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In 2015 JCB, the construction equipment manufacturer, experienced a 6% fall in revenue - Edexcel - A-Level Economics A - Question 4 - 2017 - Paper 1
Question 4
In 2015 JCB, the construction equipment manufacturer, experienced a 6% fall in revenue. This resulted from a reduction in sales of construction equipment to emerging... show full transcript
Worked Solution & Example Answer:In 2015 JCB, the construction equipment manufacturer, experienced a 6% fall in revenue - Edexcel - A-Level Economics A - Question 4 - 2017 - Paper 1
Step 1
Draw a cost and revenue diagram to show the likely impact of a reduction in sales of construction equipment on JCB's profits.
Answer
To illustrate the impact of a reduction in sales on JCB's profits, we can draw a cost and revenue diagram that includes the Marginal Cost (MC), Average Cost (AC), Average Revenue (AR), and Marginal Revenue (MR) curves.
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Identify the Original Situation:
- Begin by plotting the original AR and MR curves. The point where MR intersects MC indicates the equilibrium quantity (Q1) and price (P1).
- Mark the area representing supernormal profit (Original SNP), which is the area between the AR and AC curves over the quantity produced.
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Adjustment Due to Reduction in Sales:
- Indicate the impact of the reduction in sales by shifting the AR and MR curves downwards, representing a decrease in average revenue due to lower sales.
- The new equilibrium point where the new MR intersects the original MC is Qe, and the new price is Pe.
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Indicate the New Supernormal Profit:
- Highlight the area between the new AR and AC as the new supernormal profit (New SNP). This area will be smaller than the original SNP, indicating a decrease in profit.
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Label Your Diagram Clearly:
- Ensure all elements, including axes, curves, and areas of profit, are clearly labeled for better understanding.
Step 2
In India JCB has a strong brand image and a 50% share of the market for construction equipment. This means the construction equipment market in India is likely to have a low level of:
Answer
B contestability
The strong brand image and significant market share of JCB indicate that new entrants would face barriers to entering the market, hence the level of contestability would be low. Contestability refers to the ease with which new firms can enter and exit the market; in this case, JCB's established position reduces the likelihood of credible competition.