Section1-EducationScotland.docVIP

NATIONAL QUALIFICATIONS CURRICULUM SUPPORT Economics Microeconomics The Theories of the Firm [ADVANCED HIGHER] ???  Acknowledgements This document is produced by Learning and Teaching Scotland as part of the National Qualifications support programme for Economics. First published 2002 Electronic version 2002 ? Learning and Teaching Scotland 2002 This publication may be reproduced in whole or in part for educational purposes by educational establishments in Scotland provided that no profit accrues at any stage. ISBN 1 85955 929 8 contents Introduction 1 Section 1: The theory of perfect competition 3 Section 2: The theory of monopoly 9 Section 3: The theory of monopolistic competition and oligopoly 13 Section 4: Resource allocation/externalities 19 Section 5: Suggested solutions 23  INTRODUCTION There are basically two types of market situation: (a) Perfect competition – in this market, firms have no influence; they are price takers. (b) Imperfect competition – this market includes monopoly, oligopoly and monopolistic competition; firms are price makers and can influence the market place. Every firm must obey three rules in order to survive: ? To maximise profits, firms will produce at that output where MC=MR and at the same time MC must be rising. ? A firm will continue to produce in the short run as long as it can cover its variable costs. ? In the long run a firm must cover its total costs. SECTION 1 In order to build a model against which we can compare other market situations, certain characteristics have to be assumed: ? There are a large number of buyers and sellers in the market. ? Buyers and sellers have perfect knowledge of goods and prices in the market. ? All firms produce a homogeneous product. Products are identical. ? There is freedom of exit and entry to the industry. ? There is perfect mobility of the factors of production. In the real world it is almost impossible for all of these conditions to exist at the same time. Foreign exchange and