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IB Unit 1Higher Level
Demand function
Represents demand as a function of price
...

1
...
If the value of PED is greater than PES then the
incidence of tax will fall to a greater extent on the
producer
3
...
g
...

Marginal product
The additional output from one more unit of input
(e
...
the additional output which results from
employing one more worker, or using one more
tonne of wood)
...

Average Total Costs: TC/Q
Average Variable Costs: VC/Q
Average Fixed Costs: FC/Q
Marginal Costs: MC = ΔTC / ΔQ The cost of
producing one more unit
Economies of scale
The factors that lead to a decrease in unit cost as
more is produced
...

Factors of production
Land
Labour
Capital
Enterpirse
Entrepreneur
A person who combines the factors of production to
start a business
...

Average product (TP/ whatever you’re
considering)
The total output divided by the variable factor being
considered (e
...
no of tables per worker, no of tables
per tonne of wood)
When marginal product is above average product it
drags average product up
...

Marginal product cuts average product from above at
its highest point
Fixed Costs: Those costs which do not vary with
output in the short run (less than a year)
...
g
...

Variable Costs: Those costs that vary with output
...
g
...


When marginal cost is below average cost it drags
average product down
...

MC cuts AVC and ATC from below and at their
lowest point
...
Specialisation economies of scale
...
Marketing economies of scale
...
Technical economies of scale
4
...

5
...

Bulk buying: bigger firms can buy in bulk and
therefore reduce the costs of their inputs which will
reduce their unit cost
1

Marketing: the cost of advertising is divided by
the amount of units produced, therefore the more
units produced the lower the marketing cost per
unit
Technical: Bigger firms can use their capital
equipment all the time because they produce more
...

Diseconomies of scale
The factors that lead to an increase in the unit cost
of production as output increases past a certain
point
...
Labour relations
2
...
Also called sales revenue, total
sales or turnover
...

PXQ
Average revenue (AR): Total revenue/quantity
AR =
Marginal revenue (MR): MR is the extra revenue
a firm collects when it sells one extra unit of
output
...

Economic profit = Total Revenue – Total Costs,
where Total Costs are the explicit and implicit
costs
...
Profit Maximisation
Profit Maximisation: MC = MR
...
Revenue maximisation
MR = 0
...
Growth Maximisation
Increasing sales in order to gain market share
...


Financial: Bigger firms have more collateral,
therefore banks see them as less of a risk to lend
money to
...


Labour relations: Larger firms have greater division
of labour which usually leads to a lower unit cost
...

Control & coordination: The larger the business the
more difficult it is to coordinate the activities of all
employees efficiently (i
...
ensuring that they’re all
doing what they’re supposed to do)
Revenue Maximisation: MR = 0
 When MR is positive selling more will
increase Total Revenue


When MR is negative making less adds to
Total Revenue



When demand curve is elastic MR is positive



When demand curve is inelastic MR is
negative

If TC=TR a firm is making “normal profit”
If TCIf TC>TR a firm is making a loss
...

2

4
...

5
...

Market Failure (HL)
1
...
Abuse of monopoly power (HL)

5
...

Firms with some monopoly power can restrict
output to maximise profits – market failure
...
A very large number of small firms
2
...
Homogeneous products
4
...
Perfect Knowledge
There are two types of efficiency:
1
...

2
...


4
...
e
...
In many cases,
however, information may be asymmetric
(producers/consumers have more information than the
other)
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Government solutions to abuse of monopoly power
include:
1
...

2
...

3
...

In the short run losses can be made, however, due to
no barriers to exit firms will leave the market and
market will return to normal profit in the long run
...
One firm
2
...
Price maker
4
...
Abnormal profits possible in the long run

Barriers to entry
Factors that make it difficult for a firm to enter a
market
...


Types of barriers to entry
Economies of scale
High start up costs
Brand loyalty
Legal barriers (Patents and licensing)

Due to high barriers to entry it is possible for
monopolies to have SNP in the short and long run
...

Economies of scale are so great that the LRAC falls
through the entire output range
...
Perfect competition is productively (in the long
run) and allocatively efficient whereas a monopoly
is not (in exam draw both diagrams to explain)
2
...
Monopolist often portray anti competitive
behaviour to maintain their monopoly
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Evaluation
Whether a monopolist is better than perfect
competition depends upon:
- The extent of economies of scale – the greater the
amount of economies of scale the better served a
market will be by a monopoly
- Whether the monopoly passes the lower costs
gained from economies of scale on to the
consumer in the form of lower prices
...
Research and development possible:
Long run abnormal profits allows monopolies to
invest in research and development
...

2
...

This leads to greater efficiency
...
Regulation for natural monopolies to ensure
fair price, good quality and allocative
efficiency
...
Legislation (agencies and legislation)
Agencies
 Merger and monopolies agencies
 Competition agencies
Gov passes legislation:
Government usually pass anti competitive laws which
make anti competitive practices illegal and therefore
encourages competition which decrease the ability of
firms to become monopolies:
Evaluation
- Asymmetric information (government failure)
diminishes the ability of the government/regulator to
police an industry

Has government competition policy been
successful in promoting competition between
firms?
Yes, because:
- Fear of action by the government agencies (fines,
prison terms etc) may prevent anti competitive
- Administrative cost of running agencies and
behaviour
enforcing legislation means that many companies who
-Risk of bad publicity when caught by government adopt anti competitive policies escape detection
agency may prevent anti competitive behaviour
- Government attempts to reduce barriers to entry
have increased competition in some industries
Monopolistic competition
Non price competition
1
...
Product (slightly) differentiation
 Product development
3
...
Few firms dominate the market
2
...

3
...
g
...

4
...

5
...

Collusion
Firms acting together to reduce consumer welfare
(restrict supply to raise price)
...

Collusion comes in two types:
1
...
Tacit

Disadvantages of perfect competition compared to
monopolistic competition may include:
 firms unable to invest in research and
development due to lack of abnormal/
supernormal profits
 lack of choice of products (homogeneous
goods)
Concentration ratio
The amount of market share held by the top n firms –
measure of market dominance
...
If the data is
given, work out the concentration ratio
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Tacit collusion: This is where firms don’t formally
agree on price or output levels
...
This can happen through “price
leadership” where one firm (usually the biggest) sets
the price and the other firms follow
...
However, this is not a stable position
...
The tacit
collusion has broken down and we tend to end up at
the Nash Equilibrium
...
It’s illegal
In Britain the operation of a cartel is illegal under
the UK Competition Act, under which the Office
of Fair Trading is empowered to fine up to 10% of
a firm’s turnover if they are found guilty of
colluding
...
There is a temptation to break them
(see Game Theory)

5

Collusive Oligopoly
* Graph has steep AR/MR curves to illustrate the
lack of substitutes available to consumers when
oligopoly firms act collusively (effectively acting
as a monopoly)
* Formal (cartel) or informal agreement (tacit
collusion) amongst producers to limit competition
between themselves
* Existence of some non-price competition i
...

advertising and branding (although this is more
likely to be done to increase barriers to entry for
new firms and ensure SNP for oligopolists in the
long run)
* Oligopolist firms act as if they are a monopoly
...
Market
can be separated between oligopolists with one
firm supplying each area of the market
...

* Existence of strong legislation/agencies/regulators
which deters collusion taking place

Price discrimination
When different prices are charged for the same
good/service for reasons not associated with the cost
of production
...
The firm must be a price maker
...
Different consumers must have different
elasticities of demand (customers with inelastic
PED pay more than customers with elastic PED)
3
...


Benefits of price discrimination to firms:
* Allows firm to gain extra profit from the elastic
segment of a market that it otherwise would not have
got
* Allows firm to gain a higher level of revenue from
its sales as it is selling to the elastic segment as well as
the inelastic segment of a market
* Allows firms to sell more, therefore production
increases and a firm can gain economies of scale

Disadvantages of price discrimination to firms:
* Some consumers may resent having to pay a
higher price than others for the good/service and
may seek alternatives in the long run

6

Benefits of price discrimination to consumers:
* Price discrimination allows some consumers to
purchase products/services that they may not
otherwise have been able to afford
...


Disadvantages of price discrimination to
consumers:
* Some consumers will pay more than the price that
would have been charged in a single, nondiscriminated market, for example the inelastic part of
the Third Degree market

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