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Assessment

Assessment. You have 35 minutes to answer the following question: Using the Foreign Exchange market as an example, Explain how price and output are determined in perfect competition, both for the whole market and for a particular firm within the market (30 marks).

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Assessment

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  1. Assessment You have 35 minutes to answer the following question: • Using the Foreign Exchange market as an example, Explain how price and output are determined in perfect competition, both for the whole market and for a particular firm within the market (30 marks)

  2. Perfectly competitive marks (30 marks) • Define PC - 2 marks • Define PC market structure, conduct or behaviour - 4 marks • Normal PC diagram = 6 in total : 4 (PC) 2 (D&S) • Distinguish SR & LR explaining - 3 marks • Distinguish SR & LR diagrams – loss making = 6: 4 (PC) 2 (D&S) • Distinguish SR & LR diagrams – profit making = 6: 4 (PC) 2 (D&S) • Foreign exchange relevant examples used: up to 6 marks • Good diagrams are required for max marks

  3. Outline structure Make up an acronym that will help you remember how to structure your essay • Definition of what you’re being asked about • Describe the nature of the market structure • Characteristics • Explanation how the market structure operates in theory • Diagrams – market DS / firm • SR to LR dynamic • Contextualisation – in practice • Translate into the context of the industry • Assess how the industry characteristics match the characteristics of the theory • Conclusion • To what extent does the industry meet the characteristics?

  4. Define PC - 2 marks • A form of market structure that produces Allocative and Productive efficiency in long-run equilibrium See next question, most of you didn’t ‘define’ PC, you described its characteristics

  5. Define PC market structure, conduct or behaviour - 4 marks • Firms aim to maximise profits • Many buyers and sellers – firms are price takers • Product is homogenous • No barriers to entry/exit • Perfect knowledge • No externalities

  6. Define PC market structure, conduct or behaviour - 4 marks • Louis: “the characteristics of PC are many buyers and sellers, homogenous goods, low barriers to entry, all firms are price takers, there is a very low market concentration, all firms have perfect knowledge and there no externalities”. 1 2 3 4 (5) (6)

  7. Normal PC diagram = 6 in total : 4 (PC) 2 (D&S) • Distinguish SR & LR explaining - 3 marks • Distinguish SR & LR diagrams – loss making = 6: 4 (PC) 2 (D&S) • Distinguish SR & LR diagrams – profit making = 6: 4 (PC) 2 (D&S)

  8. Scenarios Normal profits – that level of profits which is just sufficient to keep resources employed in making a particular product from being used for some other purpose. Any profit in excess of that amount is termed Abnormal or Supernormal To get to this end state, there are two possible starting scenarios… Morgan started in the wrong place…how firms exit the market to allow abnormal profits to happen… The firm is making abnormal profits Long run Equilibrium The firm is making losses

  9. Long run equilibrium MR=MC Maximum profits MC AC P S P P = D = AR = MR P1 D O O Q1 Q Q Industry Firm

  10. SR abnormal profits Watch how you draw your abnormal profit!

  11. Abnormal losses…

  12. Long Run Equilibrium Luke – it’s about SUPPLY not demand! Toby – it’s about SHIFTS not movements along!

  13. Normal PC diagram = 6 in total : 4 (PC) 2 (D&S) • Distinguish SR & LR explaining - 3 marks • Distinguish SR & LR diagrams – loss making = 6: 4 (PC) 2 (D&S) • Distinguish SR & LR diagrams – profit making = 6: 4 (PC) 2 (D&S) • Explain that firms are price takers • Attracted to SR abnormal profits => increased supply => pushes price down => less output per firm => move to LR equilibrium => AC=AR • Vice versa from SR losses

  14. Foreign exchange relevant examples used: up to 6 marks • Firms aim to maximise profits - banks • Many buyers and sellers – companies, individuals, banks – firms are price takers • Product is homogenous – cannot distinguish between one euro and another • No barriers to entry/exit – low barriers banks can move easily between currencies, no penalties for leaving the market, individuals can buy and sell - holidaymakers • Perfect knowledge – price transparency, can see rates posted on screens, no technology advantages to reduce average costs • No externalities – no costs or benefits that are the result of production and are outside the price mechanism • Explain how firms would be attracted to abnormal profits / leave the market in the event of losses

  15. Foreign exchange relevant examples used: up to 6 marks 3 well developed points • Rory: in the FX markets firms are constantly moving in and out due to low barriers to entry and exit… • as firms enter the market the industry supply increases causing prices to fall… • they have to drop their prices due to small market share…. • if they didn’t people would move to another firm. Great start and could have scored more if you had selected other characteristics and worked them through as you did with barriers…

  16. Essay Technique

  17. Knowledge & Understanding Define…Describe…Give…How…Identify…Illustrate …List…Outline…State…Summarise…What… Application Apply…..Distinguish between…..Explain…Suggest… Analysis Analyse…..Compare & Contrast…..Examine…..Investigate… Trigger words 5 x Why? What does this show? So what? Having identified your point you need to DEVELOP it What are the implications? And? This means that… Evaluation Assess…Comment on…Critically analyse….Do you think…. Discuss….Evaluate….To what extent….

  18. Answer Structure • Describe what you feel is relevant to the evaluation Introduction Option A Option B Conclusion • Write a paragraph for each point/factor based on your analysis • Write a paragraph for each point/factor based on your analysis • Avoid repetition • Summarise your points as justification • Recommend for the future

  19. Answer Structure • Describe what you feel is relevant to the evaluation Introduction Option A Option B Conclusion • Write a paragraph covering all the points that SUPPORT one side of the argument • Write a paragraph covering all the points that SUPPORT one side of the argument • Avoid repetition • Summarise your points as justification • Recommend for the future

  20. Make up an acronym that will help you remember how to structure your essay Outline structure • Definition of what you’re being asked about • Describe the nature of the market structure • Characteristics • Explanation how the market structure operates in theory • Diagrams – market DS / firm • SR to LR dynamic • Contextualisation – in practice • Translate into the context of the industry • Assess how the industry characteristics match or the characteristics of the theory • Conclusion • To what extent does the industry meet the characteristics?

  21. Technique tips • Separate paragraph for each point • Use the definitions to build a good introduction • often tells the examiner the level of understanding early on • helps the person marking it to look at the rest of what they are saying is based on good understanding • Quality rather than quantity • 3-4 arguments for a 40 mark question. • 3 points, two on one side, one on the other builds a natural judgement. • End of each paragraph refer back to the question, can bring multiple points together rather than trying to justify each one individually • DADD • Definition, Agree, Disagree. Decision, “Depends on…” • PEEEE • Point (define), example, explain, effect, evaluate – relate back to question at end of paragraph • Analysis • Start writing “and so this means…” to get started on analysing

  22. From now on… • Every piece of homework is be tightly structured exhibiting discipline, attention to detail and only writing what is required…do not ramble! • Start with a structure and only write what is necessary.

  23. Homework • Find recent article on the Office of Fair Trading (OFT) and/or Competition Commission • What is the relevant market? • Why was the case referred? • What was the result? Look at the OFT and CC websites: www.oft.gov.uk “press releases” www.competition-commission.org.uk “current enquires”, announcements” Google News: “OFT / CC investigations”

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