# Posts tagged theory of the firm

## Price Discrimination

Feb 28th

The first video in this post goes to a student. Komilla (**CuteChadz**)has produced a very professional looking summary and it is well worth a look:

**pajholden** does price discrimination

**richardmckenzie** gives us two videos:

Click here to see a Reffonomics interactive presentation on price discrimination.

For a bit of fun, view the scene from the Monty Python film ‘Life of Brian’ where confusing haggling (first price discrimnation) takes place – click here.

## Oligopoly

Feb 21st

IB Syllabus requirements:

• Assumptions of the model

• Collusive and non-collusive oligopoly

• Cartels

• Kinked demand curve as one model to describe interdependent behaviour

• Importance of non-price competition

• Theory of contestable markets

**BrynJonesOnline** introduces the theory before moving onto Kinked Demand Theory:

**Cartels**

This helpful video is by **richardmckenzie**

**Non Collusion – Kinked Demand Theory:**

An animated slideshow on oligopoly focuses on kinked demand theory (from the excellent Reffonomics ).

The above introduces the ‘kink’ (by **ACDCLeadership**). The below is by **pajholden** and goes into more detail:

### kinked demand curve theory (click on the link to view)

The kinked demand theory can be extended to show how such a non-collusive oligopolistic firm makes a loss, makes a profit or breaks even (again from the excellent Reffonomics ).

**Theory of Contestable Markets**

**pajholden** discusses the theory in his back garden: contestable market theory

**economicslessons** has produced this video geared towards A Level economics (so the example question at the end is not an IB one):

## Extra:

On the interdependency of firms, we should consider John Nash who arrived at the theory of a Nash Equilibrium in which members of a group would serve their own interests by also serving the rest of the group’s interests (as opposed to Adam Smith’s contention that individuals (or firms) will strive to serve their own interests only). This idea was captured in the excellent film A Beautiful Mind and the relevant excerpt can be seen by clicking here.

On the difficulty of drawing a line between monopolistic competition and oligopoly, view this slideshow by Reffonomics.

Finally, for a bit of fun, see how a famous condom manufacturer has approached non-price competition through the power of advertising by clicking here.

## Monopolistic Competition

Feb 8th

Here is the IB syllabus requirement for this sub-topic:

Monopolistic competition

• Assumptions of the model

• Short-run and long-run equilibrium

• Product differentiation

• Efficiency in monopolistic competition

From www.reffonomics.com a useful introductory slide on calculating price and quantity under monopolistic competition scenario:

Which then leads to finding profit (from the same site, www.reffonomics.com) :

One that is earning a loss:

And one breaking even:

You can access all the resources here: Microeconomics by Dick Brunelle and Steven Reff – full credit to these industrious authors of the presentations above.

From http://highered.mcgraw-hill.com (McConnell Brue Economics) we have a useful interactive graph to explore with appropriate questions to solve – click on the image or title below

Now some video resources:

**econsteve12** has given us three parts:

**pajholden** provides this video: click here

**richardmckenzie** offers this video:

And finally here is **ACDCLeadership**’s 60 seconds’ worth:

## Monopoly

Feb 1st

The IB syllabus requirements for this sub-topic are to understand:

- Assumptions of the model
- Sources of monopoly power/barriers to entry
- Natural monopoly
- Demand curve facing the monopolist
- Profit-maximizing level of output
- Advantages and disadvantages of monopoly in comparison with perfect competition
- Efficiency in monopoly

Here are a selection of useful resources to further your understanding of the above.

Two very good presentations on monopolies courtesy of http://www.reffonomics.com:

Above Video Source: **mjmfoodie**

## Perfect Competition

Jan 25th

The IB Economics syllabus requires you to understand the following:

• Assumptions of the model

• Demand curve facing the industry and the firm in perfect competition

• Profit-maximizing level of output and price in the short-run and long-run

• The possibility of abnormal profits/losses in the short-run and normal profits in the long-run

• Shut-down price, break-even price

• Definitions of allocative and productive (technical) efficiency

• Efficiency in perfect competition

This selection of resources is designed to compliment your learning of this topic, with a focus on video clips and interactive resources.

Via: http://www.reffonomics.com

This is a very good interactive diagram to try out different scenarios buy adjusting the D=AR=MR line and/or the quantity produced.

Excellent interactive exploration of the relevant theory with multiple choice quiz questions to test your understanding(click on the image)

Via http://openmultimedia.ie.edu created by Javier Carrillo

**mjmfoodie** on Perfect Competition:

**pajholden** on equilibrium in perfect competition (click here to view)

**richardmckenzie** offers two detailed videos:

**ACDCLeadership** does his usual 60 seconds take on things:

## The Long-Run: Cost Curves, Economies and Diseconomies

Jan 17th

www.bized.co.uk provides some useful materials for this topic. The starting point is their mind map. Click below to view the mindmap on its original site and in full.

A very useful MS powerpoint file, also courtesy of www.bized.co.uk, to expand on teh above mindmap can be accessed here:

**pajholden** gives an overview in 8 minutes:

Check your understanding of the different economies of scale using this simple interactive test from www.dineshbakshi.com (click on it):

Once you have learned about the different Economies of Scale, attempt to create a detailed revision diagram by clicking here:

A very detailed analysis by **richardmckenzie** of how the long run cost curve can be built up of multiple short run cost curves. He also includes the long run *marginal *cost curve:

This video (with very quiet audio – you will need to turn the volume up) explains the overall shape of the LRAC (Long Run Average Cost) curve with labels but it is simpler as it does not include the SRAC curves.

Now, could you identify economies of scale on a diagram? Pause this video at the start and see fi you can answer it before the commentator gives the answer:

## Profit

Jan 13th

We need to understand this according to the syllabus:

- Distinction between normal (zero) and supernormal (abnormal) profit
- Profit maximization in terms of total revenue and total costs, and in terms of marginal

revenue and marginal cost - Profit maximization assumed to be the main goal of firms but other goals exist (sales volume maximization, revenue maximization, environmental concerns)

First review the difference between normal and supernormal (or abnormal) profit explained in this video by **mjmfoodie**:

Then, **mjmfoodie** also introduces us to profit maximisation “in terms of total revenue and total costs, and in terms of marginal revenue and marginal cost” (IB Economics syllabus):

The MC=MR is a golden rule which you really need to understand and remember. See it action in this fast-aced example by **ACDCLeadership**:

For a light hearted recap, SpongeBob Squarepants and Mr Crab discuss these principles (thanks to **EdwardBahaw**):

We must remember however, that profit maximisation is assumed to be the number one goal of firms. What about other goals?

Research / Discuss what other goals a firm might have – share them with others in your class.

Now, for each of the additional goals, discuss whether or not they in fact do in some way link to profict maximisation.

**pajholden** demonstrates that the profit maximising level can be different from output maximising level. Watch the video here:

### objectives of firms

## Revenues –Total, Marginal and Average

Dec 2nd

By now you should understand the graphs for

a) Total Product (b) Average and Marginal Product (c) FC, VC and TC (d) AFC, AVC, ATC, MC

You should also recognise the ultimate assumption of firms – profit maximising

Now we turn to **revenue.**

Image: Some rights reserved by saturnism

You now need to:

- Recap on the difference between perfect competition and monopoly market structures
- Understand the different equations for cost and the equations for calculating revenue
- Understand the behaviour of revenue for a monopoly (a price giver acting in imperfect comp) (this includes relevant graphs, trends of graphs and explanations (you might also possibly recognise the role of elasticity)
- The same as above, but for Perfect Competition
- Understand the purpose of studying revenue and how relates to previous learning on output / product and costs

First of all, recall the main differences between monopoly and perfect competition:

Now make sure you know the **Golden Equations** – complete this work sheet before moving on:

Golden Equations MS Word version

Golden Equations Google Doc version – make your own copy before you can edit

Now attempt to complete this spreadsheet worksheet. Take your time – work through it slowly and deliberately. There are two tabs to complete, one for monopoly situation (first) and one for perfect competiton. You might like to research a little to help give as full answers as possible for the text boxes.

Once you have checked through your answers to the above, you can review your overall understanding with this video:

Revenue Curves For Firms by pajholden

Finally, you should practice drawing the curves you have learned using the activities above and then try to annotate them with their key features and explanations

## Short Run Cost Curves

Nov 25th

Our eventual aim of this learning session is to understand (and know ‘like the backs of our hands’) the following diagram:

First we need to understand the difference between fixed and variable costs. This video by MJM Foodie handles this well:

This is a very good interactive exercise to consolidate your understanding of the different types of cost, and ends with a graph to show how their ‘curves’ will look. It introduces the idea of marginal costs and links changes in these costs to the theory of diminishing returns – crucial to understanding the shapes of the graphs. Read all of the text and work through the activities from start to end.

http://www.sambaker.com/econ/cost/cost.html

Now MJM Foodie begins to link us to the graphs more directly:

If you need another glimpse of how the product curve ‘translates’ to the cost curve so that the theory of diminishing marginal returns is transferred, see the first few slides of the following (after slide 3 , the slideshow really gets too technical for IB Economics):

http://www.unc.edu/depts/econ/byrns_web/Flash/Chapter_8/8_2.swf

We need to understand and be able to draw the TC, FC and AC curves.

This link helps us understand how to achieve the graph at the top – work your way through these explanations very carefully:

http://www.reffonomics.com/TRB/chapter8/COSTS6.swf

This next link gives a useful summary of the different cost curves, and includes an interactive exercise to check your understanding on Average Total Costs

http://www.kmversteeg.com/mult/9_05.swf

This is very useful for understanding the shapes of each of the cost curves:

Cost Curves Part 2 from reffonomics

Activity 7 here is a very good practical exploration of products and costs using both the EXCEL sheet and the Word Document:

http://www.economicsnetwork.ac.uk/archive/richard_green/

Finally this interactive graph allows you to ‘play’ with the set of cost curves we see in the first image of this post, showing how labour prices and fixed costs can be altered to change the gradients of the graphs, but notice how their overall shapes remain:

http://highered.mcgraw-hill.com/sites/007334365x/student_view0/chapter9/interactive_graph_2.html

Back to MJM Foodie. She explains how we can link from TC, FC and AC to ATC, AFC and AVC curves:

Finally, some more videos (if you need them) to reinforce what you should have learned by now:

### Cost Curves for Firms by pajholden