2023 H2 Economics Paper 2 Essay 3: 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 why a firm considers the level of competition in the industry when setting price and output, then asks whether consumers are disadvantaged when markets fail due to a lack of competition and what intervention is most appropriate.
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Explain why a firm considers the level of competition in the industry when making decisions about the price and output level of its product. [10]
A firm must consider the level of competition because it determines its market power and its ability to set prices. The nature of competition, from perfect competition to monopoly, decides whether a firm can influence the market price or must accept it as given. This answer contrasts two structures, perfect competition and monopoly.
Price and output under perfect competition. With many small firms selling a homogeneous product, the individual firm has no control over price. The market price is set by total supply and demand, and each firm, producing a tiny fraction of output with an undifferentiated product, must accept it as a price taker, facing a perfectly elastic demand curve. To maximise profit the firm produces where marginal cost (MC) equals the market price (P), since it adds units while the revenue from each exceeds its cost, stopping where MC equals P. In the long run, the entry and exit of firms erode supernormal profits, so firms earn only normal profit where price equals average total cost.
Price and output for a monopolist. A monopoly is a single dominant firm with significant market power, owing to a lack of close substitutes, so it is a price setter facing a downward sloping demand curve. It chooses the output where marginal cost equals marginal revenue (MR) and sets the corresponding price on the demand curve. By restricting output relative to a competitive market and charging a higher price, the monopolist can earn supernormal profits.
The level of competition therefore shapes the decision: a competitive firm produces where MC equals price as a price taker, while a monopolist produces where MC equals MR and sets a higher price as a price setter.
Contrast two market structures, with the price taker and MC equals P rule for perfect competition and the price setter and MC equals MR rule for monopoly.
Tests: Perfect competition, Monopoly
If markets fail due to a lack of competition, discuss whether consumers will be disadvantaged and what might be the most appropriate form of government intervention. [15]
- Define market failure from a lack of competition and frame the two parts of the question, consumer harm and the appropriate remedy.
- Develop why consumers may be disadvantaged, through the price, output and efficiency effects of market power.
- Develop the counter case that consumers may not be disadvantaged in certain cost conditions.
- Match the form of intervention to the type of failure, distinguishing the cases where each remedy fits.
- Weigh consumer harm against the offsetting cases and the remedies available.
- Reach an evaluative conclusion on whether consumers are disadvantaged and which intervention is most appropriate.
This part is gated. The full model answer with the worked monopoly and natural monopoly 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.
Questions students ask
Where can I get the full worked answers to the 2023 H2 Economics paper 2 essay 3?
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 2023 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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