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Microeconomics by Mind Map: Microeconomics
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Law of diminishing returns

Marginal product will start to fall after a certain point

Necessary conditions, All other factors of production are fixed, Assume labour is identical

Marginal Product: the extra output that can be produced by using one more unit of the input (for instance, the difference in output when a firm's labor usage is increased from five to six units), assuming that the quantities of no other inputs to production change.

Short run: immediate future, with 1 factor fixed

Marginal returns: returns when one unit of labour is added

Increasing returns to scale example

double labour and get triple output

decreasing returns to scale example

double labour and get same output

A decrease in marginal cost per unit output as one factor of production is increased while other factors remain fixed

External economies of scale (clusters)


overlaps between clusters means that skills and technology are shared between clusters

All skilled workers are close together

Low unemployment in certain areas means wages are higher

Clusters act as a centre for production

Definition: Benefits that arise in an industry due to clusters and are experienced by numerous firms.


High land values

Lack of space


Profit maximisation

Normal profit

That level of profit which is just sufficient to keep all factors of production in their present use. "Breaking even"


Supernormal profit

Anything above normal profit

The role of profit in the economy

Allocation of factors of production, Scarce factor resources tend to flow where the expected rate of return or profit is highest

Signal for market entry

Promotes innovation, If companies earn supernormal profit it allows them to undertake investment to promote dynamic efficiency

Investment, Retained profits remain the most important source of finance for companies undertaking capital investment projects

Rewards entrepreneurs for bearing risk, In return for bearing risk entrepreneures need the potential to earn profits

Economic performance indicator, profits made by businesses throughout the economy provide important signals about the general health of the macroeconomy


Consumer surplus

The difference between the price the consumer is willing to pay and the market price

Producer surplus

The difference between which a producer is prepared to supply a good and the market price

Static efficiency (occurs at a given point in time)

Allocative efficiency, Exists when goods are produced in line with consumer preferences (P=MC)

Productive efficiency, Occurs at the lowest point on the average cost curve

X efficiency, Occurs when a firm is not producing on its average cost curve. Perhaps due to organisational slack. This is usually associated with a monopoly.

Dynamic efficiency (occurs over time)

Deadweight loss

Net loss of economic welfare from price being raised above marginal cost.

Perfect competition

Sunk costs

Costs that cannot be recovered eg: advertising, training of staff, highly specialised equipment

The basic assumptions required for conditions of pure competition to exist are

Many buyers and sellers

No barriers to entry or exit

Identical products

Perfect information

No externalities from production or consumption

No economies of scale

The shutdown condition

Short run: Price is less than average variable cost

Long run: Price is less than average cost

Benefits of competitive markets

Lower prices

Low barriers to entry

Lower total profits

Greater entrepreneurial activity

Economic efficiency

Concentrated markets

Concentration ratio

C.R.5 = value of output of 5 largest firms/ value of output for the industry

Reasons for firms growth

Market power, increase market dominance giving themincreased pricing power in specific markets

Objectives of managers, Managerial status is increased through managing a larger firm

Profit motive, Larger scale enterprises grow to expand output and achive higher profits.

Economies of scale, Have the effect of increasing productive capacity of a business and help to raise profit margins. This is by becoming more productively efficient and allows the business to become more comptitive in domestic and international markets

Risk motive, The expansion of a business might be motivated by a desire to diversify production so that falling sales in one market might be compensated by stronger demand and output in another market

Internal growth

Retained profits or loans finance expansion by increasing fixed and variable factors. Innovation and creativity are vital to increasing the customer base for organic growth

External growth

Expansion that occurs through acquisitions or mergers, Horizontal intergration: two businesses at the same stage of production in an industry become one, Vertical intergration: acquiring a business in the same industry but at different stages of the supply chain, Lateral merger: A merger between companies that are related but not identical eg newspapers and magazines., Conglomerate merger: A merger between two firms in unrelated business


Producing a good overseas but keeping research and design operations domestic

Price discrimination

Definition: Occurs when a producer sells a product to different buyers at different prices for reasons unrelated to costs.

conditions required for discriminatory pricing

Differneces in the price elasticity of demand

Barriers to prevent market seepage

First degree price discrimination

This is charging an individual customer the maximum price they are prepared to pay

Second degree price discrimination

Businesses selling batches of product at lower prices than previous batches

Third degree price descrimination

Charging different prices for the same product in different segments of the market.


When a firm owns greater than 25% of market share.

Barriers to entry

High fixed costs

Economies of scale

Brand loyalty

Legal barriers

Control over the factors of production

Control over retail outlets

Predatory pricing

Costs and Revenues

Fixed costs: costs that a business has irrespective of output

Variable costs: change with respect to the level of output

Total cost (TC) = Fixed cost (FC) + Variable cost (VC)

Average cost

AC = TC/Quantity

Average fixed costs

AVC falls rapidly as production increase as fixed cost are diluted as production increase



Firms must take into account the likely reactions of rivals to any change in price, output or forms of non price competition.

Barriers to entry

Entry barriers maintain supernormal profits for the dominant firms to operate on the periphery of an oligopolistic market. no one firm is large enough to have a significant effect on prices and output.

Product branding

each firm is selling a branded product with scope for product differentiation

Non price competition

advertising, loyalty cards, increased range of services, home delivery or longer opening hours are competitive strategies or oligopolistic firms.

Kinked demand curve

Other firms match decrease in price

Other firms don't match raise in price

Creates price rigidity


Tacit collusion: one dominant firm sets a price and other follow

Price fixing, Cartels collectively raise the price to gain bigger supernormal profits at the consumers expense.


Definition:Transfer of assets from the public sector to the private sector.

Benefits: Promotes efficiency, reduces costs, raises incentives, provides stock market discipline, promotes competition, promotes an enterprise culture, sale raises gov revenue, reduces the size of the public sector

Drawbacks: nationalized company price P=MC, private firms may ignore externalities, private firms may close loss making services, quality of provision may fall, safety standards may be compromised in pursuit of profit.

Use of regulators

Price capping to control monopolies power, cuts in real price levels are good for household and industrial consumers, Provides incentives for increased productive efficiency., Price caps can lead to job losses in the industry and distorts the working price mechansm

Competition policy

Ways in which the competition authorities of national governments and EU seek to make markets work better and achieve higher economic efficiency and welfare.

effective price competition between suppliers

wider consumer choice

Technological innovation

Investigate anti-competitive


State aid control

Liberalization of markets

Antitrust and cartel policy

Merger control

Anti competitive practices

Predatory pricing

vertical restraint, exclusive dealing, territorial exclusivity, quantity discounts, refusal of supply

Creation of artificial barriers to entry

Collusive practices

Market Structure and Technology

Gains from technological improvements

Improves UK competitiveness with overseas markets

Innovation helps protect comparative advantage

Source of long term growth

Creates jobs

Social benefits and positive externalities from safety, new health treatments and "greener" products

Advances in technology can improve

Nature of the product

The number of buyers for the product

Number of firms in an industry which improves competitiveness

Reduces barriers to entry

Increases amount and transparency of information