Discuss one likely reason for the rise in BT’s profit

Edexcel A-Level Economics Paper 1 June 2019 Extract

Discuss one likely reason for the rise in BT’s profit (Figure 2, Extracts B and C). Use a cost and revenue diagram to support your answer. (12 marks)

One main reason that Extract B mentions that BT 'reported a rise in profit' would be an increase in BT's market share. As BT tookover EE, they were able to increase their market share. As BT enjoyed higher market share, they gain more customers and this leads to a 'increased revenue'. This leads to BT being able to change their output from MC=MR1 to MC=MR2 which is the new profit maximising level of output. The diagram shows supernormal profits increasing from the black rectangle to the red rectangle 0q2p2c2.

Additionally, as BT gain more market share, they are able to increase their output. This makes it easier for them to exploit more economies of scale, which means they can reduce their long-run average costs by taking advantage of specialist managers or bulk-buying materials. These lower long-run average costs would allow BT to earn even greater profits.

However, BT may be forced into making lower profits due to interference from Ofcom, who called BT out for providing 'poor value for money'. This led to BT decreasing their rental charges for landline-only customers from £18.99 to £11.99 per month. As this reduces BT's supernormal profits, this also reduces their ability to reinvest and innovate and achieve dynamic efficiency. This might make it slightly easier for other firms to compete with them, although the fact that they have cut their prices might also make it harder. Overall, stricter regulation from Ofcom is most likely to lead to a reduction in BT's profits but it depends on how Ofcom treat BT's competitors.

A-Level Economics Tutoring

I offer one-to-one and small group A-Level Economics tutoring for students across the UK and internationally. With 87+ five-star Google reviews and tutoring experience since 2017, I specialise in helping students understand difficult concepts and improve their exam technique.