Explain the reasons for the shape of the long-run average total cost curve.

Discuss the view that governments should always try to prevent the creation of barriers to entry in a market.

PLEASE NOTE: This question part is not on the syllabus for first teaching 2020/first exams 2022.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of long run, average total cost 
• diagram showing appropriate LRATC curve (U-shaped, L-shaped, downward-sloping)
• explanation of why costs per unit of output fall as the firm realizes economies of scale and/or why costs per unit of output may rise if the firm suffers from diseconomies of scale
• examples of firms/industries which experience economies/diseconomies of scale.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definitions of barriers to entry, market
• diagram showing a firm that faces a downward-sloping average revenue (demand) curve and realizes economic profit
• explanation of barriers to entry and how they permit a firm to achieve monopoly power and realize economic profit by restricting competition from other firms
• examples of barriers to entry in practice and/or firms that have acquired monopoly power because of economies of scale, strong brands or legal barriers to entry
• synthesis or evaluation (discuss).

Discussion may include: the possible negative effects of barriers to entry on allocative and productive efficiency; economies of scale may lead to lower prices and higher output, benefitting both producers and consumers; branding reduces problems of asymmetric information and may be beneficial to consumers; legal barriers to entry may protect consumers (e.g. licensing) and stimulate R&D (e.g. patents) or lead to inefficiencies and rent-seeking.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

This was not a particularly popular question. For some candidates the nature of long-run costs was not clear and they utilized vocabulary and terms pertinent to the short run. There were a good proportion of clear responses that clearly identified the link with economies and diseconomies of scale, where they were able to identify specific sources of such economies and diseconomies. Better responses were able to identify industries, where such changes in long-run costs as output changes, might be found. 

The key to approaching this question well was to carefully consider the different types of potential barriers to entry. A number of candidates tried to make this about advantages and disadvantages of monopoly, which worked up to a point, provided the focus was on barriers to entry. However the highest-achieving responses were able to consider in some detail what form such barriers might take, and to consider whether they always needed to be prevented. Inevitably the current (at the time of writing) pandemic provided the example of vaccines and whether or not their patents needed to be protected. There was some good use of real-world examples by the highest-achieving candidates.