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Microeconomics by Mind Map: Microeconomics
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Contestable Markets

Perfect competition/oligopoly/monopoly - structure

Price/Output/non-price decisions - conduct

Efficiency (static and dynamic) - Performance

A market is perfectly contestable when the costs of entry and exit by potential rivals are zero.

Recent increasing contestability of markets is due to: 1) Entrepreneurial zeal 2) De-regulation of markets 3) Competition Policy 4) The European Single Market 5) Technological Change

Price Discrimination

This occurs when a firm charges a different price to different groups of consumers for an identical good or service for reasons other than cost.

Conditions required for price discrimination to work: 1) Differences in price elasticity of demand between markets, to profit maximise, the firm will seek to set marginal revenue = to marginal cost in each of the different markets (segments). 2) Barriers to prevent consumers switching from one supplier to another, therefore the firm must have methods to prevent 'market seepage' or 'consumer switching'.

1st degree price discrimination: Haggling

2nd degree price discrimination: Batch, bulk buying

3rd degree price discrimination: Time, age (e.g students charged different prices to senior citizens)


Allocative efficiency

Productive efficiency

Dynamic efficiency

X inefficiency

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

Producer surplus - The difference between the price at which the producer is prepared to supply and the market price

Perfect Competition

Basic assumptions required for perfect competition to exist in a market

High levels of economic efficiency

Sunk costs

Benefits of competition

Concentrated Markets

Concentration ratio



Profit Maximisation

Normal profit

Supernormal profit

Maximizing profit

Role of profit


Benefits from a monopoly

What is a monopoly? When a firm owns more than 25% share of a market

Disadvantages of a monopoly

Oligopoly - A market dominated by a few producers, each of which as a degree of control in the market so the industry is likely to have a high level of market concentration.

Costs and revenues

Law of diminishing returns

Average total cost = Total cost/Quantity

Average variable cost = Variable cost/Quantity

Average fixed cost = Fixed cost/Quantity

Total cost = Fixed cost + Variable cost

As output rises, total cost rises parallel with variable cost.


A market dominated by a few producers each which a degree of control in the market

characteristics: 1) Interdependence and uncertainty 2) Entry barriers 3) Product branding 4) Non-price competition

The importance of non-price competition: 1) Better quality of service 2) Longer opening hours 3) Discounts on product upgrades 4) advertising and loyalty cards

There is an element of tacit collusion (price leadership)

game theory; strategic measures to corner opposing firms into doing what the firm wants

Market Structure & Technology

The most important features of market structure are: 1) The number of firms 2) The market share of the largest firms 3) The nature of costs 4) The degree to which the industry is vertically integrated 5) The extent of product differentiation 6) The structure of buyers in the industry

Price makers vs Price takers


Costs, competitors, customers, business objectives - Influencers on pricing policy