Cost Analysis, Market Structures, and Business Growth in the Confectionery Industry

Question 2 Analysis

(a)(i) Calculating Average Cost

Total costs = €1300

No. of kilos = 130

Average cost per kilo = €1300/130 = €10

(a)(ii) Calculating Profit

Total Revenue (TR)= 130 x €30 = €3900

Total Cost (TC) = €1300

Profit (TP or P)= €3900 -€1300 = €2600

(a)(iii) Identifying Variable Costs

B Variable costs

(a)(iv) Explaining Variable Costs

Variable costs change as production changes. For example, more sugar is needed as more sweets are produced.

(a)(v) Calculating Fixed Costs

Fixed costs = rent + insurance = €500 + €50 = €550

(a)(vi) Explaining Fixed Costs

Variable costs vary with output, so when output is zero, no variable costs are incurred.

(a)(vii) Limitations to Firm Growth

Lack of finance is the most important limitation to the growth of the firm. This is because there is an inability to finance expansion in the scale of output as well as an inability to grow market share or expand into other markets. However, there are other limitations to the growth of the firm, such as a lack of demand (local market) or an availability of other factors of production. In conclusion, even if finance is available and affordable, other factors may prevent or not justify growth.

(b)(i) Economies of Scale

C. As output increases, long-run average costs fall.

(b)(ii) Supermarket Market Share

Supermarkets have such high market share in the scale of confectionery because they can buy in bulk; therefore, they sell sweets more cheaply than small firms. Moreover, they employ specialists who can determine the best place to place the sweets in order to maximize sales.

(b)(iii) Factors Affecting a Firm's Market Share

Advertising and quality of goods

(b)(iv) Oligopolies and Consumer Choice

Oligopolies always limit consumer choice as there are only a few large firms in the industry. Due to this, consumers' choices are limited. In addition, sometimes oligopolies produce identical goods or services, for example, petrol, so there is no substitute, which produces a limitation in choice. On the other hand, most oligopolies may increase choice if they focus on non-price competition, such as product differentiation. Furthermore, they can have similar products, but there is a range of features and brands, like, for instance, the additives they use in petrol to keep the engine clean and make it more economical. In conclusion, choice will be limited as the number of producers is small, but they can act in different ways depending on the product. In the petrol market, choice is limited, but in the soap powder market, a few firms produce many differentiated products.