Firms, Costs, Revenue, Market Structures and Objectives
What the domain tests
Firms, costs, revenue, market structures and objectives tests cost curves, economies of scale, revenue and profit maximisation, and the behaviour of firms under perfect competition, monopolistic competition, oligopoly and monopoly.
Core rules
- Short run has at least one fixed factor; long run all factors vary.
- TC = TFC + TVC; AC = TC/Q; MC = ΔTC/ΔQ. The law of diminishing returns explains rising short-run MC.
- Economies of scale lower long-run AC; diseconomies raise it. Internal economies include technical, managerial, marketing and financial.
- Profit is maximised where MR = MC. Normal profit is the minimum return to keep a firm in the industry and is included in cost.
- Perfect competition: many firms, homogeneous product, free entry, price taker. Monopoly: one dominant firm, barriers to entry. Oligopoly: few firms, interdependence, possible collusion. Monopolistic competition: many differentiated firms.
- Firms may pursue sales maximisation, growth or satisficing rather than profit maximisation.
Worked example
A firm faces MR = MC at 100 units. Price from the demand curve is N$35; average cost is N$25. Profit = (35−25)×100 = N$1,000. If the firm instead maximised revenue, it would produce where MR = 0, which is beyond 100 units and may reduce profit. If price fell below average variable cost, the firm should shut down in the short run.
Traps
Profit maximisation is not revenue maximisation. Falling AC does not mean MC is falling. Normal profit is not zero accounting profit. Do not assume monopoly is always inefficient dynamically; innovation may offset static loss.