Business Behaviour and the Labour Market

Evaluate the likely microeconomic impact of government intervention to control monopolies.

The diagram above shows how monopolies can utilise their power through exploiting consumers, thus evidencing why they should be regulated. As the diagram demonstrates, it is important to resolve the deadweight loss shown in the shaded area. The point of allocative efficiency os where MC = AR and this is the point which maximises social welfare. However, the monopoly firm will produce at a profit maximising output where MR=MC to MC (output Q*). At this output prices are higher than the allocatively efficient point, thus demonstrating monopoly power exploitation. The loss of social welfare is undesirable for the government who aim to maximise society’s benefit and thus the government may intervene in the market. For example, OFWAT are a non-ministerial government department who regulate the regional and natural monopoly in the water industry, so that firms such as Thames Water are controlled efficiently.

The government could impose a price control on the monopoly firm through price capping. Price capping is where a maximum price is legally set for each unit sold, with the objective of avoiding consumers overspending for the producer's benefit. For example, OFWAT may set a maximum price on water bills The diagram above shows the effect on a water firm of a maximum price. As price falls from price F to price E, there is a decrease in profit because prices are lower than what they could be if exploitation was an option. The maximum price is at the point where AR equals MC so that exploitable prices are prevented. Having a maximum price implemented reduces the threat of consumer exploitation as the firms are unable to raise prices above the limit. This means that consumers will have an increased welfare as these merit goods are highly price inelastic, because water is a necessity, thus establishing its importance in being affordable for everyone. In the shortrun consumers will benefit because it ensures that water is kept at an affordable price, whilst evidencing that this is a suitable government intervention for controlling monopoly power. However, maximum pricing may lead to excess demand being created in the water industry as prices will be so low that demand will rise. Consumers may take longer showers than necessary or leave garden sprinklers on all day, because this is more affordable to them. Excess demand for water can cause a shortage, which is detrimental to national health due to the necessity of water for everyone. This is why there are often droughts resulting in hosepipe bans in the summer months in the UK. In addition to this the monopoly firm may become less dynamically efficient because of the loss of profit. Consequently, the firms will have insufficient resources to improve their services through reinvestment, for example, Thames Water may not have enough retained profit to fix leaking pipes as it is an additional cost for them. This means that price controls may not be a fully effective government intervention method because of the consumer disadvantage of a dynamically inefficient monopoly.

Another example of government intervention to control monopolies is to impose quality standards and performance targets. Both quality standards and performance targets ensure firms are operating in the consumer's interest and that competitive outcomes are achieved. An example of where a monopoly firm has had performance targets imposed is the UK railways in 2018 and this involved setting the maximum number of daily delays which were allowed. This performance target aimed to ensure consumers suffered fewer delays This will improve consumer welfare and is beneficial as delays could have detrimental effects for many rail users, such as causing them to be late or missing important business meetings without the availability of other modes of transportation to get to their destinations. Consequently, these targets which are expected of the Railway ensures that the monopoly focuses on remaining efficient to avoid governmental repercussions, such as fines. As a result, this incentivises the firms to invest and improve production for consumer benefit, rather than exploiting them through higher prices.

However, the imposition of performance targets may be detrimental to the firm. The diagram above presents how there is an increase in costs for the firm after performance targets and quality standards are imposed. As the imposition of performance standards will increase the costs to firms there is an upward shift from AC1 to AC 2 and from MC1 to MC2. As a result. The railway firm’s profits fall. Asa result, there may be unintended consequences of government intervention. Unintended consequences are when government intervention causes unanticipated negative knockon effects. If this occurs, it will have caused government failure because it has led to a net welfare loss rather than a welfare gain. For example, because costs have risen, railway firms could be tempted to ‘game the system’ to avoid these strictly monitored delays. To ‘game the system’ involves manipulating the system for the desired outcome. Railway companies were known to simply add additional minutes onto their journey times in order to avoid being late. There is an argument that this would be more detrimental to consumers. Due to this, the microeconomic impact of this type of government intervention is limited as the railway firms can easily get around the quality standards which have been set, through gaming of the system.

In judgement, the microeconomic effect of government intervention to control monopolies may depend on the type of monopoly and the government approach chosen to control these monopolies. For example, a natural monopoly such as Thames Water has such large economies of scale that new entrants would find it impossible to match the costs and prices of this firm, and therefore policies designed to increase competition would be inappropriate. Other monopolies may face some competition from smaller firms in the industry. Imposing a price control will be a more suitable method of government intervention for controlling these monopolies, despite the inefficient firm having less potential to reinvest for product improvements. This is more effective because maximum pricing is legally enforced and cannot be worked around unlike quality standards, where the producing monopoly can game the system for their benefit. Furthermore, despite the significantly greater cost of enforcement for this method compared to performance targets, it is more effective in reducing the threat of exploitation and consumers will be better off Overall, it is essential that the government policy used must match the needs of the specific market.

Essay 11: Luke Byca

Economic efficiency will always increase as a market becomes more contestable. To what extent do you agree with this statement?

Allocative efficiency is achieved when the value that consumers put on a product is equal to the cost of resources to produce the product. Productive efficiency is when the firm is operating at the lowest point on its average cost curve. Dynamic efficiency is when firms successfully meet consumers' needs and wants over time. X-inefficiency is when a firm is not at the lowest point on the average cost curve. A contestable market is one that is open to new competition due to the absence of or low barriers to entry. Barriers to entry are factors that can prevent a new firm from joining a new market, an example would be high sunk costs.

Low barriers to entry in a contestable market make it more allocatively efficient because they allow for more competition. Allocative efficiency is a state of the economy in which production is aligned with consumer preferences. One example of a market with low barriers to entry is the online clothing retail market. It has become much easier for small businesses to enter the retail market. All that is needed is a website and a product or service to offer. This makes it much easier for small businesses to enter the market and compete with larger retailers. When there are low barriers to entry, it is easier for new firms to enter the market and compete with existing firms. This increased competition leads to lower prices, better quality products, and more innovation. When there are low barriers to entry, firms are incentivised to compete on price and innovation. This competition leads to lower prices for consumers, as firms are forced to lower their prices to remain competitive. Lower prices benefit consumers, as they can purchase the goods at a lower cost. Allocative efficiency is likely to increase as a market becomes more contestable.

However, while low barriers to entry and increased competition can lead to allocative efficiency, it is important to also consider the impact on productive efficiency. Firstly, as a business expands its production it can achieve greater specialization and division of labour which can increase the productive efficiency of its production processes. This can lead to lower costs per unit and higher output per worker. Hence as a firm increases its scale and experiences economies of scale, the firm moves closer to the minimum point of the LRAC curve (the minimum efficient scale) and hence becomes more productively efficient. The diagram below shows that as output increases the long run average cost of production falls and the firm is operating closer to the minimum point of the AC curve, hence being more productively efficient In a market where there are many firms competing for a limited number of customers, such as the online clothing market, firms may not be able to grow in order to exploit economies of scale due to the fervent competition, and hence productive efficiency may not increase as a market becomes more contestable.

On the other hand, highly contestable markets can lead to an increase in the quality of goods. When there is a higher degree of competition, firms have an incentive to continuously improve their products to stay ahead of their rivals. This leads to innovation, which can result in higher quality goods. Competition can drive firms to find more productively efficient production methods, as they seek to reduce costs and increase profit margins. This can result in higher quality goods, as firms can invest more in the production process. New entrant firms may seek to enter a contestable market by innovation and creating a unique selling point compared to the incumbent firms. For example, this could be a luxury watch firm increasing the quality to ensure that people will choose them over another firm because they are less likely to break and are of a higher quality. In this sense, as a market becomes more contestable, it may become more dynamically efficient.

However, in a contestable market, firms face greater uncertainty and risk, which can reduce investment and discourage innovation. This can lead to a reduction in dynamic efficiency, as the market becomes less able to respond to changing customer needs and technological advances. This can reduce the amount of money available for investment because firms do not have much supernormal profit to invest in research and development. For example, the highly contestable watch market may tend towards a perfectly competitive market structure where firms may only make normal profit. In this case the market will become less dynamically efficient as it becomes more contestable.

While increased competition in a contestable market can lead to improvements in efficiency, it does depend on the type of efficiency and market in question. Allocative efficiency might be considered the most important type of efficiency for consumers as it provides the lowest prices and therefore, I think that contestable markets are more efficient from the point of view of the consumer.

Essay 12: Sam Gillen

Evaluate the view that profit maximisation will always be the objective of private sector firms.

Profit maximisation occurs when profits are maximised at an output where marginal revenue equals marginal cost. An example of a firm that look to profit maximise is Apple, the world’s most valuable company, and have built an ability to maximise pricing but minimise costs, generating monster profits. Although, it could be argued that there are other objectives of private sector firms depending on the size and the type of market, in satisficing and sales maximisation.

One reason for why profit maximisation will often be the objective of private sector firms is to maximise dividends for shareholders. Profit maximisation ensures that the marginal cost never exceeds the marginal revenue, and thus keeps the marginal profit positive so that profits increase when one more unit is sold. This concept can be supported by the diagram below, which indicates how a firm like Apple maximises profit. If output is less than Q* then marginal profit is positive, and the firm can increase profit by increasing output. If output is more than Q* then marginal profit is negative, and the firm would be making less profit with each additional unit. Maximising profit creates value for the shareholders and presents an attractive proposition to investors. For example, Apple will have shareholders who buy shares in the company in the hope of positive returns, an example being the Vanguard Group Inc. This means that when Apple generate high profits, by producing where their marginal revenue and their marginal costs are equal, these shareholders benefit from the maximum dividends and increasing share price. Therefore, having a positive impact upon them, potentially leading to further investment, but also leaving a positive outlook upon other investors that hope to receive those positive returns. This is one reason why profit maximisation is often the main objective of private sector.

However, to evaluate my point, firms may not always look to profit maximise. Firms may look to profit satisfice, which is where owners of a business set a minimum acceptable level of profit / return on capital. For example, managers may look not to sack underperforming workers and rather set future goals to achieve, which will essentially create better relationships in the firm. Or firms may choose to pay the national living wage rather than minimum wages. A firm may also profit satisfice by sacrificing some SNP to be kinder to the environment. Thus, reducing the firms overall carbon footprint, helping with the severity of climate change. For example Nestle adopted a “no deforestation” policy when directly sourcing palm oil, stating that its palm oil would “not come from areas cleared of natural forest after November 2005”. For these reasons, some firms may choose to profit satifice rather than profit maximise.

Another reason for why profit maximisation may be the objective of private sector firms is to achieve the benefits of dynamic efficiencies and economies of scale. Profit maximisation, focussing on generating high levels of profits by keeping MR=MC can lead to dynamic efficiency for firms via the investment of retained profits Dynamic efficiency is when the firm can successfully meet changing consumer needs and wants over time, and thus requires high levels of SNP to do so. Apple, due to its business objective of maximising profits, can always create new phones and devices in sync with the changing demand of the consumer. This can be shown diagrammatically, as the firm produces at a level Q, set by where MC=MR. This allows the firm to profit maximise and generate the high levels of SNP that are crucial for dynamic efficiency to occur; contributing to economies of scale as the firm will grow in the LR. Hence a clear reason as to why profit maximisation might be the main business objective for private sector firms is that firms, like Apple, may lose out on market share to firms if they do not profit maximising and use the high levels of SNP in R&D

However, to critique my point, profit maximisation might not always be the objective for firms in the short run. Firms may want to sales maximise, which involves supplying the largest output possible consistent with earning at least normal profits where average revenue equals average cost. This can be shown diagrammatically, as the firm will be operating at the point AC=AR, opposed to operating at MC=MR (profit maximisation) , and will focus on generating a high level of sales to essentially increase the firm’s market share. This increases the likelihood of the firm gaining monopoly power in the long run due to its increased market share, which is what Apple has done since 2007 in gaining 24.1% of the UK market of mobile phones, to then generate the ability to put prices up and gain even greater levels of supernormal profit in the long-run.

In judgement, profit maximisation will be the most appropriate business objective in most cases for private sector firms. Maximising dividends for shareholders, contributing to dynamic efficiency and thus long-run growth are both common objectives that firms would want to achieve. However, not always. Due to some firms being less profit orientated, satisficing would be more of an appropriate business objective for non-profit firms like WWF and WaterAid for instance, as well as depending on the individual owner’s goals and aspirations. Nonetheless, profit maximisation would be in most cases the most desirable business objective to pursue.

Essay 13: Alex Wilson

Evaluate the extent to which integration always leads to economies of scale and therefore the conclusion that small firms have no place in a modern economy.

Horizontal integration is when two firms in the same industry and at the same stage of production merge into one firm. In comparison, vertical integration is the merger of two firms in the same industry but a different stage of production. A relatively recent example of horizontal integration is Coca-Cola buying other beverage brands, such as Costa Coffee Integration allows two firms to merge into one, therefore the firm will become bigger, and production will increase. This means that Coca-Cola could gain more market share and increase output, which could potentially lead to economies of scale, which occur when long-run average costs fall as output rises. An example of economies of scale that Coca-Cola might experience is purchasing economies. Purchasing economies of scale occur when cost savings can be made through suppliers offering discounts to firms buying in bulk The newly merged firm will increase its output, thus increasing its demand from its suppliers. In Coca-Cola’s case, this could be the supply of sugar used in both fizzy drinks and coffee. Since CocaCola has increased its output, suppliers may be able to offer bigger bulk purchase discounts.

Minimum efficient scale is the lowest point where a firm can produce where long run average costs are minimised. As a result, cost has gone down from C1 to C2, output has risen from Q1 to Q2, and the firm has experienced economies of scale. The integrated firm’s costs may be so low that smaller firms may no longer be able to compete and thus be forced out of the market.

However, there is also potential for diseconomies of scale when firms integrate. This is shown on the diagram by the upward sloping portion of the curve. Diseconomies of scale are the increasing longrun average costs as output rises. If Coca-Cola ends up growing too large after taking over Costa, issues in communication, coordination and collaboration may arise. This is because it is more difficult for managers to reach individual employees. This is likely to lead to Coca Cola's long-run average costs increasing. As a result, it can be said that growing too large can damage a firm, and small firms may benefit as they do not risk experiencing diseconomies of scale.

On the other hand, you could argue that horizontal and vertical integration is most likely to lead to greater profit margins in the long-run due to dynamic efficiency. This is due to the increase in size, leading to higher output and sales volume. This higher profit can then contribute to dynamic efficiency in the long run. Dynamic efficiency is when firms meet consumers changing needs and wants over time. With more retained profit, the integrated firm can invest in research and development in order to produce better quality goods and services and provide better value for money for their customers. In addition, this increase in product quality is most likely to gain the firm more loyal customers, meaning their sales will increase, and profit margins will become even bigger. Not only can the firm produce better quality goods through research and development, but they can also develop new ways to produce better products at a cheaper cost. For example, Cocoa-Cola could find new capital that they can employ which can replace workers, therefore meaning they spend less in wages. As a result of this, profits will increase and costs will fall, which is most likely to lead to economies of scale. Due to the advantages of economies of scale, integrated firms are likely to be able to outperform smaller firms and hence you could argue that smaller firms will have no place in the modern economy.

However, you could also argue that there are advantages to a firm remaining smaller that a large integrated firm can’t experience. For example, a smaller firm can enter or is most likely to operate in a niche market. A niche market is a small, specialised market for a particular good or service. Operating in such a market allows firms to provide more personalised and bespoke products to their customers. This is likely to lead to more repeat purchases and loyal customers. Furthermore, you could say that there is opportunity for a monopoly, meaning that one small firm dominates the market with its niche products. This means that there is potentially for high profit margins. For example, specialised music shops are likely to achieve high amounts of sales, as consumers will struggle to find other shops selling the same specialised products. Therefore, there is also potential for long-run average costs to decrease as the niche firm can invest in research and development with its retained profits.

In conclusion, it should be said that integration doesn’t always lead to economies of scale, but usually does. This is because firms can run the risk of being too market and profit focused, causing them to grow too big and experiencing increased costs, or diseconomies of scale. In addition, there numerous benefits of remaining small and operating within a niche market, and these smaller firms can react quicker to changing market conditions. Whether economies of scale are achieved for integrated firms depends on how they use their increased size, market share and profits in order to benefit the business.

Essay 14: Josh Harvey

Evaluate the extent to which government intervention in the labour market can be effective in tackling labour market failure caused by the immobility of labour.

Governments may intervene in the labour market to solve immobility of labour. For example, if there are not enough workers in one area, or if there are not enough occupations for specific workers near them. Occupational immobility occurs where workers are stuck with non-transferable skills and therefore cannot occupy other job vacancies. Geographical immobility of labour occurs when workers skills do not match jobs in their local area and where geographical limitations stop the labour force moving to jobs that are available to them

Governments can use schemes that tackle the geographical immobility of labour such as extended transport technology. An example this is the HS2 scheme which tackles immobility of labour between London and Birmingham. This high-speed train allows for people to travel to London from Birmingham and vice versa in only 45 minutes, meaning that a worker could work in London if there are not enough job placements in the Birmingham area This means that job vacancies in London are now open to the people of Birmingham. Therefore, geographical immobility of labour will be lessened since workers have access to more jobs.

In the diagram above, there is an excess demand, or shortage, of labour at wage, W1. Due to improved transportation links, such as the HS2 network, there is an outward shift in the supply of labour because more workers are able to travel to the available jobs. As a result, the shortage of workers caused by geographical immobility of labour is removed due to government intervention. However, the rise of online technology and the increased possibility of working remotely has reduced the problem of geographical immobility of labour without the need for government intervention, making schemes like HS2 redundant. After Covid-19 the rise in remote learning through investment in software such as Zoom has allowed people to work from home. This means that people from can effectively work for a firm regardless of location. Examples of this are where people living in another nation can work for the firm using just their laptop connected to the internet. Therefore, technology may be solving the problem of geographical immobility of labour. This means that there is a greater opportunity cost to projects such as the HS2 project as money could be better spent elsewhere. This is exemplified by the governments recent announcement to stop HS2, after the original cost of £33 billion increased to £71 billion and the project has been halted for another 2 years at least. This is an example of government failure due to information gaps, since the government may have had imperfect information about the advances of remote learning advances and the rising cost of building HS2.

Regarding occupational immobility of labour, governments can use subsidies or state funded training schemes to encourage versatile skills to match up the labour force to the jobs available. They can also offer training schemes just for the unemployed so that they can boost their human capital and have more diverse job opportunities after the training. This will strengthen the countries workforce too. For example, job centres can offer basic software training for unemployed people which will allow them to occupy more jobs with their furthers skills. This will tackle occupational immobility as more unemployed workers will have applicable skills. Referring back to the diagram above, we can see how an increase in training can shift the supply of labour curve outwards and resolve the excess demand for labour at a wgae of W1.

However, these schemes are expensive for the government. Both subsidies and entirely state funded schemes come at great cost for the government, even if the quality of labour is being improved through them. It is true that with so many options and organisation involved it may be hard to decide and calculate what and how to begin these training schemes. It is also true that the training must target sectors of the economy where certain skills are needed and workers cannot fill the jobs since they do not have the correct skills. If not, the increased training will not lead to higher employment. An example of this is David Cameron 2012 work programme which was argued to be ineffective as big companies profited from the subsidies they got from putting unemployed people into long term work and letting down the previously unemployed people by ‘cherry picking’ only the best of them.

In judgement, government intervention in the labour market can be successful in tackling the geographical and occupational immobility of labour. By creating training schemes to solve occupational immobility allowing workers to be better trained, as well as schemes that tackle geographical immobility such as high-speed railways like HS2 London to Birmingham. However, governments must consider being as well informed as possible for these schemes to be successful.

Essay 15: Harrison Harper

“In the long-run, economic efficiency is more likely to occur in a perfectly competitive industry than one which is more concentrated. To what extent do you agree with this statement?

There are many different types of efficiencies such that can happen in different types of markets, however there are certain types that will not be possible in certain markets, such as dynamic efficiency in a perfectly competitive market. This is because there is no super normal profit (SNP) in a perfectly competitive market thus not allowing for dynamic efficiency. This is because in a perfectly competitive market the firms will be operating at costs as shown on the diagram. Perfectly competitive is only a theoretical situation however an example would be watermelons in Shanghai in October. A more concentrated market structure means less competitive, for example monopolistic, oligopolistic or a monopoly. The types of efficiency are: allocative efficiency where marginal costs equal price (MC = P), productive efficiency where ATC = MC, and dynamic efficiency where innovation happens and there must be SNP for this to happen.

In the long run within a perfectly competitive market a firm is allocatively efficient as shown in diagram 1 below.

This will happen because price will equal marginal cost in a perfectly competitive market and the firm is a price taker. Price is determined by the forces of supply and demand in the market. The diagram shows for the perfectly competitive firm, the profit maximising output (Q1 determined by where MC=MR) allows the firm to produce at the allocatively efficient point of P=MC. Watermelon sellers in Shanghai are allocatively efficient as they must sell at the market price. If they try to raise their price, they will have no consumers as the consumers will just go to another producer However, for a non-perfectly competitive firm, like Apple there is a limited number of producers in the market giving the firm a degree of price setting power. Consumers pay higher prices as there is little or no substitutes for them to choose from. This is shown in diagram 2 for the non-perfectly competitive firm

In this diagram, the profit maximising firm sets output where MC=MR (Q*), but at this level of output there is no allocative efficiency as price/AR does not equal MC. Therefore, allocative efficiency is more likely to occur in a perfectly competitive industry than a more concentrated one.

Perfectly competitive firms, such as watermelon sellers in Shanghai are not dynamically efficient. Dynamic efficiency is when a firm uses some of its SNP to innovate the production process or the actual product to make it more competitive, as changing the product may make it more desirable or changing the production process may lower costs and may make it cheaper for consumers if the cost savings are passed on. As shown in the diagrams above the monopoly firm has price setting power and makes SNP allowing them to reinvest in new capital or research into improving their goods or services. Dynamic efficiency happens all the time such as Cadburys using profit to release a new product twice a year. Firms have taken their profit and reinvested to gain higher levels of market share. In a perfectly competitive market, the firm does not make SNP (see diagram 1 where the PC firm makes normal profit as AC=AR). Such firms do not have the ability to reinvest profits into improving goods such as how watermelon farmers in Shanghai are not able to innovate. Thus, in the long run a perfectly competitive firm is less likely to be dynamically efficient than a more concentrated one.

Productive efficiency is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost. In diagram 1the perfectly competitive firm is operating at productive efficiency where MC =AC. However, in diagram 2, the firm which has monopoly power, is not. However, in the long-run a monopoly firm can grow and benefit from economies of scale This is shown by firms benefitting from technical efficiencies that are likely to occur with firms with high control of the market. This occurs when a firm is able to, for example, fill containers entirely and so costs are spread across multiple goods making the cost of distribution per unit dramatically less. For example, if the cost of shipping a container is $500 no matter how many goods are inside. If there are 10 units inside the cost will be $50 per unit. However if there is 10 thousand units, the cost will be $0.05 per unit. The monopoly firm that can grow in scale of output in the long run is able to exploit economies of scale by lowering unit costs in this way. This cost saving can then be then passed on to consumers bringing them lower prices. This does not happen in perfectly competitive markets as firms do not have the ability to invest SNP into long term growth. Thus, in the long run a perfectly competitive firm is less likely to be productively efficient than a more concentrated one.

However, larger firms may become X-inefficient. This is when a lack of effective competition in an industry means that average costs are higher than they would be if the market were more contestable. This leads to a loss of productive efficiency. For example, Apple dominates the mobile phone market in the US, and this has led it to not have to cut back on costs and it may spend unnecessary amounts on things like fine art on the walls of its managers that it could not get away with under more competitive conditions.

Firms in more concentrated markets are better for the consumer due to their ability to be dynamically efficient and exploit economies of scale. However, they may need to be regulated by the government to avoid excessive prices. If the government does use the appropriate regulation, then it will be able to maximise consumer welfare in the long run and this will be the best possible outcome for society because there will be lower prices and the best quality products.

Essay 16: Izzy Wood

Given criticisms over the sewage management of water companies, and price increases in many energy companies, to what extent has privatisation in the UK been a success?

Privatisation is when there is a transfer of an asset from the government sector to the private sector. In theory, privatisation should boost the UK economy. This is because privatisation allows for the profit motive. The profit motive will lead to productive efficiency as the firm strives to maximise profit. Profit is the difference between total revenue and total costs and the desire to maximise profit will cause a firm to decrease minimise costs. Productive efficiency occurs when the firm produces at a level of lowest average cost The reason privatisation can increase productive efficiency is that the private firm is likely to get rid of unnecessary costs. X-inefficiency is when there is a lack of competition in an industry and therefore a firm’s average costs are higher than necessary. An example of this was in the 60s and 70s where nationalised industries, such as the national railways, didn’t have the incentive to cut costs. On the diagram below, there is a movement from xinefficiency closer to productive efficiency as shown by the movement from p1 to p*. Productive efficiency occurs when a business reaches the lowest point on its cost curve (PE) therefore the firm has moved closer to this point as a result of privatisation. The act of cost cutting can also decrease prices for consumers. In the real world, if rail privatisation to show productive efficiency, it would decrease ticket prices if the cost saving is passed on to the consumers.

However, in evaluation, if a firm lacks competition it is classified as a natural monopoly Natural monopolies may have no incentive to cut costs and lower prices for consumers. Natural monopolies can supply the entire market at a lower long run average cost than if there were other firms and this can lead to a decrease in consumer welfare. For example, water is an everyday essential therefore even if the price was to increase people would have no choice but to pay. With this level of market power, the natural monopoly may have no incentive to cut costs and be productively efficient as it can increase profits by increasing price. This can be illustrated by the data which states that water bills in the UK have increased by 40% since privatisation in 1991. A high degree of market power can lead to x-inefficiency for both nationalised and privatised . Thus there is no likelihood of privatised monopolies like water companies being more productively efficient and productive efficiency cannot be used as a measure of the success of privatisation.

However, privatisation can lead to an increase in dynamic efficiency. Dynamic efficiency, which is the ability to meet the changing wants and needs of consumers over time, requires supernormal profit, which is more likely to happen due to the profit motive under privatisation. Dynamic efficiency can lead to innovation due to the reinvestment of the profit. This can lead to advancements in technology which can increase factor of production therefor increasing the supply. For example, this can be shown through the advancement of electronic tickets and maps in the railway industry, which allows for more people to easily access their travels, which in turn can increase the volume of people who will find it more appealing to use leading to increased revenue. Another example is the increase in train size which allows for more people to travel at once therefore increasing the consumer welfare as it eliminates the worry of not getting a seat. This can benefit consumers because it can allow for faster travel and ensure they will be able to make it to their desired place in comfort. This can increase labour productivity in the UK because fewer workers will be late for work increasing their productive output.

On the other hand, privatisation can only be successful if the right regulation is in place. For example, Ofwat, which is the England and Wales water regulator and is responsible for preventing water companies acting against social interest. However, raw sewage was discharged into rivers over 375,000 times in 2021. This cause harmful damage to the natural biodiversity in those environments. This is an example of privatised firms damaging the environment in order to maximise profits and the regulatory body being unable or unwilling to prevent the damage. A nationalised water industry would likely not have done this since they are more accountable to the general public and less likely to pursue profits at the expense of social welfare. Another example of poor regulation can be shown through the cancelation of trains in stations such as Manchester Oxford Road, which experiences 11.06% of trains being cancelled each year. Regulators should have inspected the trains more thoroughly but also over a longer period of time. If privatisation causes social welfare loss, then it limits the extent to which privatisation in the UK can be considered a success.

In judgement, in theory privatisation is a good way of increasing incentives for firms, which can positively increase consumer welfare. However, in reality, the success of the privatisation of companies like water and railway have been questioned given their ability to hold high market power. Since natural monopolies aren’t exposed to competition, privatisation is likely to have linited success.

Essay 17: Freddie Middleton

Evaluate the factors which influence the supply of labour to nursing or to another occupation of your choice.

Wage elasticity of supply (WES) refers to the responsiveness of quantity of labour demanded to a change in wage. Wage cuts in the NHS will lead to falls in the nursing workforce and depending on whether they are WES inelastic or elastic the size of that change will be determined. For example, Nurses after ten years of pay cuts are now effectively working ‘one day a week for free’ which may be the cause of the decrease in the supply of nurses, but there could be other contributing factors.

One likely cause of the shortage of nurses may be frequent real pay cuts. This is because a decrease in pay for nurses will likely cause a movement along the labour supply curve for nurses. This is backed up by the data as it is predicted that tens of thousands of nurses could leave NHS due to real pay cuts.

This diagram illustrates how the real wage cuts- W1 to W2- will cause the supply of nurses to decrease from E1 to E2 and therefore cause a fall in employment. This illustrates how this may lead to the loss of some of the nurses due to the fact that average nurses’ pay having dropped 20% in the last decade’.

However, nurses may be more motivated by ethical reasons than wages. For example, a nurse who feels their life is calling to care for people may not be motivated by wages. As a result of this the WES for nurses may be more inelastic than my previous diagram suggests. This means that nurses may be less likely to quit due to real wage cuts and this means there will be a smaller decrease in the labour supply for nurses due to the wage..

This diagram illustrates how a more inelastic labour supply would cause a smaller fall in the supply for nurses due to wage cuts as the movement between E1 and E2 is much smaller than in the original diagram. Another factor that could have caused the decrease in supply for nurses is the qualifications you need to become a nurse. For example, a Tesco’s cashier who wants to train to be a nurse may not have the funds. This is because, due to high inflation, the relative cost to become a nurse and study to get the qualification is higher than it used to be in real terms. As a result of this, there are higher barriers to enter the nursing profession meaning there is an inward shift of the supply of people who can be a nurse. As a result of this, people may be less incentivised to become a nurse and therefore there will be a decrease in the supply of qualified nurses The cost of acquiring these qualifications may cause a decrease in the amount of people willing and able to get the qualifications which may cause a decrease in supply for nurses and therefore the fall in the workforce.

This diagram shows the inward shift in labour supply from LS1 to LS2 leading to a fall in employment shown by E1 moving to E2. However, if this was the cause of a fall in the supply of nusrses, the government could change regulation in order to fix this. This means, for example, it would cost the Tesco’s cashier less to obtain nursing qualifications. For example, they may be able to train nurses on the job and therefore get their qualifications as they work. This means that qualifications will not cause a barrier to entry to the workforce and not cause future nurses to incur the cost of acquiring the qualifications. As a result of this, there will be a smaller shift in supply for nurses and therefore the fall in the workforce wouldn’t be as great.

In judgement, as there are so many factors that could influence the fall in the size of the supply of nurses it may be impossible to say which one is most influential. However, on the anecdotal evidence provided by nurses in the current wave of strike action, it is likely that real wage cuts and stressful working conditions are lowering the motivation to become a nurse and acquire the necessary qualifications to work as a nurse.

Essay 18: Max Hepburn

“Oligopoly is the market structure most likely to promote consumer welfare.” To what extent do you agree with this statement?

Oligopoly is where there is limited competition within a market and there is a small number of producers and sellers. The characteristics of an oligopoly include imperfect market with few firms, product differentiation and high barriers to entry. Consumer welfare is the individual benefits derived from the consumption of goods and services.

Oligopoly results in allocative inefficiency. Allocative efficiency is a state of the economy in which production is aligned with consumer preferences (P=AR=MC). Due to the high barriers to entry, firms set high prices in order maximise profit and thus price (P) is greater than marginal cost (MC).

As you can see in the diagram, the profit maximising level of output can be seen at output A, and the allocatively efficient level of output can be seen at output C. Consumer surplus is not being maximised as price is high and output is lower. This is a form of market failure as monopolies can make supernormal profit at the expense of their customers. Oligopoly firms could lower their prices in order to gain more short-term profit than their competitors (price competition), however oligopoly firms also have the opportunity to collude in order to gain maximum long-term profit. This is especially prevalent in the mobile phone market with Apple and Samsung. They both collude and sell their products at higher prices to make it mutually beneficial. This is a form of tacit collusion which is when firms speak off the books and decide to minimise competitiveness and maximise profit. Doing so means that they compete on the products quality, such as screen and camera. This will cause negative consumer welfare as prices remain very high. However, regulation can stop this from happening. For example, the government can introduce a price cap on mobile phones in order for them to be sold to consumers for a reasonable price. This is great for consumers as they get a lower price and increased consumer surplus, although for firms they lose profits and less potential for dynamic efficiency.

In the diagram above, we start at profit maximising equilibrium Q*, P*. The price cap is imposed on all firms in the industry and now the price cannot exceed this cap. For example, in the mobile phone market, firms like Samsung and Apple will not be able to charge a price above Pcap for their phones. As a result, the firms must forgo some of their profit, but consumers get a price closer to the Par, which is the price under allocative efficiency. Therefore, oligopoly with government regulation could be the market structure most likely to promote consumer welfare. This is happening to all firms in the industry.

However, one reason that it is unlikely for a government to impose a price cap in a market such as mobile phones is that it would diminish dynamic efficiency. Dynamic efficiency is when a firm successfully meets consumers changing needs and wants over time. This can mean developing new or better products and finding better ways of producing goods and services. An example of a company doing this is Netflix. This is because of all the technological advancements and investments they have made. Netflix has invested in order to make sure their services are of a high quality. For example, they provide a high variety of different content from a vast range of genres. This in turn causes an increase in consumer welfare in the long run. Another example is in the market for mobile phones. Dynamic efficiency for mobile phones looks at finding cheaper ways to provide consumers with a high quality, which in turn will again increase consumer welfare in the long run. For example, year on year they upgrade and improve features such as the camera quality and the software provided.

However, due to dynamic efficiency gains, firms like Netflix may become dominant and gain monopoly control. A monopoly is where there is a dominant seller. If this were the case in the streaming industry, Netflix’s services will become more limited and repetitive. In addition, a higher concertation level could reduce consumer choice and therefore in the long-run cause negative consumer welfare. Prices may rise as well and therefore add to the negative consumer welfare. Although oligopoly may be good for promoting consumer welfare with dynamic efficiency, market structures do change and there is no guarantee that oligopolies will remain as oligopolies in the long run.

Overall, dynamic efficiency is generally preferable than allocative efficiency. This is because lower prices provided by allocative efficiency will only be a short run benefit. Dynamic efficiency is more important because it benefits consumers in the long run. You can see this with the examples of Netflix and mobile phones. However, it all depends on the market. For example, in markets such as streaming services, dynamic efficiency will be more beneficial for promoting consumer welfare. On the other hand, in markets such as coffee shops having allocative efficiency may be more beneficial to consumers since there are limited ways in which new products can develop

Essay_19: Ned Floyd

Discuss the extent to which a monopolistic industry of your choice exhibits the characteristics of this market structure.

Monopolistic competition is a form of market structure where there are many firms competing against each other with low barriers to entry, yet they do not offer homogenous goods and thus there are no perfect substitutes. For example, the clothing brand market is an example of monopolistic competition as there are many firms all producing goods that are not perfect substitutes.

As mentioned, the clothing market provides a clear example of monopolistic competition There are many medium sized firms in the market that compete with one another, for example, there are many different clothing retailers such as ‘Phase Eight’ and ‘FatFace’ all situated in the same city. This means that the firms are price makers as they can decide what price to charge for their products due to the levels of product differentiation. This gives firms price setting power as the differentiation causes consumers to be willing and able to pay more for that specific good. This is unlike perfect competition, where firms are price takers as their goods that they sell are homogenous and as a result there are many substitutes. An example of this is seen in the market for watermelons in Shanghai in October, where there are loads of firms all selling the same good - watermelons. Furthermore, as demand is perfectly elastic, firms must charge the same price for their goods. This can be seen on the first diagram to the left where the AR curve (demand curve) is perfectly elastic due to the absence of product differentiation between the goods.

This is unlike the clothing marketwhich is a monopolistic market due to the level of product differentiation. This can be seen on the second diagram to the left, where the AR curve is more inelastic that that of the perfectly competitive firm

However, some people would argue that due to the high levels of product differentiation the clothes market is an example of oligopolistic competition. Oligopolistic competition is a market structure where there are many medium sized firms who compete on price and by product differentiation. Furthermore, many firms make high levels of SNP that is invested into brand differentiation for example, T.M. Lewin may spend a lot more than some other types of monopolistic markets on advertisement for their goods. Other large firms like Nike may also choose to associate themselves with different athletes for an even higher degree of product differentiation. Furthermore, the market for linen shirts could then be split into two sub markets: regular shirts and designer shirts, and the market for designer shirts could be described as more oligopolistic as there are fewer competitors and higher barriers to entry due to the larger market share that firms possess. Furthermore, some other economists would argue that despite the low barriers to entry in terms of the overall market, the clothing market is an oligopolistic market due to the existence of SNP in the long run. This goes against the idea that the clothing market is monopolistic as this kind of market structure does not allow for SNP in the long run due to the lower barriers to entry allowing other firms to enter the market and take the SNP. These characteristics are seen more commonly in an oligopolistic market structure- perhaps alluding to the idea that the clothing market is better labelled an oligopolistic market than monopolistic

Some other economists would argue that due to the lower barriers to entry that are present in the retail industry, it is indeed a monopolistic market. This is because these days factories and production can be cheaply outsourced by the firm and then sold as their own. For example, the firm ‘Fruit of the Loom’ offer large quantities of production of clothing items that smaller firms can use without having to sink costs into a large factory and workers. These low barriers to entry show that despite the firm’s ability to have non-price competition, the barriers to entry are low and thus the market is monopolistic.

Some other economists would argue that despite the low barriers to entry in terms of the overall market, the top end of retail is dominated by a few big firms protected by high barriers to entry, such as brand loyalty. In 2020 Nike had a 27% market share in athletic footwear, which is far higher than a monopolistic market structure may suggest. For example, large brands like Carhartt, Nike and Levi’s are multi-national corporations (MNC’s) that command large swathes of loyal consumers who feel some degree of brand loyalty towards their favourite brands. For this reason, the market could arguably be more accustomed to being labelled an oligopoly due to the high amounts of SNP that are able to be made in the long run, something that monopolistic firms cannot achieve due to the supposed lower barriers to entry.

Overall, despite the odd characteristic that doesn’t quite fit into the category of monopolistic competition, the retail market is an example of a monopolistic market. Even though the top of the market has high barriers to entry, and the biggest firms command a large market share, the majority of the market has low barriers to entry as a monopolistic market should be. Monopolistic markets are only a theoretical construct and thus no market would fit exactly into any classification, but the retail market fits best into the classification of monopolistic market due to having many medium sized firms that don’t offer homogenous goods.