AQA A-level Economics: Efficiency, market structure and surplus (7136) – Revision Notes

These notes condense AQA A-level Economics (7136) content sections 4.1.5.10 and 4.1.5.11 (website numbering 3.1.5): efficiency, market structure and consumer and producer surplus. Neither section carries an AS-only or A-level-only marker in the specification. Fuller explanations sit in the study guide. Test yourself with the practice set, the free diagnostics, the course hub and the checklist. Every figure here is made up.

Core definitions

Term	Definition
Static efficiency	Efficiency at one point in time, given fixed technology and capital
Productive efficiency	Producing at the output that minimises average total cost (ATC), where MC = ATC
Allocative efficiency	Price equals marginal cost (P = MC), so resources match what consumers value
Dynamic efficiency	Efficiency over time through R&D, investment and technological change
Consumer surplus	Willingness to pay minus price paid, summed over units bought
Producer surplus	Price received minus the minimum price producers would accept (the MC curve)
Deadweight loss	Surplus lost because mutually beneficial trades do not happen

The two static conditions

	Productive	Allocative
Condition	Minimum ATC	P = MC
Diagram test	Output where MC cuts ATC from below	Output where price line meets MC
Failure looks like	ATC above its minimum	Price above MC (too little made)
Long-run perfect competition	Met	Met

Why P = MC. Price shows the value of the last unit to the buyer. MC shows what it costs to make. If value is above cost, a unit is missing.

Dynamic efficiency

• R&D: new products and cheaper processes.
• Investment in human capital: training and skills raise productivity.
• Investment in non-human capital: machines, software and premises.
• Technological change: the ATC curve shifts down over time.

Chain for supernormal profit. Barriers protect profit, so there is cash for R&D, so costs fall or products improve later. Counter-chain: little rivalry means little pressure, so the firm keeps the profit and does not innovate.

Conduct and performance indicators

Conduct	Performance
Pricing behaviour	Price level and profit margin
Output and capacity decisions	Unit costs and productivity
Advertising and non-price competition	Quality and variety
R&D and investment spending	New products and cost reductions over time
Collusion or rivalry	Consumer surplus and total surplus

Method for comparing two structures.

1. Pick one static and one dynamic indicator.
2. Say what each shows about P against MC or ATC against its minimum.
3. Give a reason the number could mislead.
4. Reach a judgement about the case given.

Surplus: reading a diagram

• CS: triangle under demand and above the price line.
• PS: area above the supply (MC) curve and below the price line.
• Total surplus: CS + PS, greatest where P = MC.
• Deadweight loss: triangle between demand and MC over the units not produced.

Structures at a glance (typical tendencies, not rules)

Structure	Static performance	Dynamic performance
Long-run perfect competition	P = MC and minimum ATC	Little spare profit, but strong cost pressure
Monopolistic competition	P above MC, ATC above its minimum	Product variety and small changes
Oligopoly	P usually above MC	Can be high where rivals fight on quality and R&D
Monopoly	P above MC, large deadweight loss	Depends on whether protected profit is reinvested

Always test the tendency against the case you are given.

Worked reminder: competition against monopoly

Demand: P = 92 − 2Q. MC (market supply): P = 32 + Q.

Competitive: 92 - 2Q = 32 + Q  ->  Q = 20, P = 52
CS = 0.5 x 20 x (92 - 52) = 400
PS = 0.5 x 20 x (52 - 32) = 200      total = 600

Monopoly: MR = 92 - 4Q = 32 + Q  ->  Q = 12, P = 68, MC = 44
CS = 0.5 x 12 x (92 - 68) = 144
PS = 12 x 68 - (32 x 12 + 0.5 x 12 x 12) = 816 - 456 = 360
DWL = 0.5 x (20 - 12) x (68 - 44) = 96
Check: 144 + 360 + 96 = 600

Reading it. Consumers lose 256 (400 down to 144). Producers gain 160 (200 up to 360). The difference, 96, is deadweight loss.

Price discrimination and surplus

Type	CS	PS	Deadweight loss
No discrimination (monopoly)	Falls	Rises	Present
Perfect (first degree)	Zero	Maximum	Zero
Third degree	Usually falls	Rises	Depends on whether output rises

Method in steps for third-degree questions.

1. Find MR = MC in each market.
2. Read price from each demand curve.
3. Compare profit and CS with a single price.
4. Say whether total output changed. If it did not, welfare tends to fall slightly. If it rose, welfare may rise.

Evaluation hooks. Perfect discrimination removes deadweight loss but moves all surplus to the firm. Extra profit could fund investment, or it could just be kept. Some groups may only be served because of discrimination.

Worked reminder: third-degree price discrimination

Constant MC = 14. Market 1: P = 46 − Q. Market 2: P = 30 − Q (illustrative).

Discriminating:
 Market 1: 46 - 2Q = 14 -> Q = 16, P = 30, profit = 16 x 16 = 256
 Market 2: 30 - 2Q = 14 -> Q = 8,  P = 22, profit = 8 x 8  = 64
 Profit = 320; CS = 0.5 x 16 x 16 + 0.5 x 8 x 8 = 160

Single price (P <= 30): Q = 76 - 2P, so P = 38 - 0.5Q, MR = 38 - Q
 MR = MC -> Q = 24, P = 26 (market 1 buys 20, market 2 buys 4)
 Profit = 24 x 12 = 288; CS = 200 + 8 = 208

Reading it. Profit rises by 32, CS falls by 48, and total output is 24 either way. Profit plus CS drops from 496 to 480, so welfare is slightly lower. The fully competitive total is 640 (512 from market 1 plus 128 from market 2), so both regimes sit below it.

Productive efficiency: quick test

For TC = F + aQ + bQ², the lowest ATC is at Q = √(F/b). With F = 100 and b = 0.25 that gives Q = 20. Always check by confirming that MC equals ATC at that output. If you are given a table instead, work out ATC for each row and pick the lowest. Remember that a table only shows the outputs listed, so say “lowest of those shown”.

Evaluation prompts

• Is the market contestable, or does the firm have protected profit?
• Is the time horizon long enough for dynamic gains?
• Who gains: consumers, workers, shareholders, society?
• Does the evidence you have show a trend, or a single year?

Must-know distinctions

• Productive efficiency concerns what each unit costs to make. Allocative efficiency concerns how price compares with marginal cost.
• Static efficiency is about now. Dynamic efficiency is about change over time.
• Deadweight loss is lost surplus. Supernormal profit is a transfer and is not deadweight loss.
• A monopoly can have lower ATC if scale economies are large. It still usually has P above MC.

Self-test

1. What must be true of average total cost for a firm to be productively efficient?
2. State the condition for allocative efficiency.
3. A firm has TC = 100 + 2Q + 0.25Q². Find the output at which ATC is lowest, and that ATC.
4. In a market with demand P = 92 − 2Q and supply P = 32 + Q, find equilibrium quantity and price.
5. Calculate consumer and producer surplus at that equilibrium.
6. A monopoly faces the same demand and cost curves. Find its output and price.
7. Calculate the deadweight loss.
8. With perfect price discrimination in that market, what are output, consumer surplus and producer surplus?
9. Name two conduct indicators and two performance indicators.
10. Give one reason supernormal profit might support dynamic efficiency, and one reason it might not.
11. Give one reason a monopoly could have lower ATC than a competitive industry.

Answers

1. Output where ATC is at its minimum (MC = ATC).
2. Price equals marginal cost (P = MC).
3. ATC = 100/Q + 2 + 0.25Q. MC = 2 + 0.5Q. Setting MC = ATC gives Q = 20, and ATC = 5 + 2 + 5 = 12.
4. 92 − 2Q = 32 + Q, so Q = 20, P = 52.
5. CS = 0.5 × 20 × 40 = 400. PS = 0.5 × 20 × 20 = 200.
6. MR = 92 − 4Q = 32 + Q, so Q = 12, P = 92 − 24 = 68.
7. 0.5 × (20 − 12) × (68 − 44) = 96.
8. Output 20, CS 0, PS 400 + 200 = 600.
9. Conduct: any two of pricing, advertising, R&D spending, collusion. Performance: any two of profit margin, unit cost, new products, consumer surplus.
10. Yes: profit can finance costly R&D. No: a firm with little rivalry may keep the profit and not innovate.
11. Large economies of scale: one firm may spread fixed costs over more output than several small firms could.

Where marks are usually lost

• Writing “lowest price” when the question asks for minimum average cost.
• Calculating deadweight loss with the wrong base or height. Use the quantity gap and the P − MC gap at the monopoly output.
• Reading the monopoly price from the MR curve. Output comes from MR = MC, but price comes from demand.
• Stating a conclusion about welfare with no figures or diagram to support it.
• Treating dynamic efficiency as certain. Advice for judgement answers: give a condition under which the claim holds.
• Listing indicators without saying what each reveals about efficiency.
• Describing price discrimination without linking it to surplus.

Official syllabus

Source: the AQA specification for AS and A-level Economics (versions 7135 and 7136), for first teaching from September 2015, version 1.3, covering content sections 4.1.5.10 and 4.1.5.11.