1. Costs and Revenues
1.1. Fixed costs
1.1.1. Do not change with marginal output
1.2. Variable costs
1.2.1. Change with marginal output
1.3. Average cost
1.3.1. Total cost/Quantity
1.4. Marginal cost
1.4.1. The cost of producing one extra unit
1.5. The short-run
1.5.1. That period of time where at least one factor of production is fixed (usually capital)
1.6. The law of diminishing returns
1.6.1. In short run if the variable factor of production is increased, there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average product
1.7. Marginal product
1.7.1. The output produced by one more unit of a given output
1.8. How productivity affects firms' costs
1.8.1. Higher labour productivity leads to lower variable costs per unit
1.8.2. If the cost of labour rises, firms may be tempted to switch away from labour towards capital
1.9. Long-run
1.9.1. Where all factors of production are variable
1.10. Economies of scale
1.10.1. The average cost per unit decreasing due to a firm expanding their scale of production
1.11. Minimum efficient scale
1.11.1. The first point you reach the bottom of the LRAC
1.11.2. The point where you have exhausted all potential economies of scale
2. Perfect Competition
2.1. Conditions
2.1.1. Many buyers and sellers
2.1.2. No barriers to entry
2.1.3. Identical products
2.1.4. Perfect information
2.1.5. No externalities
2.1.6. No economies of scale
2.2. Sunk costs
2.2.1. A cost that cannot be recovered
2.2.1.1. e.g. advertising/training/highly specialised equipment
2.3. Shut-down conditions
2.3.1. Short-run
2.3.1.1. Price is less that AVC
2.3.2. Long-run
2.3.2.1. Price is less than AC
2.4. Factors on which firms can compete
2.4.1. Quality
2.4.2. Customer support
2.4.3. Location
2.4.4. Advertising
2.4.5. Brand identity
2.5. Benefits of Competition
2.5.1. Lower prices
2.5.2. Lower barriers to entry
2.5.3. Lower total profits
2.5.4. Greater entrepreneurial activity
2.5.5. Economic efficiency
3. Price Discrimination
3.1. It occurs when a producer sells an identical product to different buyers at different prices for reasons unrelated to costs
3.2. Conditions
3.2.1. Differences in PED's
3.2.2. Barriers to prevent 'market seepage'
3.3. 1st Degree
3.3.1. A unique price for each individual unit
3.3.1.1. Haggling
3.4. 2nd Degree
3.4.1. Batch/Quantity
3.5. 3rd Degree
3.5.1. Time/Status
3.6. Consequences
3.6.1. Impact on consumer welfare
3.6.1.1. Consumer surplus is reduced
3.6.2. Producer surplus and the use of profit
3.6.2.1. Supernormal profit could be reinvested to improve dynamic efficiency
4. Monopoly
4.1. Definition
4.1.1. Only one firm in the industry
4.1.2. Where a firm has greater than 25% of market share
4.1.3. Lack of competition and substitutes means the demand curve is inelastic and the firm is a price-inelastic
4.2. Barriers to entry
4.2.1. High fixed costs
4.2.2. Economies of scale
4.2.3. Brand loyalty
4.2.4. Legal barriers
4.2.5. Control over supply chain
4.2.5.1. Over factors of production
4.2.5.2. Over retail outlets
4.2.6. Predatory pricing
4.3. Inefficiences
4.3.1. Allocatively
4.3.2. Productively
4.3.3. X
4.4. Efficiences
4.4.1. Likely to be dynamically efficient
4.4.1.1. Supernormal profits reinvested into R&D
4.5. Costs
4.5.1. Earn abnormal profits at the expense of efficiency and welfare of consumers
4.5.2. price is set above the average and marginal cost leading to market failure
4.5.3. can cause government intervention and failure
4.6. Benefits
4.6.1. Economies of scale
4.6.1.1. Greater output and lower price
4.6.1.1.1. Greater R&D
4.7. Natural monopolies
4.7.1. Utilities
5. Market Structure and Technology
5.1. Market structure features
5.1.1. Number of firms
5.1.2. The market share of the largest firms
5.1.3. The nature of costs
5.1.4. The degree of vertical integration
5.1.5. The extent of product differentiation
5.1.6. The structure of buyers in the industry
5.1.7. The turnover of customers
5.2. Market structure
5.2.1. Perfect competition
5.2.1.1. Firms are price-takers
5.2.1.2. Free entry and exit of businesses drives down towards normal profit
5.2.1.3. Perfectly elastic DD curve as all products are identical
5.2.2. Monopoly
5.2.2.1. Can earn supernormal profits
5.2.2.2. Can protect market position with use of entry barriers
5.2.2.3. Potential use of price discrimination
5.2.3. Oligopoly
5.2.3.1. Competition among the few
5.2.3.2. Each firm has some market power
5.2.3.3. Interdependent nature of pricing decisions between rival firms
5.2.3.4. Firms must consider strategic behaviour of other firms
5.2.3.5. Objective may be protecting market share rather than profit
5.3. Main factors affecting a firm's pricing power
5.3.1. Costs
5.3.2. Competitors
5.3.3. Customers
5.3.4. Business objectives
5.4. Impact of technology on firms
5.4.1. Enhance both production and consumption
5.4.2. Reduce AC's
5.4.3. Job losses will emerge
5.4.4. Increases in dynamic efficiency
5.5. Technology and competition
5.5.1. Promote competition
5.5.1.1. Reduce barriers to entry
5.5.1.2. Reducing concentration of market
5.5.1.3. Increasing contestability in market
5.5.2. Reinforcing monopoly power
5.5.2.1. Firms patent
5.5.2.2. Reinforce their dominance
6. Profit Maximisation
6.1. Normal profit
6.1.1. That level of profit which is just sufficient to keep all the factors of production in their present use. This occurs where AC=AR
6.2. Supernormal profit
6.2.1. Anything excess of normal profit
6.3. Maximising profit
6.3.1. MC=MR
6.4. Role of profit
6.4.1. Allocation of factors of production
6.4.2. Signal for market entry
6.4.3. Promotes innovation
6.4.4. Investment
6.4.5. Rewards entrepreneurs for bearing risk
6.4.6. Economic performance indicator
6.5. Firms' goals
6.5.1. Managerial status
6.5.2. Market share
6.5.3. Revenue maximisation
7. Efficiency
7.1. Consumer surplus
7.1.1. The difference between the price a consumer is prepared to pay and the market price
7.2. Producer surplus
7.2.1. The difference between the price a firm is prepared to sell for and the market price
7.3. Static efficiency
7.3.1. At a given moment in time
7.4. Dynamic efficiency
7.4.1. Over a period of time
7.4.1.1. Process
7.4.1.2. Product
7.5. Allocative efficiency
7.5.1. It exists where goods are produced in line with consumer preferences: P=MC
7.6. Productive efficiency
7.6.1. Occurs at the lowest point on the AC curve
7.7. X inefficiency
7.7.1. exists when firms are not producing on their AC curves; owing to organisational slack (normally associated with monopolies)
7.8. Economic efficiency
7.8.1. Productive and Allocative -> Static
8. Concentrated Markets
8.1. Concentration ratio (C.R.5)
8.1.1. Value of output from the 5 largest firms in an industry
8.2. Why do firms grow larger?
8.2.1. Market power motive
8.2.2. Objectives of managers
8.2.3. Profit motive
8.2.4. Economies of Scale
8.2.5. Risk motive
8.3. Growth
8.3.1. Internal
8.3.1.1. Uses the retained profits or loans of a company to finance expansion by increasing fixed and variable factors
8.3.2. External
8.3.2.1. Horizontal integration
8.3.2.1.1. Merger between two firms at the same stage of production
8.3.2.2. Vertical integration
8.3.2.2.1. Acquiring a business in the same industry but at different stages of the supply chain
8.3.2.3. Lateral merger
8.3.2.3.1. A merger between two companies that are related but not identical
8.3.2.4. Conglomerate merger
8.3.2.4.1. A merger between two firms in unrelated business
8.4. Outsourcing
8.4.1. Technological change
8.4.2. Increased competition
8.4.3. Pressure from financial markets
9. Oligopoly
9.1. Definition
9.1.1. A market dominated by a few firms who each have a degree of control in the market
9.1.2. Exists when CR5 is greater than 60%
9.2. Features
9.2.1. Interdependence and uncertainty
9.2.2. Barriers to entry
9.2.2.1. Maintain supernormal profits
9.2.3. Product branding
9.2.4. Non-price competition
9.3. Kinked demand curves
9.3.1. Shows the likely reaction of other firms to a change in price
9.4. Collusion
9.4.1. Tacit
9.4.2. Explicit
9.5. Game theory
9.5.1. e.g. Prisoner dilemma
10. Contestable Markets
10.1. Produce at minimem costs
10.1.1. Earn no excess profits
10.2. No barriers to entry or exit
10.2.1. Access to the same cost curves
10.2.1.1. No sunk costs
10.3. Performance
10.3.1. Downward pressure on price
10.3.2. Consumer surplus
10.3.3. Lower profit margins
10.4. Evaluate
10.4.1. No market is perfectly contestable
10.4.2. Strategic barriers to entry
10.4.2.1. Use of patents etc
10.5. Ways to increase contestability of markets
10.5.1. De-regulation of markets
10.5.2. Competition policy
10.5.3. Technical change