Topic 3 of 6 · Form 6
Theory of the firm and market structures
Short- and long-run costs, the law of diminishing returns, economies and diseconomies of scale (internal and external), minimum efficient scale; total, average and marginal revenue.
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Costs and revenue
Short- and long-run costs, the law of diminishing returns, economies and diseconomies of scale (internal and external), minimum efficient scale; total, average and marginal revenue.
Objectives of firms
Profit maximisation (MC = MR), revenue maximisation (MR = 0), sales maximisation, satisficing, principal–agent problem.
Market structures
Perfect competition, monopolistic competition, oligopoly (kinked demand curve, game theory and the prisoner's dilemma, collusion and cartels), monopoly (natural monopoly), contestable markets; price discrimination.
Worked example: A monopolist faces MR = 100 − 4Q and MC = 20. Find the profit-maximising output.
100 − 4Q = 20 → Q = 20 units
Efficiency
Productive, allocative, dynamic and X-efficiency in different structures.
Labour markets
Marginal revenue product theory; wage determination; trade unions; minimum wages; monopsony; wage differentials; economic rent and transfer earnings.
Check yourself
- Where does a firm maximise profit?
- What is price discrimination?
- Define economic rent.
Show answers
- Where marginal cost equals marginal revenue (with MC rising).
- Charging different prices to different consumers for the same product for reasons unrelated to cost.
- Earnings above the transfer earnings (the minimum needed to keep a factor in its current use).
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