JC Economics Essay Market Structures & Pricing Behaviour Model Answers
In the Market Structures topic, when we assume profit maximising condition as the objective for firms, there a few ways to do so, and of the conduct is to engage in pricing behaviour, including price discrimination, as long as the conditions of it are met.
Question
(a) “Consumers’ tastes and preferences is the most important factor in influencing a firm’s pricing behaviour.” Discuss this assertion. (25)
JC Economics Essay – Profit Maximisation & Pricing Behaviour
Introduction:
A firm’s pricing behaviour depends on the firm’s objectives. Assuming that a firm is profit maximising, it will aim to produce at to the point whereby MR MC.
Body:
Thesis
Changes in consumers’ tastes and preference as a non-price determinant of demand would cause shifts in the revenue curves i.e. AR & MR curves, hence it is an important factor influencing a firm’s behaviour.
(Qn: how does the diagram look like, if any?)
Anti-thesis
There is a need to consider the other non-price determinants that could influence on a firm’s revenue curves. In light of revenue maximisation, there is also a need to consider the price elasticity of demand concept pertaining to the good or service that may not be directly linked to consumers’ tastes and preferences.
In addition, there is a need to consider for changes in cost conditions as well, since the profit-maximising condition is given by MR MC.
In markets which are oligopolistic, there is also a need to account for rival firms strategies in pricing decisions. Examples include petrol stations, taxi markets and so on Not all firms aim to maximise their profits in the short run; there could be alternative aims that firms pursue. Briefly elaborate on a few of these alternative aims of firms.
EV: Depends on firm’s objectives. We’ve been assuming profit max. If the objective is to maximise market share, we may even seen a firm setting price below AC, aka price war, so that can gain market share at the expense if rival firms. (Simply the case of an oligopolistic firm)
EV: Depends if there are any government intervention. In the case of a monopoly, the firm is definitely regulated. If it is a natural monopoly, price are set such that P = MC or P = AC.
Qn: what other evaluation ideas can you come up with?
More of developing evaluation skills in our Accelerated JC Economics Revision Lessons
Conclusion
Consumers’ tastes & preferences are likely to have a significant influence on a firm’s pricing decisions. However, it is unlikely to be the most important in most markets, as there are other factors that influence a firm’s pricing decision, such as other non-price determinants for demand, cost factors, as well as rival firms’ strategies. Moreover, not all firms’ aim to be profit-maximising and the pursuit of other alternative aims would influence a firm’s pricing behaviour as well.
JC Econs tuition teacher’s comments:
1. The question focuses on price competition. If the qn changes focus to non price competition, then specifically, we can look at product differentiation, which can be either perceived or real differentiation.
(Qn: can we sketch any relevant diagram?)
Mark Scheme
High Level 3: (18-20 marks)
Answer shows good knowledge of how consumers’ tastes & preferences could influence a firm’s pricing decision (with clear linkages to revenue curves & profit maximising condition).
Excellent consideration of alternative factors that could influence a firm’s pricing decision, including rival firm’s strategies and alternative theories of firms.
Excellent rigour in economic analysis and development.
Excellent attempts at contextualisation with a wide variety of relevant examples.
Low Level 3
Answer shows good knowledge of how consumers’ tastes & preferences could influence a firm’s pricing decision (with clear linkages to revenue curves & profit maximising condition).
Good consideration of alternative factors that could influence a firm’s pricing decision, including rival firm’s strategies and alternative theories of firms.
Good rigour in economic analysis and development.
Good attempts at contextualisation with some relevant examples.
High L2
Answer shows good knowledge of how consumers tastes & preferences could influence a firm’s pricing decision (with clear linkages to revenue curves & profit max condition).
Some consideration of alternative factors that could influence a firm’s pricing decision including cost consideration or any factor other than non-price determinant of demand.
Some rigour in economic analysis and development
Some attempts at contextualisation with a few examples.
Low L2
Answer shows some knowledge of how consumers tastes & preferences could influence a firm’s pricing decision. Some consideration of alternative factors that could influence a firm’s pricing decision, including other DD factors.
Lack of rigour in economic analysis.
Minimal contextualisation with minimal examples.
High L1
Answer shows some knowledge of how consumers’ T&P could influence a firm’s pricing decision.
Minimal or no consideration of
alternative factors that could influence a firm’s pricing.
Errors and inconsistencies occur in the explanation, showing lack of understanding of the economic concepts. Lack of economic analysis
Minimal or no contextualisation.
Low L1
Answer is mostly irrelevant.
Only few valid points which do not clearly address the question.
Evaluation (5 marks)
E2
Judgement based on analysis, with a consideration of the relative significance of alternative factors that influence a firm’s pricing behaviour.
E1
Mainly unexplained judgement.