AQA A Level Economics Course Companion Year 2 Topics Microeconomics Author: Geoff Riley www.tutor2u.net Copyright tutor2u: www.tutor2u.net/economics 1 Individual economic decision making ................................................................................................ 4 Imperfect Information ........................................................................................................................ 6 Behavioural Economics ...................................................................................................................... 8 Public and Private Sector Organisations ...................................................................................... 15 Profit and Not-for-Profit Organisations ........................................................................................ 15 Production and productivity ............................................................................................................ 18 Specialisation, division of labour and exchange ............................................................................... 18 The Law of Diminishing Returns ....................................................................................................... 21 Long Run Returns to Scale ............................................................................................................ 22 Costs of Production .......................................................................................................................... 24 Costs of production in the short run ............................................................................................ 24 Economies and Diseconomies of Scale ............................................................................................ 31 Long run average cost (LRAC) ....................................................................................................... 31 Marginal, average and total revenue ............................................................................................... 38 Price elasticity of demand and the relationship to total revenue ................................................ 40 Profit ................................................................................................................................................. 43 Profit maximisation in the short run ............................................................................................ 45 Technological change ....................................................................................................................... 47 Economic Efficiency (Static and Dynamic) ........................................................................................ 50 Market Structures ............................................................................................................................ 53 Business Objectives .......................................................................................................................... 56 Profit Maximisation ...................................................................................................................... 57 Revenue Maximisation ................................................................................................................. 57 Sales Maximisation ....................................................................................................................... 58 Profit Satisficing ............................................................................................................................ 59 Divorce between Ownership and Control & the Principal Agent Problem .................................. 61 Perfect Competition ......................................................................................................................... 65 Assumptions of the Model ........................................................................................................... 65 Profit maximisation in the short run ............................................................................................ 67 Profit maximisation in the long run .............................................................................................. 67 Shut down price and break-even price ........................................................................................ 69 Perfect Competition and Efficiency .............................................................................................. 70 Monopolistic Competition ............................................................................................................... 72 Assumptions of the model ........................................................................................................... 72 Revenue curves in monopolistic competition .............................................................................. 73 Profit maximisation in the short run ............................................................................................ 73 Profit maximisation in the long run .............................................................................................. 73 Non-price competition ................................................................................................................. 74 Monopolistic competition and economic efficiency .................................................................... 75 Oligopoly .......................................................................................................................................... 77 Assumptions of the model ........................................................................................................... 77 Measuring Market Concentration – The N-Firm Concentration Ratio ......................................... 78 Non-collusive oligopoly ................................................................................................................ 79 Game Theory in Oligopoly ............................................................................................................ 83 The Prisoners’ Dilemma ............................................................................................................... 85 Potential Benefits from Collusion – A Game Theory Example ..................................................... 87 First Mover Advantage in Markets ............................................................................................... 87 Open / Formal Collusion in an Oligopoly ...................................................................................... 89 Collusion and Efficiency ................................................................................................................ 92 Copyright tutor2u: www.tutor2u.net/economics 2 Tacit/informal collusion ............................................................................................................... 93 Monopoly ......................................................................................................................................... 94 Nature of Monopoly Power in Markets ....................................................................................... 94 Monopoly and Profit Maximisation ............................................................................................. 95 Revenue Maximisation ................................................................................................................. 97 Natural Monopoly ........................................................................................................................ 97 Monopoly and Efficiency .............................................................................................................. 99 Policies to Regulate Monopoly Power ....................................................................................... 101 Price Discrimination ....................................................................................................................... 103 Necessary conditions for price discrimination ........................................................................... 103 Main Aims of Price Discrimination ............................................................................................. 103 Types of Price Discrimination / Dynamic Pricing ........................................................................ 104 Price Discrimination and Efficiency / Welfare ............................................................................ 107 Contestable and non-contestable markets .................................................................................... 108 Prices and Profits in a Contestable Market ................................................................................ 111 The Labour Market ......................................................................................................................... 113 Demand for Labour .................................................................................................................... 113 Labour Supply ............................................................................................................................. 116 Labour Immobility ...................................................................................................................... 120 Wage determination in competitive labour markets ................................................................. 121 Wages and employment in imperfectly competitive labour markets .......................................