NCEA Level 3 Economics (91400) 2013 Assessment Schedule

NCEA Level 3 Economics (91400) 2013 — page 1 of 7 Assessment Schedule – 2013 Economics: Demonstrate understanding of the efficiency of different market structures using marginal analysis (91400) Evidence Statement

Question Evidence

ONE (a)

(c) At P0, the market is allocatively efficient, as the sum of the gains to consumers and producers is maximised. As long as the market is in equilibrium, it is allocatively efficient. Market equilibrium in Graph One occurs where MC (S) = AR (D). Because the monopolist restricts the quantity to where profits are maximised (MC = MR), at Pp the total of consumer surplus (CS) + producer surplus (PS) is reduced from what it would be if it is left at P0. Although the producer gains extra surplus from the higher price, it is less than the combined loss of surplus to the producer from less sales, plus the loss to the consumer of less consumption at a higher price.

By setting the price at P1, the price would be lower than the monopolist would choose, to maximise profits – but it would be above the market equilibrium price. It would mean the quantity would be higher than the monopolist would choose, to maximise profits – but it would be below the market equilibrium quantity. In this way, the deadweight loss would fall to the shaded area on the graph, which is smaller than the deadweight loss (abc), that would exist if the monopolist chose his / her own price or quantity, thus making the market more efficient.

P0 is the ideal – as no deadweight loss would occur, and the market would be allocatively efficient. Some regulation is needed by the Commerce Commission, otherwise the monopolist will stay at Pp, and would remain there, as strong barriers will stop others entering the market. The price (P1) is an improvement in efficiency over Pp, so it would be a good idea.

P0 is the best overall price to maximise efficiency. NCEA Level 3 Economics (91400) 2013 — page 2 of 7

N1 N2 A3 A4 M5 M6 E7 E8 On the graph, On the graph, Understanding Understanding In-depth In-depth Comprehensive Comprehensive ONE of: ONE of: involves: involves: understanding understanding understanding understanding involves: involves: involves: involves:

 Qp, Pp, Q0  a Qp – Pp  identifying  identifying OR P0. combination Q0 P0 on the Q0 P0 on the  explaining  explaining  comparing or  comparing or graph graph why P0 is why P0 is contrasting P1 contrasting OR  identifying  identifying most most with Pp OR P1 with Pp, efficient efficient P0 in terms of AND  a Q0 – P0 Qp Pp on the Qp Pp on the combination graph graph  explaining  explaining the impact on P0 in terms of . in detail, the in detail, the efficiency. the impact on  shading  shading Includes efficiency. DWL on the DWL on the effect of P1 effect of P1 on on discussion of Includes graph graph which is the discussion of OR OR efficiency by efficiency by shifting from shifting from best point by which is the explaining explaining considering best point by Pp Pp DWL area DWL area overall impact considering (eg abc) (eg abc)  explaining  explaining on efficiency overall the impact the impact  explaining  explaining  explaining in impact on why why on Q of P1 on Q of P1 efficiency regulation. regulation. detail why the allocative allocative Commerce  explaining in efficiency efficiency  referring to  referring to Commission detail why the occurs at P0 occurs at P0 the graph to the graph to needs to Commerce support support regulate at P1 Commission answers answers Some parts  integrating the needs to (refers to (refers to regulate at may be direction of direction of graph into the incomplete. discussion by P1 (referring changes changes to the from one from one using the points, features of a point to point to monopoly) another, another, shading, or identifies identifies extra labelling  integrating areas). areas). to clearly the graph into show the comparisons discussion by Some parts between the using the may lack price options. points, detail or are shading, or incomplete. extra Some parts labelling to may lack detail clearly show or are comparisons incomplete. between the price options.

N0= No response; no relevant evidence. NCEA Level 3 Economics (91400) 2013 — page 3 of 7

Question Evidence

TWO (a)

(b) With the fall in price to P2, the farmers with low debt and farmers with high debt will lower output to Q2.

This is as at Q1 – the MC is now higher than MR1, meaning marginal losses occur.

This is true for all output levels between Q1 and Q2, so they reduce output to Q2, to continue to maximise profits.

(c) For the farmer with low debt, the large supernormal profits at P1, as shown in Graph Two, has fallen to the smaller supernormal profits at P2. In comparison, the farmer with high debt in Graph Three has gone from having normal profits to making subnormal profits at P2, as shown by the shaded area in Graph Three. This is because he has higher average costs due to higher fixed costs in debt servicing. This pushes up total costs, and therefore, average costs. This means that he could make a higher level of profit for his investment in other industries (eg vineyards), as those industries become relatively more profitable. So in the long run, the dairy farmer with high debt will leave the market (which is easy to do with perfect competition, as there are no barriers to exit) if he doesn’t believe the situation will change. NCEA Level 3 Economics (91400) 2013 — page 4 of 7

N1 N2 A3 A4 M5 M6 E7 E8 ONE of: TWO of : Understanding Understanding In-depth In-depth Comprehensiv Comprehensiv On EITHER On EITHER involves: involves: understanding understanding e e graph – graph –  identifying  identifying involves: involves: understanding understanding  labels Q1 Q1 correctly Q1 correctly  explaining in  explaining in involves involves  labels Q1 correctly correctly on EITHER on EITHER detail detail comparing and comparing and contrasting contrasting  identifies graph graph changes changes  identifies new between both between both new  identifying  identifying from Q1 to from Q1 to D1=MR1=AR1 Q2, by using Q2, by using farmers by: farmers by: D1=MR1=AR Q2 correctly Q2 correctly  identifies marginal marginal  explaining in  explaining in 1 with correct with correct types of profit new new analysis (for analysis (for detail detail made by  identifies EITHER EITHER changes changes types of D1=MR1=AR D1=MR1=AR either farmer graph). Q1, graph). Q1, from Q1 to from Q1 to 1 shown on 1 shown on profit made Q2 and new Q2 and new Q2, by using Q2, by using  identifies EITHER EITHER by either D1=MR1=AR D1=MR1=AR marginal marginal output which graph graph farmer 1 correctly 1 correctly analysis analysis, will be  identifies  explaining  explaining identified. identified. referring to produced at the changes the changes  explaining output which (Reference (Reference MR1 lower price. in output in output why low will be made to made to debt farmer  explaining produced at using using quantities quantities marginal marginal makes why low lower price. between Q1 between Q1 supernormal debt farmer analysis analysis and Q2) and Q2) profits at Q1 makes  explaining  explaining  explaining in  explaining in while high supernormal the types of the types of detail types detail types debt farmer profits at Q1 profit profit of profit for of profit for makes while high  some  some EITHER EITHER normal debt farmer reference to reference to farmer in farmer in profits at Q1 makes the graph. the graph. relation to relation to (due to normal the graph by the graph by higher AC profits at Q1 Some parts correct correct and fixed (due to may be labelling, labelling, costs) higher AC incomplete. shading, or shading, or  explaining and fixed comparing comparing the change costs) AC and AR AC and AR in profits for  explaining at Q1 and Q2 at Q1 and Q2 each farmer the change  referring to  referring to  explaining in profits for the graph to the graph to why high each farmer support support debt farmer  explaining explanations explanations will leave why high . . the market debt farmer Some parts  integrating will leave may lack graphs to the market detail or are support  integrating incomplete. explanations graphs to . support Some parts explanations may lack . detail or are incomplete. N0= No response; no relevant evidence. NCEA Level 3 Economics (91400) 2013 — page 5 of 7

Question Evidence

THREE (a) (b)

(d) The perfect competitor is a price taker, as there are many sellers in the market – all producing identical products. So they cannot influence the price.

The price is set in the market (Graph Five), where S = D (P1). This is the price that the perfect competitor must accept. This is shown in Graph Four by the horizontal demand / MR curve D = AR = MR. For the monopolist, they are the only producer in the market – so by changing quantity, they influence price. This is shown by the downward-sloping demand curve in Graph Six.

They choose Q2 as here MC = MR, and profits are maximised for the same reason as the perfect competitor. The consumers (demand) then determine what price they are willing to pay for this quantity (P2). Both the perfect competitor and the monopolist choose to produce where MC = MR, where they maximise profits. This is because at any quantity – before Q1 for the perfect competitor, and Q2 for the monopolist – the marginal revenue is greater than the marginal cost.

So producing more units increases profits. This is maximised at Q1 for the perfect competitor, and Q2 for the monopolist – as after this MC > MR. So producing more will reduce overall profits.

At Q1 for the perfect competitor and Q2 for the monopolist, both producers are making supernormal profits (shaded area on Graphs Four and Six) – as their costs (AC) are less than their revenue (AR) for the quantity Q1 for the perfect competitor, and Q2 for the monopolist. This means that there are better profits in these markets than in the next best alternative, and producers in the next best alternative will want to enter this market to get the better profits. NCEA Level 3 Economics (91400) 2013 — page 6 of 7

For the perfect competitor, new producers can enter the market, as there are no barriers to entry.

This means that market supply in Graph Five shifts in the long run to SLR, causing the market price to fall. Since the perfect competitor accepts the market price, the price they receive also falls (as does their MR).

Since MR is now less than MC at Q1, they will not want to produce this quantity – as it reduces profits (marginal loss made).

This is true for all units between Q1 and Q3, and the quantity supplied by the perfect competitor will fall to Q3.

The perfect competitor now makes normal profits (AC = AR) at Q3, so no one wants to enter or leave the market. Normal profit is sufficient to keep the perfect competitor in business. So the perfect competitor can only make supernormal profits in the short run, due to no barriers to entry. In comparison, the monopolist has strong barriers to entry. This means those who wish to enter the market to get the supernormal profits are unable to. This could be due to legal barriers, like patents. The monopolist can continue to make supernormal profits in the long run, as no change will occur in the market due to the strong barriers.

N1 N2 A3 A4 M5 M6 E7 E8 TWO of : THREE of: Understanding Understanding In-depth In-depth Comprehensiv Comprehensive  shows  shows involves: involves: understanding understanding e understanding D = AR = MR D = AR =  showing  showing involves: involves: understanding involves correctly on MR correctly D = AR = D = AR =  showing  showing involves comparing and Graph Four on Graph MR correctly MR correctly D = AR = D = AR = comparing and contrasting contrasting between the  labels profit Four on Graph on Graph MR correctly MR correctly between the perfect maximising  labels profit Four Four on Graph on Graph perfect competitor and price for maximising  labelling  labelling Four Four competitor and monopolist by: EITHER the price for profit profit  correctly  correctly monopolist by: perfect EITHER the maximising maximising placing AC placing AC  explaining in competitor or perfect price and price and on BOTH on BOTH  explaining in detail why the monopolist competitor quantity for quantity for graphs to graphs to detail why monopolist or the EITHER the EITHER the have have monopolist OR PC  labels profit OR PC maximise maximising monopolist perfect perfect supernormal supernormal competitor competitor profits profits maximise profits where quantity for  labels profit profits MC = MR EITHER the maximising OR the OR the  explaining in  explaining in monopolist monopolist where MC = (discusses perfect quantity for detail why detail why MR marginal competitor or EITHER the  explaining  explaining profit is profit is (discusses profits before the monopolist perfect that that maximised maximised marginal or after).  places AC competitor monopolist monopolist at MC = MR at MC = MR profits Refers to correctly on or the sets quantity sets quantity (profit (profit before or EITHER EITHER monopolist and demand and demand maximizing maximizing after). graph to Graph Four  places AC determines determines rule) rule) Refers to support OR Six correctly on price OR price OR  explaining  explaining EITHER explanation explaining explaining graph to  identifies that EITHER that that  explaining that perfect that perfect support monopolist is a Graph Four monopolist monopolist that for competitor competitor explanation price maker OR Six sets quantity sets quantity monopolist Q has price has price but perfect  identifies and demand and demand  explaining decision set by set by competitor is a that determines determines that for determines market (and market (and price taker. monopolist price (price price (price monopolist price, while then then is a price maker) OR maker) OR Q decision PC is a price chooses chooses maker but perfect perfect determines taker and quantity quantity perfect competitor competitor price, while price is set based on based on competitor has price has price PC is a by the market this) this) is a price set by set by price taker market market  explaining taker.  explaining  explaining and price is why in the that others that others (price taker) (price taker) set by the and then and then short run PC will enter the will enter the market makes market if market if chooses chooses quantity quantity  explaining supernormal supernormal supernormal why in the profits but in profits are profits are based on based on this this short run PC the long run made for PC made for PC makes only normal due to no due to no  explaining  explaining supernormal profits can be barriers to barriers to that others that others profits but in made. Refers entry entry will enter the will enter the the long run to features of  explaining  explaining market if market if only normal the PC supernormal supernormal that others that others profits can  explaining cannot enter cannot enter profits are profits are be made. made for PC made for PC why the the market if the market if Refers to monopolist supernormal supernormal due to no due to no features of barriers to barriers to can make NCEA Level 3 Economics (91400) 2013 — page 7 of 7

profits are profits are entry. Shifts entry. Shifts the PC supernormal made for made for Supply in Supply in  explaining profits in the monopolist monopolist market to market to why the long run and due to due to right. Shows right. Shows monopolist short run. strong strong new P and new P and can make Refers to barriers to barriers to Q on Graph Q on Graph supernormal features of entry. entry. Four; area Four; area profits in the the Some parts of of long run and monopolist may be supernormal supernormal short run.  integrating incomplete. profit profit Refers to graphs into identified in identified in features of the Graph Four Graph Four the explanations. monopolist OR OR  integrating explaining explaining graphs into that others that others the cannot enter cannot enter explanations the market if the market if . supernormal supernormal profits are profits are Some parts made for made for may lack monopolist monopolist detail or are due to due to incomplete. strong strong barriers to barriers to entry so P entry so P and Q and Q unchanged. unchanged. Area of Area of supernormal supernormal profits profits identified on identified on Graph Six. Graph Six. Some parts may lack detail or are incomplete. N0= No response; no relevant evidence.

Judgement Statement Achievement Achievement Not Achieved Achievement with with Merit Excellence Score range 0 – 7 8 – 13 14 – 18 19 – 24