Pearson Edexcel IAL Economics 3.3.3.6h Productive, allocative & dynamic

Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.
Quantitative skills assessed:
QS4: Construct and interpret a range of standard graphical forms.
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
Knowledge, Application, Analysis (12 marks) - indicative content
- A monopoly market structure is when there is one single dominant supplier in the market. These firms possess price setting ability
- Allocative efficiency occurs when P=MC, productive efficiency occurs when the business is producing at the lowest point of it LRATC curve, X
inefficiency occurs when a business allows average costs to rise, dynamic efficiency occurs when a business is investing to reduce it costs
- Firms with monopoly power, such as MTN Ghana, face limited competition therefore it has price setting ability
- MTN Ghana can abuse their dominant position by offering low quality products to consumers to save on costs of production. As consumers have limited other options but to purchase from them, consumer welfare decreases
- Monopolies will not be allocatively efficient as the lack of competition, such as MTN Ghana controlling 70\% of the market, allows them to charge higher prices ( P>MC ) than in a more competitive industry
- Monopolies benefit from high producer surplus, reducing consumer surplus and causing a deadweight welfare loss
Costs \& \\ Revenue

- A monopoly may be productively inefficient if it restricts output below the lowest point on the AC curve

- A monopoly may restrict output and produce at a point below the lowest point of the AC. The monopoly produces at 0Q

- 0 Q is profit-maximising output, shaded area is supernormal profit

- A monopoly will be x-inefficient. The lack of competition and inelastic demand enables the business to increase the price without a proportionate fall in quantity demanded. If costs increase the monopoly can allow prices to increase to cover the rising costs

Accept reverse argument as KAA

Restrict to a maximum of Level 3 if no appropriate diagram provided

Level

Mark

Level 0

Level 1

1-3

Level 2

4-6

Level 3

7-9

Level 4

10-12

Evaluation (8 marks) - indicative content

- Monopolies are large firms and have a greater capacity to be productively efficient and achieve economies of scale. The fall in LRAC may cause the price to fall for consumers, improving consumer welfare

- Monopolies have greater potential for dynamic efficiency -financial resources for investment in R & D and product innovation for consumer benefit

- A monopolist in a contestable market may choose to set the price low to deter potential entrants (making close to a normal profit) where P is closer to MC and therefore closer to allocative efficiency

- A monopolist may be able to cross subsidise loss-making parts of its business and cover the losses with the supernormal profits made in other parts of the business. This increases consumer choice

- If the monopoly is a natural monopoly it is more efficient to have a single seller in the market achieving economies of scale, than to have firms competing

- Regulation may ensure efficient operation of monopolists

- Monopoly power is dependent on the firm's share of the market and the market shares of its competitors

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.

Level 2

4-6

Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.

Level 3

7-8

Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.
Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.

Question

Evaluate measures to reduce the occupational and geographical immobility of

labour.

Indicative content