Theme 3

Theme 3 Diagrams

Monopoly

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• The market power which the single or dominant supplier has, in terms of being able to set prices.
• They operate at profit max, but can be very inefficient due to a lack of competition in the market.

Revenue Maximisation

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• Defined as that output level where marginal revenue is zero. It is an alternative objective to profit max. A firm may wish to increase its market share but still make some profit, and it may go for profit satisificing.
• It operates where MR = 0

Sales Maximisation

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• Defined as the maximum level of output, which can be produced without making a loss, i.e. where average revenue equals average cost.
• A firm may pursue this objective to increase market share, ultimately to obtain long run profits.
• It operates where AC = AR

Perfect Competition

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• In perfect competition, there are many buyers and many sellers, of whom all sell a very homogeneous product.
• In the short run there are profit incentives, and the market is open to generate super normal profits.
• In the long run however, due to perfect competition having little to no barriers to entry and a very homogeneous product, more firms enter the market, leading to an increase in supply. This causes the price of products to fall, leading to only normal profit being achievable.

Short Run: Breakeven & Close Down Points

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• Theory states that if a firm is covering their variable costs in the short run then they will stay in the market, as it could be beneficial to do so. They must make a contribution to their fixed costs.
• If a firm is not covering their variable costs in the short run, it would be better for them to leave the market.

Monopolistic Competition in the Short Run

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• In Monopolistic Competition, there are many buyers and many sellers, who sell a differentiated product.

Monopolistic Competition in the Long Run

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• In thee long run, due to there being no barriers to entry into the market, it will lead to an increase in supply to the market, lowering prices, and so eventually it will lead to AC = AR, where only normal profit could be made.

Monopoly & Perfect Competition.

Natural Monopoly

Price Discrimination

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• Bildunterschrift: Charging different prices in different markets for essentially the same good.

Entry Limit Pricing

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• Bildunterschrift: An incumbent firm (established) sets a price to deter entry, the price is set just below a potential firms LRAC.

Increase in Fixed Costs

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• An increase in fixed costs shifts the Average Cost curve, but not the Marginal Cost curve.
• Leads to a fall in Super Normal Profit.

Increase in Variable Costs

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• An increase in variable costs shifts both the Average cost curve and the Marginal cost curve.
• An increase in AC and MC will lead to a fall in profit.

Decrease in Demand

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• A decrease in demand leads to a shift left in both AR and MR curves.
• This leads to a fall in price, thus leading to a fall in profit.

Increase in Demand

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• An increase in demand leads to a shift right in both AR and MR curve.
• This leads to an increase in profit levels.

Fall in Demand