Microeconomics: Consumer and Producer Theory, Market Structures
What this domain tests
This domain tests consumer choice, cost and revenue, and how market structure changes price, output and efficiency. You must explain marginal reasoning, draw cost curves accurately and compare perfect competition, monopoly, monopolistic competition and oligopoly.
Core rules
- Consumer equilibrium: MUx/Px = MUy/Py, with income exhausted. Indifference curves are convex; budget line slope is −Px/Py.
- Producer: in the short run at least one factor is fixed; LRAC is the envelope of SRAC curves. Profit maximisation is MR = MC, with MC cutting MR from below.
- Perfect competition: many firms, homogeneous product, free entry; long-run P = minimum LRAC and zero economic profit.
- Monopoly: barriers to entry, downward-sloping demand, P > MR; profit-maximising output where MR = MC, price read from demand.
- Monopolistic competition: differentiated products and free entry; short-run profit attracts entry, long-run P = AC but not minimum AC.
- Oligopoly: interdependence; use game theory, kinked demand or collusion. Efficiency requires P = MC and no deadweight loss.
Worked example
A monopolist faces P = 100 − Q and MC = €20 (constant). Total revenue is P×Q = 100Q − Q², so MR = 100 − 2Q. Set MR = MC: 100 − 2Q = 20, so Q = 40. Price from demand: P = 100 − 40 = €60. TR = €2,400; variable cost = €800; profit before fixed costs = €1,600. A competitive industry with P = MC would produce Q = 80 at P = €20, showing the monopoly restricts output and raises price.
Traps
Do not equate MR with price for a monopolist. Do not say perfect competition is productively inefficient in long-run equilibrium. In consumer theory, check the marginal-utility-per-euro ratio, not total utility. Label curves and state the profit-maximising condition.