2. Micro Economics

2.1 Markets

Perfect Competition:
  • Made up of many many small firms.
  • Firm buyers so small they can't influence industry.
  • Equal products- No marketing.
  • No barriers to entry (can join and leave industry).
  • All producers and consumers have perfect knowledge of market.
Perfect Competion in the Long Run.

Perfect competition making losses. Only possible in the Short Run. This disappears by firms leaving the industry and therefore the price increases ( as supply decreases) and therfore normal profit will be made.

Perfect competition making SnP(Super Normal Profit). Only possible in the Short Run. This disappears by firms joining the industry and therefore the price decreases ( as supply increases) and therfore normal profit will be made.

Monopolistic Competition:
  • Made up of fairly large firms.
  • Firms are small compared to industry therefore 1 firms actions are unlikely to have great effect on other competitors.
  • No Barriers to entry or exit.
Same as perfect competition in a way-
  1. SnP can be made in Short run only.
  2. Losses can be made in Short run only.
This can only happen in the Short run. Will disappear in Long Run for same reasons as in Perfect Competition (entry and exit of firms).

Same as Monopoly in a way-
  • Will try to make SnP even in Long Run
  • Not Productively or Allocatively Efficient.


This will happen in the long run.


Not allocative efficient because in Monopolistic Competition the consumer has a choice for different products.

Monopoly:
  • Only 1 firm producing therefore firm is industry.
  • Barriers to entry
  • Able to make SnP in Long Run.
How Monopolies arise:
  1. Economies of Scale:
    • Average Cost (AC) goes down
    • Division of labour
    • Specialisation
    • Bulk buying
    • Financial Economies
  2. Natural Monopoly:
    • Only enough resources in the market to provide economies of scale to one firm.
  3. Legal Barriers:
    • Patents- Because of Research and Development (Usually about 20 years). Encourages invention.
    • Product to single firm.
  4. Brank Loyalty:
    • Think of product as brand (e.g. Hoover instead of vacuum cleaner)
  5. Anti-Competitive Behaviour:
    • Price war.
      • Legal: Lower price because of price war.
      • Illegal: Not giving competition a chance to compete (e.g. microsoft installing media player with its operating system).
Monopolies can control either Price or Output, never both.

This is the standard Monopoly graph.

Advantages:
  • Can still achieve lower prices and higher quantity (better for consumer)

  • More development. (More choices in future)
Disadvantages:
  • If no large Economies of Scale the the Price will be higher then in perfect competition
    • May be seen as unfair by perfect competition and by those with lower income.
  • Anti-Competitive behaviour.
  • Productively (MC=MR) and Allocatively (MC=AC) inefficient.
Oligopoly:
  1. No barriers to entry
  2. Made up of a few firms which dominate the market (e.g. airlines, supermarkets or newspapers)
  3. Action of 1 firm may have a significant effect on other firms.
  4. Firms are interdependant- will act depending on what they think other will do
Competitive Oligopoly ( Kinked Demand Curve):



  • If one firm increases price others won't follow therefore price is elastic.
  • If one firm lowers price others will gollow therefore price is inelastice.





  1. Giant firms dominating market
  2. Firm is a pricemaker
  3. Rigid Price at the king (no price war)
  4. Competitive through:
    • Advertising
    • Sales Promotions
  5. No barriers to entry
  6. Uncertanty between rival competitors
  • Usually firm with higherst market share determines price.
  • Sometimes the 'Barometric Price Leader' (Firm known for  having the best accountants and market analysts) determine the price. This is because as they've got the best analysis of the market other firms tend to follow their decisions.
  • Costs won't change so that all firms keep their market share.
Non-competitive Oligopoly (Cartel):
  1. Act like monopolist
  2. Fix profit maximising price ( give each other quotas)
    • This maximises industry profit
  3. Tend to break down as their's incentive to cheat (due to underproduction firms are tempted to sell 'under the table'.
Each firm is set a quota at 'Q'. This means that the cartel fixes production to keep a certain price.
Globalisation:
  • Megamerges:
    • Tata- taking over Jaguar and Land Rover
  • Strategic alliances:
    • Star Alliance (Airline)

2.2 Elasticities
2.3 Theory of The Firm (HL)
2.4 Market Failurre
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