PC, IC, Monopoly

• TC is made up of two components:

  • Explicit - physical costs (TFC,TVC)
  • Implicit - Opportunity costs
• Accounting profits - Considering ONLY explicit costs and revenues.
• Economic profit - considering BOTH implicit and explicit costs and revenue
• Normal profit - the minimal profit required for a firm to keep FoP in use
• Supernormal/abnormal profit ( AR > AC ) - when level of economic profit is greater than 0
• Subnormal profit ( AR < AC ) - when level of economic profit is below 0
• Normal profit ( AR = AC ) - when level of economic profit is 0

  
• Dividends - share of profits distributed to shareholders
• Predatory pricing - when firms purposely price goods cheaply to drive firms out the market
• Profit satisficing - sacrificing profit to satisfy stakeholders
• Objective of a firm: PRSP

  • Profit maximising
  • Revenue maximising
  • Sales maximising
  • Profit satisficing
  • survival

  
• Dynamic efficiency - reinvesting supernormal profits into the firm to decrease AC

  • Supernormal profits in LR
• X efficiency - production with no waste

  • Production on the AC curve
• Allocative efficiency/Pareto efficiency - where no consumer can be made better off without the cost of another

  • P = MC
• Productive efficiency - maximisation of output at the lowest point of AC

  • min point of AC, where MC = AC
• Barriers to entry:

  • Legal (patents)
  • High capital/ sunk costs
  • Economies of Scale
  • Predatory pricing - firms can subsidise losses in SR due to LR SN profits
• Barriers to entry examples:

  • capital costs
  • sunk costs
  • legal barriers
  • limit pricing (pre-predatory pricing)
• technical efficiency - when a given quantity of output is produced using the minimum input possible
• Price leadership: the most dominant firm will set a price and other firms will follow
• limit pricing - selling at a low price to deter new firms from joining the market
• Nash equilibrium - where game theorists suggest that the individual will choose the most optimal outcome for themselves
• sunk costs - costs that cannot be recovered after a firm leaves the market
• Deadweight loss - The loss of output that results from a change in price, losing out on consumer surplus