Firm behaviour & Trade

Perfect competition

Market of many buyers and sellers, identical products, perfect information and no barriers.

Price taker

Perfectly competitive firms cannot influence the market price. P = MR = AR.

Perfect competition LR

Firms will always return to normal profit from a loss or supernormal profit as others leave or enter the industry. P = ATC.

Monopoly

A market where one firm is the sole producer with no substitutes and high barriers to entry.

Price maker

A firm with a downward sloping demand curve can set prices.

Monopoly MR

Monopolies must lower the price to sell an additional unit. P > MR.

Monopoly profit maximisation

They find the quantity where MC = MR but charge the highest price possible. P > MC.

Deadweight loss

Permanent loss of economic surplus because the monopoly restricts output below the social optimum.

Monopolistic competition

Many firms selling differentiated product with some price making power and low barriers to entry.

Oligopoly

Market with a small number of large firms with high barriers who also act based on their rivals actions.

Cartel

Form of oligopoly where firms agree to fix the market.

Monopoly MR Curve calculation

MR curve shares the same Y intercept as the D curve but twice the gradient.

Mutually beneficial trade condition

For trade to benefit both parties, the price of each good must fall exactly between the opportunity costs of each producer and their respective products.