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Micro by Mind Map: Micro

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. Profit Maximisation

2.1. Normal profit

2.1.1. That level of profit which is just sufficient to keep all the factors of production in their present use. This occurs where AC=AR

2.2. Supernormal profit

2.2.1. Anything excess of normal profit

2.3. Maximising profit

2.3.1. MC=MR

2.4. Role of profit

2.4.1. Allocation of factors of production

2.4.2. Signal for market entry

2.4.3. Promotes innovation

2.4.4. Investment

2.4.5. Rewards entrepreneurs for bearing risk

2.4.6. Economic performance indicator

2.5. Firms' goals

2.5.1. Managerial status

2.5.2. Market share

2.5.3. Revenue maximisation

3. Perfect Competition

3.1. Conditions

3.1.1. Many buyers and sellers

3.1.2. No barriers to entry

3.1.3. Identical products

3.1.4. Perfect information

3.1.5. No externalities

3.1.6. No economies of scale

3.2. Sunk costs

3.2.1. A cost that cannot be recovered e.g. advertising/training/highly specialised equipment

3.3. Shut-down conditions

3.3.1. Short-run Price is less that AVC

3.3.2. Long-run Price is less than AC

3.4. Factors on which firms can compete

3.4.1. Quality

3.4.2. Customer support

3.4.3. Location

3.4.4. Advertising

3.4.5. Brand identity

3.5. Benefits of Competition

3.5.1. Lower prices

3.5.2. Lower barriers to entry

3.5.3. Lower total profits

3.5.4. Greater entrepreneurial activity

3.5.5. Economic efficiency

4. Efficiency

4.1. Consumer surplus

4.1.1. The difference between the price a consumer is prepared to pay and the market price

4.2. Producer surplus

4.2.1. The difference between the price a firm is prepared to sell for and the market price

4.3. Static efficiency

4.3.1. At a given moment in time

4.4. Dynamic efficiency

4.4.1. Over a period of time Process Product

4.5. Allocative efficiency

4.5.1. It exists where goods are produced in line with consumer preferences: P=MC

4.6. Productive efficiency

4.6.1. Occurs at the lowest point on the AC curve

4.7. X inefficiency

4.7.1. exists when firms are not producing on their AC curves; owing to organisational slack (normally associated with monopolies)

4.8. Economic efficiency

4.8.1. Productive and Allocative -> Static

5. Concentrated Markets

5.1. Concentration ratio (C.R.5)

5.1.1. Value of output from the 5 largest firms in an industry

5.2. Why do firms grow larger?

5.2.1. Market power motive

5.2.2. Objectives of managers

5.2.3. Profit motive

5.2.4. Economies of Scale

5.2.5. Risk motive

5.3. Growth

5.3.1. Internal Uses the retained profits or loans of a company to finance expansion by increasing fixed and variable factors

5.3.2. External Horizontal integration Merger between two firms at the same stage of production Vertical integration Acquiring a business in the same industry but at different stages of the supply chain Lateral merger A merger between two companies that are related but not identical Conglomerate merger A merger between two firms in unrelated business

5.4. Outsourcing

5.4.1. Technological change

5.4.2. Increased competition

5.4.3. Pressure from financial markets

6. Price Discrimination

6.1. It occurs when a producer sells an identical product to different buyers at different prices for reasons unrelated to costs

6.2. Conditions

6.2.1. Differences in PED's

6.2.2. Barriers to prevent 'market seepage'

6.3. 1st Degree

6.3.1. A unique price for each individual unit Haggling

6.4. 2nd Degree

6.4.1. Batch/Quantity

6.5. 3rd Degree

6.5.1. Time/Status

6.6. Consequences

6.6.1. Impact on consumer welfare Consumer surplus is reduced

6.6.2. Producer surplus and the use of profit Supernormal profit could be reinvested to improve dynamic efficiency

7. Monopoly

7.1. Definition

7.1.1. Only one firm in the industry

7.1.2. Where a firm has greater than 25% of market share

7.1.3. Lack of competition and substitutes means the demand curve is inelastic and the firm is a price-inelastic

7.2. Barriers to entry

7.2.1. High fixed costs

7.2.2. Economies of scale

7.2.3. Brand loyalty

7.2.4. Legal barriers

7.2.5. Control over supply chain Over factors of production Over retail outlets

7.2.6. Predatory pricing

7.3. Inefficiences

7.3.1. Allocatively

7.3.2. Productively

7.3.3. X

7.4. Efficiences

7.4.1. Likely to be dynamically efficient Supernormal profits reinvested into R&D

7.5. Costs

7.5.1. Earn abnormal profits at the expense of efficiency and welfare of consumers

7.5.2. price is set above the average and marginal cost leading to market failure

7.5.3. can cause government intervention and failure

7.6. Benefits

7.6.1. Economies of scale Greater output and lower price Greater R&D

7.7. Natural monopolies

7.7.1. Utilities

8. Oligopoly

8.1. Definition

8.1.1. A market dominated by a few firms who each have a degree of control in the market

8.1.2. Exists when CR5 is greater than 60%

8.2. Features

8.2.1. Interdependence and uncertainty

8.2.2. Barriers to entry Maintain supernormal profits

8.2.3. Product branding

8.2.4. Non-price competition

8.3. Kinked demand curves

8.3.1. Shows the likely reaction of other firms to a change in price

8.4. Collusion

8.4.1. Tacit

8.4.2. Explicit

8.5. Game theory

8.5.1. e.g. Prisoner dilemma

9. Contestable Markets

9.1. Produce at minimem costs

9.1.1. Earn no excess profits

9.2. No barriers to entry or exit

9.2.1. Access to the same cost curves No sunk costs

9.3. Performance

9.3.1. Downward pressure on price

9.3.2. Consumer surplus

9.3.3. Lower profit margins

9.4. Evaluate

9.4.1. No market is perfectly contestable

9.4.2. Strategic barriers to entry Use of patents etc

9.5. Ways to increase contestability of markets

9.5.1. De-regulation of markets

9.5.2. Competition policy

9.5.3. Technical change

10. Market Structure and Technology

10.1. Market structure features

10.1.1. Number of firms

10.1.2. The market share of the largest firms

10.1.3. The nature of costs

10.1.4. The degree of vertical integration

10.1.5. The extent of product differentiation

10.1.6. The structure of buyers in the industry

10.1.7. The turnover of customers

10.2. Market structure

10.2.1. Perfect competition Firms are price-takers Free entry and exit of businesses drives down towards normal profit Perfectly elastic DD curve as all products are identical

10.2.2. Monopoly Can earn supernormal profits Can protect market position with use of entry barriers Potential use of price discrimination

10.2.3. Oligopoly Competition among the few Each firm has some market power Interdependent nature of pricing decisions between rival firms Firms must consider strategic behaviour of other firms Objective may be protecting market share rather than profit

10.3. Main factors affecting a firm's pricing power

10.3.1. Costs

10.3.2. Competitors

10.3.3. Customers

10.3.4. Business objectives

10.4. Impact of technology on firms

10.4.1. Enhance both production and consumption

10.4.2. Reduce AC's

10.4.3. Job losses will emerge

10.4.4. Increases in dynamic efficiency

10.5. Technology and competition

10.5.1. Promote competition Reduce barriers to entry Reducing concentration of market Increasing contestability in market

10.5.2. Reinforcing monopoly power Firms patent Reinforce their dominance