Costs, revenue and market structures

ZIMSEC A Level · Economics · Form 5, Form 6

Short run: at least one factor is fixed. Law of diminishing returns: adding variable factors to a fixed factor eventually raises marginal cost.
Total cost = fixed + variable cost; average cost = TC ÷ Q; marginal cost = change in TC from one more unit.
Long run: all factors variable; economies and diseconomies of scale shape the long-run average cost curve.

Total revenue = P × Q; marginal revenue = change in TR from one more unit.
Profit is maximised where MC = MR.
Normal profit is the minimum to keep a firm in the industry; supernormal profit is above that.

Perfect competition: many firms, homogeneous products, free entry and exit, perfect information; firms are price takers; only normal profit in the long run.
Monopoly: a single seller with barriers to entry; a price maker; can earn supernormal profit in the long run; possible inefficiency but may fund research (economies of scale, natural monopolies such as electricity grids).
Monopolistic competition: many firms with differentiated products (hairdressers, restaurants); normal profit in the long run.
Oligopoly: a few large firms (mobile networks, banking, cement); interdependence, price rigidity (kinked demand curve), collusion and non-price competition.

Allocative efficiency (P = MC), productive efficiency (lowest point of AC), and dynamic efficiency (innovation over time).

Exam tip: For market structure questions, describe the features, then explain the profit outcome in the short and long run with diagrams.

Show answers

Where marginal cost equals marginal revenue.
Any two: economies of scale, patents/licences, high start-up costs, brand loyalty, control of resources.
Firms fear rivals will match price cuts but not price rises (kinked demand curve).

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