CORRECTION RECORD

Unit 3 confirmed corrections

These changes address confirmed errors and inconsistent explanations. Original source documents are preserved. See the evidence correction record for the subsequent review of historical claims.

Size of Businesses

Before: A demerger is when a business sells off one or more of the businesses that it owns into a separate, independent company.

Now: A demerger is when a business separates one or more of its divisions into independent businesses. This need not involve selling the separated business.

Why: Aligns the definition with block 135; a sale is not a necessary condition for a demerger.

Size of Businesses

Before: demerger → firm sells off a division → remaining business more focused → easier to manage → diseconomies of scale risk ↓

Now: demerger → firm separates a division into an independent business → remaining business more focused → easier to manage → diseconomies of scale risk ↓

Why: Removes the incorrect requirement that a demerger must be a sale.

Economies and Diseconomies of Scale

Before: At outputs beyond the MES, diseconomies of scale begin to raise average cost again.

Now: In the U-shaped curve shown, diseconomies of scale raise average cost beyond the MES. In other cases, minimum average cost may persist over a range of outputs before diseconomies of scale begin.

Why: MES is the lowest output at minimum long-run average cost, not necessarily the point at which costs immediately start rising.

Economies and Diseconomies of Scale

Before: A further source, increasingly relevant in the digital economy, is network economies of scale — cost advantages gained as an online platform expands, since adding extra products, sellers or customers to an established platform (e.g. an online marketplace) costs very little relative to the extra revenue it generates.

Now: A further source of economies of scale in the digital economy is spreading the fixed costs of an online platform over more transactions, where serving additional users has a low marginal cost. This is distinct from a network effect: the platform becomes more valuable to users as more people use it.

Why: Separates supply-side average-cost economies from demand-side network effects; revenue growth alone is not a cost economy.

Profits and Losses

Before: A common slip in exams: don't assume a firm shuts down the moment it makes a loss — as long as AR ≥ AVC in the short run, continuing to produce loses less than shutting down immediately, since some contribution is still made towards fixed costs.

Now: A common slip in exams: don't assume a firm shuts down the moment it makes a loss — when AR > AVC at its chosen output in the short run, continuing to produce loses less than shutting down, since some contribution is made towards fixed costs. At AR = AVC, operating and shutting down give the same loss, equal to fixed costs.

Why: Corrects the equality case, consistent with the existing shutdown explanation elsewhere.

Monopolistic Competition

Before: Only normal profit is earned in the long run, but firms retain some incentive to differentiate/innovate in the short run to protect supernormal profit, so the incentive is stronger than under perfect competition, though funding is still constrained in the long run

Now: Only normal profit is earned in the standard long run, but firms still have incentives to differentiate and innovate to gain a temporary advantage. Limited retained profit may constrain funding; the strength of innovation depends on finance, rivalry and the scope for differentiation.

Why: Removes the unconditional ranking against perfect competition and distinguishes incentives from funding.

Monopolistic Competition

Before: Limited

Now: Not guaranteed

Why: Dynamic efficiency cannot be assigned a fixed level solely from this market structure.

Monopolistic Competition

Before: Higher prices than under perfect competition, since P > MC (allocative inefficiency); firms also have some X-inefficiency, weakening the pressure to minimise costs

Now: P > MC in the standard model, indicating allocative inefficiency in the absence of externalities; weaker competitive pressure may allow X-inefficiency. A direct price comparison with perfect competition also depends on costs and product characteristics.

Why: A markup does not itself prove higher prices across different products and costs, or establish X-inefficiency.

Monopolistic Competition

Before: Resources are used less efficiently than under perfect competition, since neither allocative nor productive efficiency is achieved

Now: In the standard long run, P > MC and output is below minimum AC: neither allocative nor productive efficiency is achieved. These model results should be weighed against the benefits of product variety.

Why: Specifies the long-run model instead of making an unqualified welfare ranking.

Oligopoly

Before: concentration ratio ↑ → market share concentrated in fewer firms → market power ↑ → competitive pressure ↓

Now: concentration ratio ↑ → market share concentrated in fewer firms → may increase market power and weaken competitive pressure, depending on entry barriers and rivalry

Why: Concentration alone does not establish market power; aligns with the neighbouring qualifications.

Monopoly

Before: Economies of scale may keep average costs (and potentially prices) lower than under smaller competing firms; price discrimination can extend access to previously priced-out groups via cross-subsidisation

Now: Economies of scale may keep average costs (and potentially prices) lower than under smaller competing firms; price discrimination can extend access to previously priced-out groups through lower prices in those markets

Why: Lower prices to one group do not necessarily require cross-subsidisation.

Monopoly

Before: Retained supernormal profit funds investment, R&D, and resilience to short-term shocks; can exploit economies of scale; price discrimination raises total profit

Now: Retained supernormal profit can fund investment, R&D, and resilience to short-term shocks; the firm may exploit economies of scale. Price discrimination can raise profit where differences in demand can be exploited and implementation costs do not outweigh the gains.

Why: Profit provides funding but does not guarantee investment, and discrimination is not costless or invariably profitable.

Contestability

Before: In a highly contestable market, incumbents cannot set price above average cost — if they did and earned supernormal profit, new firms would enter and compete that profit away.

Now: In the model of a perfectly contestable market, incumbents cannot sustain price above average cost: supernormal profit attracts hit-and-run entry that competes it away. A highly contestable market may face strong entry pressure without meeting all the assumptions of perfect contestability.

Why: The zero-supernormal-profit conclusion requires the perfect-contestability assumptions.

The Demand for Labour

Before: A rise in the price of capital relative to labour makes labour the relatively cheaper input, so firms substitute towards demanding more labour.

Now: A rise in the price of capital relative to labour makes labour the relatively cheaper input, encouraging substitution towards labour where this is feasible. The overall effect on labour demand also depends on whether higher costs reduce output and whether capital and labour are substitutes or complements.

Why: Separates substitution from scale and complementarity effects rather than guaranteeing higher labour demand.

The Determination of Wage Rates in Competitive and Non-Competitive Markets

Before: In the long run, however, if private-sector wages rise while public-sector wages do not, workers gradually move from the public to the private sector, forcing the government to raise public-sector wages to expand supply and retain enough workers — so over a long period, public- and private-sector wages tend to rise by similar percentages even though they can diverge in the short term.

Now: In the long run, if private-sector wages rise while public-sector wages do not, some workers may move to comparable private-sector jobs. Recruitment and retention difficulties can put pressure on the government to raise public-sector wages, but the response depends on budgets, bargaining arrangements and the availability of alternative jobs.

Why: Retains the recruitment mechanism without an unsupported prediction of equal percentage wage growth.

The Determination of Wage Rates in Competitive and Non-Competitive Markets

Before: trade unions and the minimum wage — both a trade union and a statutory minimum wage work the same way against a monopsonist: by imposing a wage floor, they remove the monopsonist's ability to pay progressively less to attract each extra worker, at least up to that floor.

Now: trade unions and the minimum wage — a negotiated or statutory wage floor can counter monopsony power. Over the range where enough workers are willing to work at that wage, the firm can hire extra workers at the same wage, so marginal labour cost equals the wage. A suitably set floor can raise both wages and employment relative to the unregulated monopsony outcome; a floor set too high can reduce employment.

Why: Corrects the reversed wage-supply relationship and explains why the wage floor removes the marginal-cost uplift over the flat segment.

Government Intervention in Product Markets

Before: A related route specific to the labour market is trade union power: where trade unions push for higher wages above the free-market equilibrium, they can act as a counterbalance to exploitative monopsony power, and can also increase job security.

Now: A related route specific to the labour market is trade union power: a negotiated wage above the wage paid by an unregulated monopsonist can counterbalance employer power and may raise employment if appropriately set. This does not require a wage above the competitive equilibrium; an excessively high negotiated wage can reduce employment. Unions may also improve job security.

Why: Distinguishes the monopsony wage from the competitive equilibrium wage.

Government Intervention in Product Markets

Before: Efficiency: May fall slightly if regulation limits firms' flexibility to minimise cost

Now: Efficiency: May fall if regulation limits firms' flexibility to minimise cost; the extent depends on the regulation and the market

Why: Removes an unsupported claim about the size of the efficiency effect.

Revenue

Before: Unitary elastic (PED = 1)

Now: Unitary throughout the relevant price range (|PED| = 1)

Why: Match Unit 1 and distinguish constant unit elasticity from a point on a straight demand curve.

Economies and Diseconomies of Scale

Before: A further cause is X-inefficiency

Now: A separate cost risk is X-inefficiency

Why: Distinguish operating above attainable costs from scale diseconomies.

Economies and Diseconomies of Scale

Before: in a very large firm facing less competitive pressure, average costs may end up higher than they need to be simply because management lacks the incentive to minimise costs.

Now: Weak competitive pressure may reduce the incentive to minimise costs, leaving a firm above its attainable cost at a given output. This is X-inefficiency; it can occur without an increase in scale and is distinct from diseconomies caused by managing a larger organisation.

Why: Keep the scale and efficiency concepts distinct.

Economies and Diseconomies of Scale

Before: Type of diseconomy

Now: Source of higher average costs

Why: The table also includes a separate inefficiency risk.

Economies and Diseconomies of Scale

Before: X-inefficiency

Now: X-inefficiency (separate from scale diseconomies)

Why: Identify the distinction in the summary table.

Economies and Diseconomies of Scale

Before: Weak competitive pressure removes the incentive to minimise costs

Now: Weak competitive pressure may leave costs above the attainable level at a given output; this need not result from increased scale.

Why: Avoid treating weak competition as proof of diseconomies of scale.

Oligopoly

Before: Non-collusive behaviour (firms actively competing) is more likely with several firms, a significant cost advantage for one firm, homogeneous products, or a saturated market.

Now: Non-collusive behaviour may be more likely when there are more firms, a strong incentive to undercut rivals or substantial differences in costs. Homogeneous products can intensify price competition, but also make prices easier to compare and deviations from an agreement easier to detect. Their effect on collusion depends on monitoring, entry barriers and the gains from cheating.

Why: Product homogeneity can support rivalry or coordination; it has no unconditional direction.

The Determination of Wage Rates in Competitive and Non-Competitive Markets

Before: public-sector wages held below private-sector wages → workers gradually leave the public sector for higher pay elsewhere → public sector faces a staffing shortfall → government forced to raise public-sector wages to restore supply

Now: Public-sector pay becomes less attractive relative to available alternatives → recruitment and retention may worsen → government faces pressure to improve pay or conditions. Its response depends on budgets, bargaining and policy choices; staffing shortages can persist.

Why: Align the exam chain with the qualified explanation above.

Government Intervention in Product Markets

Before: regulator has less information than the firm it regulates → sets price/profit cap that is too generous or too strict → intervention fails to achieve its intended outcome → a form of government failure

Now: A regulator with incomplete information may set a price or profit cap too loosely or too tightly → the policy may be less effective than intended. This constitutes government failure if its total welfare outcome is worse than the relevant alternative, not merely because the objective is only partly achieved.

Why: Failure to meet a target is not sufficient evidence of government failure.

Size of Businesses

Before: Greater focus on core business, funds raised from the sale, loss-making parts removed

Now: Greater focus may improve performance; funds are raised only if the separation involves a sale. The effect also depends on which activities are retained.

Why: Demergers do not necessarily involve a sale or guarantee stakeholder gains.

Size of Businesses

Before: Job security ↑ if loss-making parts are removed, reduced cultural conflict, greater focus improves profitability

Now: A clearer business focus may support jobs, but restructuring can also involve redundancies or weaker job security.

Why: Demergers do not necessarily involve a sale or guarantee stakeholder gains.

Size of Businesses

Before: Greater competition (more independent firms) → lower prices; more focused firms better meet consumer needs

Now: Independent firms may compete more strongly and better meet consumer needs; prices and quality depend on the resulting market structure and efficiency.

Why: Demergers do not necessarily involve a sale or guarantee stakeholder gains.

Types of Businesses

Before: Sony Ericsson (a joint venture between Sony and Ericsson to combine consumer electronics expertise with telecoms technology) is a classic example.

Now: Sony Ericsson is a historical example of a joint venture combining consumer electronics and telecommunications expertise. Sony completed its acquisition of Ericsson’s 50% stake on 15 February 2012, ending the joint venture and making the business wholly owned by Sony.