Economics - Unit 7 – Mr Riekert

Economics - Unit 7
 Theory of Firm – 29th January 2024
Perfect Competition Monopolistic Oligopoly Monopoly
Number of Many firms with Many firms Few large firms. Single dominant
Firms identical products. with slight firm.
product
differentiation.

Entry and Exit Low barriers: firms Low barriers: High barriers: Extremely high
Barriers can enter and exit firms can difficult for new barriers: virtually
freely. enter and exit firms to enter. impossible for
relatively new firms to
easily. enter.
Price Taker / Price taker: individual Price maker: Price maker or Price maker: firm
Maker firms have no control firms have taker depending has significant
over price. some control on the market control over
over price due behaviour. price.
to product
differentiation.

Differentiatio Homogeneous Some product Product Unique product

n products; no product differentiation differentiation with no close
differentiation. through through substitutes.
branding or branding,
quality. technology, or
location.
2 Real-life Agricultural markets t-shirt market, Automobile Local utilities
examples (e.g., wheat), Fish sunglasses industry (e.g., (e.g., water
market market Toyota), Soft supply), Patented
drink industry drugs (e.g.,
(e.g., Coca-Cola). pharmaceuticals).

One other Perfectly elastic Advertising Interdependence Monopolies may

fact demand curve for and branding among firms can engage in price
individual firms. play a crucial lead to collusion discrimination to
role in market or strategic maximize profits.
competition. behaviour.
Economics - Unit 7 – Mr Riekert

Another fact Marginal revenue Firms may Oligopolies often Monopolies may
equals price in perfect engage in non- engage in game face regulatory
competition. price theory strategies scrutiny due to
competition to like price their market
differentiate leadership. power.
products.

Diagram

Profit Maximization
TR
Total revenue ( TR )=P ( Price ) × Q ( Quantity ) Average revenue ( AR )=
(Q)
∆ TR
Marginal revenue ( MR )=
∆Q
Economics - Unit 7 – Mr Riekert

Varying Price

Cost of Production
 Short run – period of time when at least one factor of production is fixed
 Long run – period of time when all factors of production are variable
 Total cost – all cost of production on a firm
 Marginal cost – the extra or additional cost gained from producing one more unit of
output
∆ TC TC
Marginal Cost ( MC )= Average Cost ( AC ) =
∆Q Q
Economics - Unit 7 – Mr Riekert

Types of Economies of Scale

 Specialisation of Labour
 Specialisation of Management
 Bulk buying of inputs (factors of production)
 Financing economies
 Spreading of certain costs, such as marketing, over large volumes of output

Types of Diseconomies of Scale

 Co-ordinating and monitoring difficulties
 Communication difficulties
 Poor Worker Motivation