2. Contestable markets
Where an entrant has access
to all production techniques
available to existing
businesses and entry
decisions can be reversed
without cost
3. 1. Knowledge of concepts and facts
2. Application of knowledge and
understanding
3. Analysis: explain economic theory
4. Evaluation: prioritise evidence and
arguments; make reasoned judgements
and recommendations; reach and
present supported conclusions
The exam tests ............
4. Build real world examples
into your notes
Common industries used
include food retailers,
energy, banks, airlines,
technology sectors
15. Great diagrams lift your
script!
Poor ones test
examiner patience
Diagrams must be big
16. Cost & Price
Output (Q)
Pricing in a Contestable Market – Some Alternatives
Cost & Price
Output (Q)
Highly Contestable Market –
Profit Maximising Output
Highly Contestable Market –
Pricing to Maximise Revenue
AC
AR
MR
MC
AC
AR
MR
MC
17. Cost & Price
Output (Q)
Pricing in a Contestable Market – Some Alternatives
Highly Contestable Market –
Profit Maximising Output
AC
AR
MR
MC
In the left hand
diagram draw in
the profit
maximising output
and price (label it
Q1 and P1.)
Q1
P1
C1
Price > Average Cost
Supernormal profits
High profits send
signals to other
suppliers
18. Cost & Price
Output (Q)
Pricing in a Contestable Market – Possible Long Run Equilibrium?
Highly Contestable Market –
Profit Maximising Output
AC
AR
MR
MC
In the long run if
the market is highly
contestable which
level of price and
output is probable?
(Label this Q2 and
P2).
Q1
P1
C1
When AC = AR,
normal profits made,
a return sufficient to
keep factor inputs in
their present use
P2
Q2
19. Pricing in a Contestable Market – Some Alternatives
Cost & Price
Output (Q)
Highly Contestable Market –
Pricing to Maximise Revenue
AC
AR
MR
MC
In the right hand
diagram show the
price and output
for a firm that
seeks to maximise
total revenue
20. Pricing in a Contestable Market – Some Alternatives
Cost & Price
Output (Q)
Highly Contestable Market –
Pricing to Maximise Revenue
AC
AR
MR
MC
In the right hand
diagram show the
price and output
for a firm that
seeks to maximise
total revenue
P1
Revenue maximised
when marginal
revenue = zero
21. Pricing in a Contestable Market – Some Alternatives
Cost & Price
Output (Q)
Highly Contestable Market –
Pricing to Maximise Revenue
AC
AR
MR
MC
In the right hand
diagram show the
price and output
for a firm that
seeks to maximise
total revenue
P1
C1
Revenue maximised
when marginal
revenue = zero
Still some super
normal profits made
Lower price and
higher output than
MC=MR
Revenue max means
a lower profit margin
is made – usually
good for consumer
welfare – but profit
has value too!
22. Hit and Run Entry
Entry to a market in hope of an immediate profit
Absence of sunk costs makes this easier!
24. Examples of Exit Barriers
Asset write-offs Lost consumer goodwill Redundancy costs
Costs
Exit costs can be an
important barrier to
contestability in
markets – many
students ignore them!
25. Get help from fellow
students, teachers and
tutor2u on Twitter:
@tutor2u_econ