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Pearson Edexcel IAL Economics 3.3.2.4a distinction between normal profit

Practise distinguishing normal profit, supernormal profit and losses using cost-revenue diagrams, data extracts and business contexts.

Syllabus
First assessment 2019
Course
Economics YEC11
Level
A2

Exam points

  • interpret AR, AC, MR and MC curves to decide whether a firm makes losses or supernormal profit
  • explain how cost or demand changes alter total profit using an appropriate cost-revenue diagram
  • use extracts on retailers or producers to examine reasons for closures, losses or rising profits

3.3.2.4a - distinction between normal profit, supernormal profit and losses question 1

[Maximum number: 8]

Sources for use with Section B
The electric vehicle market in China

Figure 1 Market share for electric vehicle passenger sales, based on sales revenue, 2021

Figure 2 Tesla electric vehicle prices, 2022 (Yuan, 000s)

Extract A Changes in the Chinese electric vehicle market

In 2020 the Chinese Government adopted many new measures to reduce CO2 emissions, in order to meet its climate change goals by 2030. For example, the Government has increased the number of charging points and raised the tax on non-electric vehicles. The global increase in the price of fuel has also led to an increase in demand for electric vehicles. Between 2021 and 2022 the sales of electric vehicles in China increased by 83% to 5.92 million.

Extract B Tesla in China Tesla, a US-owned vehicle company, has attempted to increase its sales in China to take advantage of the increasing demand for electric vehicles. In 2019 the company opened a factory in Shanghai. It became the first fully foreign-owned vehicle manufacturer in the country. By producing vehicles in China, Tesla was able to take advantage of government 5 incentives, such as subsidies, aimed at promoting the domestic electric vehicle industry, as well as benefiting from low-cost labour. This new factory was expected to increase Tesla’s competitiveness in the Chinese market by making its vehicles more affordable for consumers. China has become a key manufacturing centre for Tesla. Its factory in Shanghai produced over 710 000 vehicles in 2022. This represented 52% of the 10 company’s worldwide output. However, production has been difficult in China. Tesla faced supply chain disruptions as a result of the global health crisis of 2020 to 2022. This resulted in a reduction in output and an increase in its costs of production. Tesla also had to pay taxes on imported components and finished vehicles. 15 In October 2022 Tesla reduced the price of several of its electric vehicles. The two main reasons for these price reductions were:; a fall in its production costs arising from government subsidies to electric car manufacturers; improved efficiency from manufacturing in Shanghai. 20 The lower prices of Tesla’s electric vehicles had a significant impact on its competitors. Domestic and other international manufacturers responded by reducing their prices for electric vehicles as they competed for market share.

With reference to the first two paragraphs of Extract B, examine the impact of Tesla producing its electric vehicles in China on its costs and profits.

Illustrate your answer with a costs and revenues diagram.

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