Economics Microeconomics: Firms and Markets Syllabus

Microeconomics: Firms and Markets syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Microeconomics: Firms and Markets in Economics, not a summary of it.

1. 1

   Production and Costs

   3 topics

   • Production Function
   • Short-run vs Long-run Costs
   • Economies and Diseconomies of Scale
2. 2

   Revenue and Profit

   4 topics

   • Total, Average, and Marginal Revenue
   • Profit Maximisation
   • Normal and Supernormal Profit
   • Shutdown and Break-even Points
3. 3

   Perfect Competition

   3 topics

   • Assumptions of the Model
   • Short-run and Long-run Equilibrium
   • Allocative and Productive Efficiency
4. 4

   Monopoly

   4 topics

   • Barriers to Entry
   • Monopoly Equilibrium and Pricing
   • Price Discrimination
   • Natural Monopoly and Regulation
5. 5

   Imperfect Competition

   4 topics

   • Monopolistic Competition
   • Oligopoly
   • Game Theory
   • Contestable Markets
6. 6

   Factor Markets

   3 topics

   • Labour Demand and Supply
   • Wage Determination
   • Labour Market Imperfections

Microeconomics: Firms and Markets flashcards for Economics

23 of 58 cards from the Microeconomics: Firms and Markets deck — real questions with worked answers.

1. What is a production function?

   A relationship showing the maximum output a firm can produce from a given combination of inputs (factors of production) over a period of time, written generally as $Q = f(L, K)$ where $L$ is labour and $K$ is capital.

2. Distinguish the short run from the long run in production theory.

   In the short run at least one factor of production is fixed (typically capital). In the long run all factors are variable and the firm can change its scale of production.

3. Define the marginal product of labour (MPL) and give its formula.

   The additional output produced by employing one more unit of labour, holding other inputs fixed: $$MPL = \frac{\Delta Q}{\Delta L}$$

4. Define average product of labour (APL) and give its formula.

   Output per unit of labour employed: $$APL = \frac{Q}{L}$$

5. State the Law of Diminishing Marginal Returns.

   As successive units of a variable factor are added to a fixed factor in the short run, the marginal product of the variable factor will eventually fall (i.e. $MPL$ begins to decline).

6. What is the relationship between marginal product and average product?

   When $MPL > APL$, $APL$ is rising; when $MPL < APL$, $APL$ is falling; $MPL$ intersects $APL$ at the maximum of $APL$.

7. List the main short-run cost concepts and their formulas.

   Total cost $TC = TFC + TVC$; average fixed cost $AFC = \frac{TFC}{Q}$; average variable cost $AVC = \frac{TVC}{Q}$; average total cost $ATC = \frac{TC}{Q}$; marginal cost $MC = \frac{\Delta TC}{\Delta Q}$.

8. Why is the short-run ATC curve U-shaped?

   At low output, spreading fixed costs over more units lowers $AFC$ and hence $ATC$; at high output, diminishing marginal returns raise $AVC$ and $MC$, pushing $ATC$ back up, producing a U-shape.

9. What is the relationship between the MC curve and the ATC and AVC curves?

   The $MC$ curve cuts both the $ATC$ and $AVC$ curves at their minimum points. When $MC$ is below average cost, average cost falls; when $MC$ is above, average cost rises.

10. How does the long-run average cost (LRAC) curve relate to short-run ATC curves?

    The LRAC curve is the envelope of all possible short-run ATC curves, tangent to each; it shows the lowest achievable average cost for each output when all factors are variable.

11. What are economies of scale?

    Falling long-run average cost as the scale (output) of the firm increases; sources include technical, managerial, financial, marketing, purchasing (bulk-buying) and risk-bearing economies.

12. What are diseconomies of scale?

    Rising long-run average cost as output increases beyond a certain point, caused by coordination and control problems, communication difficulties, and worker motivation issues in large firms.

13. What is the minimum efficient scale (MES)?

    The lowest level of output at which a firm minimises its long-run average cost (i.e. exhausts all economies of scale); the start of the flat portion of the LRAC curve.

14. Distinguish internal from external economies of scale.

    Internal economies of scale arise within the firm as it grows; external economies of scale arise from the growth of the whole industry (e.g. a skilled labour pool, shared infrastructure) benefiting all firms.

15. Define total revenue (TR) and give its formula.

    The total receipts from selling output: $$TR = P \times Q$$

16. Define average revenue (AR) and state what it equals.

    Revenue per unit sold: $AR = \frac{TR}{Q} = P$. The AR curve is therefore the firm's demand curve.

17. Define marginal revenue (MR) and give its formula.

    The additional revenue from selling one more unit: $$MR = \frac{\Delta TR}{\Delta Q}$$

18. How do AR and MR relate for a price-taking (perfectly competitive) firm?

    Price is constant, so $AR = MR = P$, and both are horizontal (perfectly elastic) at the market price.

19. How do AR and MR relate for a firm with a downward-sloping demand curve?

    MR lies below AR and falls twice as steeply; for a linear demand $P = a - bQ$, $AR = a - bQ$ while $MR = a - 2bQ$.

20. State the profit-maximisation rule using marginal analysis.

    A firm maximises profit where $MR = MC$, provided $MC$ is rising (cuts $MR$ from below) at that output.

21. Give the formula for economic (total) profit.

    $$\pi = TR - TC = (AR - ATC) \times Q$$

22. Why does maximising where MR = MC give maximum profit?

    If $MR > MC$, producing more adds to profit; if $MR < MC$, cutting output adds to profit. Profit is greatest when the last unit's added revenue just equals its added cost, $MR = MC$.

23. What is normal profit?

    The minimum reward needed to keep an entrepreneur in the current line of business; it is counted as a cost. Normal profit is earned when $TR = TC$, i.e. economic profit $\pi = 0$ ($AR = ATC$).

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