2022 H2 Economics Paper 2 Essay 1: Suggested Answers
How to use these essay answers. The responses below, including the part (a) answer, are structured guides to the requirements of the question, the content, analysis and evaluation a strong answer must cover, rather than full essay prose with a written introduction and conclusion. Use them to see what to include and how to build the argument, then write it up in your own continuous prose, adding your own introduction and conclusion.
This essay explains how a firm's price and output change when its objective shifts from profit maximisation to profit satisficing, then asks for the most appropriate strategy a firm could adopt to reduce the competition it faces.
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Explain the likely effects on a firm's price and output when its objective changes from profit maximisation to profit satisficing.
Defining the terms. Profit maximisation is the usual assumed objective of a firm, where the firm produces at the output level where marginal cost equals marginal revenue (MC = MR). Profit satisficing is an alternative where managers, who may have different objectives from owners or shareholders, choose an output that satisfies or placates shareholders rather than one that strictly maximises profit.
The profit maximising benchmark. A profit maximising firm produces where MC = MR. At an output where MC is greater than MR, the firm makes a loss on each additional unit, so it could raise profit by producing less. At an output where MR is greater than MC, the firm could add to profit by producing one more unit, so it could raise profit by producing more. Only where MC = MR, at output Q0 and price P0, is profit maximised. On a diagram with MC, MR and the downward sloping AR (demand) curve, Q0 is read where MC cuts MR and P0 is read off the AR curve above Q0.
How price and output change under profit satisficing. If managers pursue profit satisficing, price can be set anywhere in a range, from P1 at the profit maximising output (where MC = MR) down towards P* at the normal profit output (where AC = AR). The chosen point depends on the degree of contestability and on whether there is a threat of hit and run entry.
Where the threat of competition is high, managers are likely to move away from the profit maximising point, lowering price from P1 towards P* and raising output from Q1 towards Q*. In effect, the firm accepts a lower price and a higher output than under profit maximisation, settling for sufficient rather than maximum profit, with the exact position set by competitive pressure.
Define both objectives, justify the MC = MR profit maximising output, and show that satisficing yields a range of lower prices and higher outputs down to the normal profit point.
Tests: Objectives of firms, Monopoly
Discuss the most appropriate strategy that a firm could adopt if its objective was to reduce the competition that it faces.
- Frame the question around the factors that decide which strategy is most appropriate, such as the firm's financial strength and the nature of the market.
- Develop one strategy and the mechanism by which it reduces competition, then note its requirements and risks.
- Develop a second, distinct strategy and its mechanism, then note its requirements and risks.
- Develop a third strategy and its mechanism, then note its requirements and risks.
- Compare the strategies on effectiveness and on what each depends on.
- Reach an evaluative conclusion that the most appropriate strategy is contingent on the firm's circumstances.
This part is gated. The full model answer with the worked diagrams and the evaluation, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Tests: Barriers to entry, Monopoly
Questions students ask
Where can I get the full worked answers to the 2022 H2 Economics paper 2 essay 1?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2022 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How should I use these suggested essay answers?
Treat them as a guide to the requirements of the question, the content, analysis and evaluation a strong answer must cover, not as full essay prose. Write the essay up in your own continuous prose, with your own introduction and conclusion.
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