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Micro Economics ECON3 by Mind Map: Micro Economics
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Micro Economics ECON3

2 Profit Maximisation



Normal Profit, The level of profit which is just enough to keep all factors of production in their current use

Supernormal profit, Anything above normal profit

Role of profit


Promotes inovation

Allocation of factors of production

Is profit really maximised?

Managerial theory, Revenue maximisation, Market share maximisation, Principle agent problem, Devision between owners and managers

Behavioural theroies, A firm is so complex that maximising a single variable is impossible

3 Perfect Competition

What is it?/ What is needed for it?

Many buyers and sellers

No barriers to entry or exit

Identical products

Perfect information

No externalities

No economies of scale


Sunk costs, A cost that cannot be recovered

The competitive process, Scarce resourses, Formation of prices/ supply and demand, Profits or losses emerge, Firms leave or enter the industry

The shutdown condition, Short run: Price < AVC, Long run: Price < AC

The real world

Firms compete on other areas, E.g. Brand, Quality, USP

4 Efficiency, Consumer & Producer Surplus


Consumer surplus, The difference between the price the consumer is prepared to pay and the market price

Producer surplus, The difference between the price a producer is prepared to sell at and the market price

Static efficiency, Occurs at a given point in time

Dynamic efficiency, Occurs over time

Static efficiency

Allocative efficiency, When Price = Marginal cost

Productive efficiency, Producing at the lowest point on the AC curve

X efficiency, Organisational slack that occurs through lack of competition

Dynamic efficiency

Product efficiency

Process efficiency

5 Concentrated Markets

Concentration ratio

value of output from the x largest firms/ value of output for the industry

Internal growth

When a company internally finances its own expansion through profits and re-investment

External growth

Horizontal, When a company takes over a rival that is in the same industry at the same point in the supply chain

Vertical up, Merger up the supply chain away from the consumer

Vertical down, Movement down the supply chain

Lateral, Take over of a company in a similar but different industry

Conglomerate merger, Take over of a total different company in a totally different industry

6 Price Discrimination

What is needed for it to be possible?

Differences in PED

Barriers to prevent "market seepage"

First degree

Each consumer gets and individual price

Second degree

This is selling bulk orders at a lower per unit price

Third degree

This is the most common, Discriminating in terms of time or age etc...

1 Costs & Revenues


Variable Costs, Costs that vary proportionately with quantity produced

Fixed Costs, Costs that do not vary with quantity produced

Total cost, Total cost of producing a given amount

Marginal cost, Cost of the next unit produced

Average cost, A total cost divided by the number of units produced


Economies of scale

Law of Diminishing returns

9 Contestable Markets


Sunk Costs, Costs that cannot be recovered. A barrier to exit

Perfectly Contestable, A market with no costs to entry or exit

Hit and Run entry, When a new firm enters a contestable market as they believe there are profits to be made.


Risk of hit and run entry due to no barriers to entry, Competitive prices, No collusion or oligopolistic behaviour

What helps create contestablility?

New technology


Competition policy


Increased market size

10 Technology and market structure


Short term, Can increase startup costs and barriers to entry, Move towards capital intensive production causes job losses

Long term, Decreases average costs as more can be produced from the same inputs


Leads to fall in prices if the market is competitive

Leads to better quality


Technology improves both product and process efficiency.

Increase in competition or monopoly?

In this seance the effect on structure depends on the type of technological advancement and on the type of market

7 Monopoly


Monopoly, When one firm has over 80% of the market share, There are several different definitions as a monopoly is defined depending on its characteristics

Effects of monopoly

Consumer, High prices and reduction of consumer surplus

Producer, Long term supernormal profita


Dynamic, Can be dynamically efficient due to large capital available for investment

Static, Not allocatively efficient due to profit maximisation, Not productively efficient

8 Oligopoly


Oligopoly, When 5 or less firms have over 80% of market share.

Collusion, When firms in an oligopoly collectively decide to raise prices

Tacit collusion, Collusion with no direct communication


If collusive, an oligopoly can have the same effects as a monopoly

The magic number 5

Game theory suggests that collusion cannot hold with many more than 5 firms

This is because that with more firms the greater the chance that one will abandon the group and act under self interest by dropping prices

Kinked demand curve

Low quantities, Elastic as none follow a rise in price

High quantities, Inelastic as dropping price is followed by others so market share changes little