Economics Market Power

perfect competition

• assumption that there is perfect information available to firms and consumers about price and quality of a good/service

• producers have less ability to bargain price of a good/service

• eg. coal, gold, corn

monopoly

• a single firm operates the entire market

• firm can set the price of the product

• it is expensive to start/leave the business

• eg. apple

oligopoly

• there are only a few firms in the market

• competition amongst firms are large despite the market being average

• it is difficult to compete for prices

• eg. supermarkets

monopolistic competition

• the most competitive and common market structure

• many firms with relatively small size compared to the price of the market

• each firm sells similar good, but not identical

• branding/ marketing is what set them apart

• eg. restaurants, hair salons

rational producer behaviour

firms are assumed to always be trying to maximise the profits they make

revenue

the money received from the sale of a firms output of goods and services

total revenue (TR)

the overall amount of money received by a firm for selling it’s entire output of goods and services

TR = P x Q

Average revenue (AR)

• Shows how much revenue there is per unit of output

• It calculates how much revenue a firm receives on average, from each unit of product they sell.

• AR = TR/Q

Costs

expenses or expenditures of a firm in relation to creating their product

fixed costs

• expenses that do not change with the level of output

• eg. rent, insurance

total fixed costs (TFC)

the sum of production costs that do not change with level of output

TFC = AFC x Q

average fixed costs (AFC)

fixed costs per unit of output

AFC = TFC/Q

Variable costs

a type of production costs: changes based on the amount of output produced

eg. raw materials

total variable costs (TVC)

production costs incurred directly from the output of a particular good or service

TVC = AVC x Q

Average variable costs (AVC)

the direct production costs incurred for each unit of output of a good or service

AVC = TVC/Q

Total costs (TC)

total amount of production costs spend on the output of a particular good or service

TC = TFC + TVC

Average costs (AC)

unit costs of production

AC = TC/Q

Profit

the amount of excess total sales

P = TR-TC

Profit maximisation

Generating the highest possible profit for the business

MR = MC

there is no change in profits

Marginal cost

Additional cost of producing an extra unit of output

MC = change in TR/ change in quantity

Marginal revenue (MR)

the additional revenue received from the sale of an extra unit of output

MR = change in TR/ change in quantity

Profit maximisation: MR > MC

additional revenue exceeds additional costs, so profit maximising firm should INCREASE it’s output

Profit maximisation: MR < MC

additional costs exceeds additional revenue, so profit maximising firm should DECREASE it’s output

Economic costs

the explicit and implicit costs of all resources used by a firm in the production process

Explicit costs

identifiable, and accountable costs related to the output of a product

eg. wages, raw materials, rent

Implicit costs

The opportunity costs of the output, that is the income from the next best alternative that is foregone

Abnormal profit (aka. supernormal/ economic profit)

• AR>AC

• there is excess profit in the amount needed to generate a return on the firms capital investments

• creates incentives for existing firms to produce and for potential rivals to entire t

Normal profit

• AR = AC

• when firms earn just enough revenue to cover it’s total costs (TC) of production and remain operational in the industry

• 0 economic profit

Losses

• when TC > TR, firms make a negative profit (a loss)

• this is because firm price (AR) is not sufficient to cover its unit costs of production (AC)

• AR < AC

• although possible to still remain operational, it is not sustainable