Market Power: Production and Costs (HL only)

18 Theory of the Firm - Production, Costs, Revenues, & Profit (mine)

2.11 Market failure—market power (HL only)

Perfect competition–many firms, free entry, homogeneous products

Monopoly—single or dominant firm, high barriers to entry, no close substitutes

Imperfect competition

Rational producer behaviour—profit maximization (HL only)

* AR = Average revenue, AC = Average cost

Calculation (HL only): profit, MC, MR, AC, AR from data

Diagrams for Revenue and Cost:

1. Total Product

2. Average/Marginal Product

3. Total Costs (TC, AVC, ATC)

4. Average/Marginal Cost

5. Long Run Average Total Cost

6. Average/Marginal/Total Revenue (for Price Taker)

7. Average/Marginal/Total Revenue (for Price Maker)

8. Normal Profit

9. Economic Profit

10. Economic Loss

Costs of production: economic costs:

- Explain the meaning of economic costs as the opportunity cost of all resources employed by the firm (including entrepreneurship).

- Distinguish between explicit costs and implicit costs as the two components of economic costs.

Costs of production in the short run:

- Explain the distinction between the short run and the long run, with reference to to fixed factors and variable factors.

- Distinguish between total costs, marginal costs and average costs.

- Draw diagrams illustrating the relationship between marginal costs and average costs, and explain the connection with production in the short run.

- Calculate total fixed costs, total variable costs, total costs, average fixed costs, average variable costs, average total costs and marginal costs from a set of data and/or diagrams.

Total Costs, Average Costs, Variable Costs Marginal costs:

Why do the MC and ATC curves look the way they do? 

Short-run profit maximization rule sylabus requirements:


Market Structures

Syllabus Requirements:


19 Theory of the Firm - Market Structures (mine)

Monopoly Syllabus Requirements:

Monopolistic Competition and Oligopoly syllabus requirements: 

Syllabus Reqs:

Degrees of market power

Diagram: perfectly competitive firm as price taker where,

*P = D = AR = MR

Diagram: perfectly competitive firm showing:

Diagram: equilibrium in perfectly competitive market with reference to allocative efficiency when P = MC or MB = MC, maximum social/community surplus.

*P = Price, D = Demand

Monopoly

Diagram: market power where AR > MC

Diagram: monopolist showing:

Diagram: price/quantity comparison of a monopoly firm with a perfect competitive market. Also showing welfare loss under the monopoly.

Diagram: natural monopoly

Oligopoly

Diagram: collusive oligopoly acting as a monopoly

Monopolistic competition

Diagram: monopolistically competitive firm showing:

Diagram: monopolistic competition (with a more elastic demand curve compared to a monopoly)

Advantages of large firms having significant market power, including:

Risks in markets dominated by one or a few very large firms

Government intervention in response to abuse of significant market power