In this revision presentation we consider the important relationship between market structure, the conduct (decisions) of businesses and the likely outcomes for economic efficiency and social welfare. The aim is to offer some suggestions for higher level evaluation in longer essay and data response questions on different market structures.

1. A* Evaluation:
Business Conduct
and Efficiency
A Level Microeconomics
Revision 2019
Tutor2u Economics

3. The conduct of businesses in
a market can have a big
impact on economic
efficiency and welfare
outcomes

4. Judge the outcomes in
markets / industries on a
case by case basis – not by
what the economics
textbook says might happen

5. Market
structure
How many firms?
How highly concentrated is the industry?
Nature of the product (e.g. how differentiated?)
Barriers to entry and exit including legal, structural
Regulated or unregulated?
Nature of supply costs (economies of scale, MES, sunk costs)
Price elasticity of demand
Number of & power of consumers / customers
Market structures
influence the actual
behaviour of businesses
Market structures are
dynamic – they change
because of regulatory
reforms, changes in
technology and other
external factors

6. Conduct of
firms
Pricing strategies (limit pricing, collusion)
Investment decisions – use of supernormal profit
Market entry and exit decisions (E.g. shut-down)
Marketing spending & other non-price competition
Employment and wage decisions in labour market
Extent of ethical / unethical behaviour
Tax avoidance – particularly for TNCs
Conduct of firms is strongly
influenced by their
objectives
e.g. profit / sales / revenue
Conduct of firms also
shaped by the regulatory
environment and by
ownership / discipline of
stock & bond markets

7. Market
performance
Efficiency (allocative, productive, dynamic)
Economic welfare (affordability, equity in access)
Social welfare (meeting environmental challenges)
Real price levels
Productivity growth
Returns to equity to drive future investment
Conduct of firms has a
large bearing on market
performance and
whether scarce resources
are allocated efficiently.

8. A* Evaluation
Points –
Market
Structures
• Look for evidence on the actual conduct
of businesses (good and bad) rather than
assuming a textbook answer
• Digital businesses can scale very quickly -
consider Uber, Airbnb, Netflix as
examples – raises competition issues
• Growing importance of sustainability
when assessing market performance –
are businesses doing enough to meet
needs of the age
• No business operates independently – all
are interdependent to a degree (use
game theory ideas in your answers)