often a weakness of students, but I would have gone into more depth about dynamic efficiency as Extract C and the preamble was suggesting the examiners wanted to see that appear.
Point 2 - I thought that a market failure argument was weak in this question, it wasn't really what the question wanted you to focus on but you did bring in elements which were relevant to how governments would react compared to stakeholders. Maybe better evaluation would be that supernormal profits might allow Royal Mail to invest in Electric Vehicles? Maybe considering how regulation of the privatised industry might have an effect?
Conclusion - I think the point about more parcels being delivered would increase AD in the economy was a little unnecessary, would the parcel delivery market really have that significant of an effect? When I did this essay I talked a little about the importance of the speed in productivity in my conclusion, but I certainly don't think the diagram was really necessary. I would stick to max 2 diagrams in the exam because otherwise your just drawing them for the sake of it, and not really talking about them which is where you will get the credit. It was good to see an in-depth conclusion as that is what will get you into the top mark band.

One thing I would say about your structure is that is might have been easier to do Intro, Point 1 For, Evaluation (Against), Point 2 For, Evaluation (Against), Conclusion. I just think it makes your evaluation so much easier if you are comparing and contrasting in that way.

I would type up my essay but I know it will take me quite a while and we are only a few days away from the exam now so I will just summarise the points I made. But most importantly, I think your essay was missing a focus on dynamic efficiency which the preamble suggested discussing.

Introduction - Definition of privatisation, explanation of the changes to the industry and why the government decided to privatise.
Point 1 - Privatisation would decrease average costs as a profit motive would reduce the x-inefficiency seen in the inefficient government-owned organisation. Monopoly diagram to show reduced average costs. The benefit of the government revenue raised by the IPO.
Evaluation Against - Private contractors could be used to get the benefits of both the public and private sector to reduced average costs. The impact on consumers and the economy of cost-cutting reducing the quality of the service. Royal Mail undervalued at the IPO which is an example of government failure.
Point 2 - Movement from allocative efficient price to profit maximising price leads to dynamic efficiency. Diagram to show the supernormal profits. Discussion of the use of the profits reducing costs and improving the service examples.
Evaluation Against - Profits given as dividends to shareholders. Monopoly power in letter delivery would mean consumers would have to pay higher prices reducing the consumer surplus. Impact on rural households where letter delivery is loss-making.
Conclusion - Privatisation reduced costs, the possible impact of regulation especially for the letter delivery side and possibly the expansion of Royal Mail globally to gain the economies of scale companies such as DPD and UPS have.

Hope this helps and good luck with the exam
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criptonight
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(Original post by Ben___)
I think overall your response would be put into mark band 4 (16-20 marks).

Introduction - Just a definition? Maybe add some context to why privatisation happened in 2013 and the changes in the industry.
Point 1 - Allocative Efficiency is where P=MC, A contestible price would be where AC=AR. My approach would be that a government-owned organisation would be welfare maximizing and hence be producing at the allocatively efficient price. The top answers on this paper were from students who were able to differentiate the letter market compared to the parcel market. In the letter market, Royal Mail is a dominant monopoly, it is parcel delivery where it is losing market share. I think you would have been better developing the point around reduced average costs from x-inefficiency being removed, to develop your logical chains of reasoning you could have given an example of a characteristic of x-inefficiency. Also, I don't know whether that was the actual diagram you drew but it is missing the AC curve. Evaluation for this paragraph was good, bringing in data from the extracts made it supported but you could have supported the evaluation of dynamic efficiency by showing the area on the diagram that is supernormal profits, and bringing in shareholder dividends as an evaluation point would have developed the response more. Your reference to the efficiencies was good throughout this paragraph as that is often a weakness of students, but I would have gone into more depth about dynamic efficiency as Extract C and the preamble was suggesting the examiners wanted to see that appear.
Point 2 - I thought that a market failure argument was weak in this question, it wasn't really what the question wanted you to focus on but you did bring in elements which were relevant to how governments would react compared to stakeholders. Maybe better evaluation would be that supernormal profits might allow Royal Mail to invest in Electric Vehicles? Maybe considering how regulation of the privatised industry might have an effect?
Conclusion - I think the point about more parcels being delivered would increase AD in the economy was a little unnecessary, would the parcel delivery market really have that significant of an effect? When I did this essay I talked a little about the importance of the speed in productivity in my conclusion, but I certainly don't think the diagram was really necessary. I would stick to max 2 diagrams in the exam because otherwise your just drawing them for the sake of it, and not really talking about them which is where you will get the credit. It was good to see an in-depth conclusion as that is what will get you into the top mark band.

One thing I would say about your structure is that is might have been easier to do Intro, Point 1 For, Evaluation (Against), Point 2 For, Evaluation (Against), Conclusion. I just think it makes your evaluation so much easier if you are comparing and contrasting in that way.

I would type up my essay but I know it will take me quite a while and we are only a few days away from the exam now so I will just summarise the points I made. But most importantly, I think your essay was missing a focus on dynamic efficiency which the preamble suggested discussing.

Introduction - Definition of privatisation, explanation of the changes to the industry and why the government decided to privatise.
Point 1 - Privatisation would decrease average costs as a profit motive would reduce the x-inefficiency seen in the inefficient government-owned organisation. Monopoly diagram to show reduced average costs. The benefit of the government revenue raised by the IPO.
Evaluation Against - Private contractors could be used to get the benefits of both the public and private sector to reduced average costs. The impact on consumers and the economy of cost-cutting reducing the quality of the service. Royal Mail undervalued at the IPO which is an example of government failure.
Point 2 - Movement from allocative efficient price to profit maximising price leads to dynamic efficiency. Diagram to show the supernormal profits. Discussion of the use of the profits reducing costs and improving the service examples.
Evaluation Against - Profits given as dividends to shareholders. Monopoly power in letter delivery would mean consumers would have to pay higher prices reducing the consumer surplus. Impact on rural households where letter delivery is loss-making.
Conclusion - Privatisation reduced costs, the possible impact of regulation especially for the letter delivery side and possibly the expansion of Royal Mail globally to gain the economies of scale companies such as DPD and UPS have.

Hope this helps and good luck with the exam
Wow. So helpful. Thank you very much.
Just a Few Questions:
Because the question is about costs and benefits though, I'd have thought you would say a Benefit and Evaluate it, and then a Cost and Evaluate it? Isn't that good to address the question directly?
And I completely understand externalities was quite weak because at the time I was thinking what to say and externalities were the first thing that came to my head tbh. In the mark scheme, a potential cost was them talking about "ignoring externalities" though, so do you have any idea what they were looking for in terms of that externality argument?
How long to spend on a conclusion roughly, and should you aim to cover time (LR & SR), opportunity cost, and macroeconomic effects?
Have you done Economics A Level or is yours too on Monday?
Whats the IPO?
I saw on your profile you talked about the main topics for Macro (when you said it was unlikely to be on financial markets) - do you have any idea of the main topics we could get this year for Micro?

Sorry for the question overload
Thank you though, much appreciated
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Ben___
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(Original post by criptonight)
Wow. So helpful. Thank you very much.
Just a Few Questions:
Because the question is about costs and benefits though, I'd have thought you would say a Benefit and Evaluate it, and then a Cost and Evaluate it? Isn't that good to address the question directly?
And I completely understand externalities was quite weak because at the time I was thinking what to say and externalities were the first thing that came to my head tbh. In the mark scheme, a potential cost was them talking about "ignoring externalities" though, so do you have any idea what they were looking for in terms of that externality argument?
How long to spend on a conclusion roughly, and should you aim to cover time (LR & SR), opportunity cost, and macroeconomic effects?
Have you done Economics A Level or is yours too on Monday?
Whats the IPO?
I saw on your profile you talked about the main topics for Macro (when you said it was unlikely to be on financial markets) - do you have any idea of the main topics we could get this year for Micro?

Sorry for the question overload
Thank you though, much appreciated
My first exam is on Monday too! An IPO is an Initial Public Offering, so it is just when a company lists on the stock market, they set a price per share which people can buy ahead of the shares hitting the stock market. So in the case of Royal Mail shares were valued at 330p and they jumped to 615p, so obviously, the government could have raised a lot more revenue. But this isn't expected knowledge it was hinted to in Extract B.

In terms of my structure, I would see it as the evaluation paragraph being the 'against'. So essentially you are doing a 'for' paragraph, then an 'against' but when you are directly contrasting the issues it is evaluation. That's just easier for me doing a for and against argument because I find it helps me focus in on the points I want to make, but it's completely up to you with what you feel comfortable doing in the exam.

So looking at topics which are expected to come up I have attached the topics of the past papers which will give you an idea of what normally comes up:

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With the externalities reference in the mark scheme, it was referring to your second point about how private firms ignore the social costs and governments are more likely to produce at the socially optimum point, but I think if you are going to talk about this you should evaluate with regulation and how governments can apply taxes ect to deal with the market failure. But I think if you had done the evaluation well the point would have been better.

And then with conclusions, I wouldn't say I stick with any specific idea of what I discuss, just make sure you are not repeating yourself as that won't get you and marks. But with whatever the 25 markers you will be comparing different point you made so it is a great place to sum up your ideas around which one is better and why. So if you were evaluating market structures in your final conclusion you could say: "Whilst monopolistic competition may be considered an inefficient market structure as it is not statically or dynamically efficient, the extent of which it is allocatively inefficient doesn't reach the same extent of consumer exploitation as a monopoly. Furthermore, the market may have a degree of innovation which is considered a normal cost which is needed to compete in the market. For example, clothing brands need to continue to produce new products to keep customers due to changes in fashion." So you are adding to your evaluation marks but because you are comparing everything at once it is a little easier. Another great conclusion for macro is considering the position of the economy so: "Whilst supply-side policies may be more effective at increasing GDP in the economy without creating macroeconomic trade-offs it is important to consider the current position of the economy. The UK currently has levels of spare capacity, hence a Keynesian economist would argue that to stimulate the economy an increase in AD is necessary (Diagram of Keynesian LRAS). Therefore a monetary policy decision to reduce interest rates could be more effective given the current state of the UK economy from Brexit uncertainty".
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criptonight
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(Original post by Ben___)
My first exam is on Monday too! An IPO is an Initial Public Offering, so it is just when a company lists on the stock market, they set a price per share which people can buy ahead of the shares hitting the stock market. So in the case of Royal Mail shares were valued at 330p and they jumped to 615p, so obviously, the government could have raised a lot more revenue. But this isn't expected knowledge it was hinted to in Extract B.

In terms of my structure, I would see it as the evaluation paragraph being the 'against'. So essentially you are doing a 'for' paragraph, then an 'against' but when you are directly contrasting the issues it is evaluation. That's just easier for me doing a for and against argument because I find it helps me focus in on the points I want to make, but it's completely up to you with what you feel comfortable doing in the exam.

So looking at topics which are expected to come up I have attached the topics of the past papers which will give you an idea of what normally comes up:

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Size:  29.0 KBName:  Screenshot 2019-05-17 at 22.50.16.png
Views: 78
Size:  23.5 KB

With the externalities reference in the mark scheme, it was referring to your second point about how private firms ignore the social costs and governments are more likely to produce at the socially optimum point, but I think if you are going to talk about this you should evaluate with regulation and how governments can apply taxes ect to deal with the market failure. But I think if you had done the evaluation well the point would have been better.

And then with conclusions, I wouldn't say I stick with any specific idea of what I discuss, just make sure you are not repeating yourself as that won't get you and marks. But with whatever the 25 markers you will be comparing different point you made so it is a great place to sum up your ideas around which one is better and why. So if you were evaluating market structures in your final conclusion you could say: "Whilst monopolistic competition may be considered an inefficient market structure as it is not statically or dynamically efficient, the extent of which it is allocatively inefficient doesn't reach the same extent of consumer exploitation as a monopoly. Furthermore, the market may have a degree of innovation which is considered a normal cost which is needed to compete in the market. For example, clothing brands need to continue to produce new products to keep customers due to changes in fashion." So you are adding to your evaluation marks but because you are comparing everything at once it is a little easier. Another great conclusion for macro is considering the position of the economy so: "Whilst supply-side policies may be more effective at increasing GDP in the economy without creating macroeconomic trade-offs it is important to consider the current position of the economy. The UK currently has levels of spare capacity, hence a Keynesian economist would argue that to stimulate the economy an increase in AD is necessary (Diagram of Keynesian LRAS). Therefore a monetary policy decision to reduce interest rates could be more effective given the current state of the UK economy from Brexit uncertainty".
Absolute G. Thanks, man. Wish you good luck in your exams and easy entry into your uni.
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