2025 Firms and Decisions (2) Market Structure ACJC

© ACJC Economics Dept/2025/Firms and Decisions (2): Market Structure 1 ANGLO-CHINESE JUNIOR COLLEGE JC1 Economics H2 Firms and Decisions (2) MARKET STRUCTURE Section Content Page 1 PRIMARY OBJECTIVE: PROFIT MAXIMISATION (RECAP) 5 1.1 Revenue and Cost Concept 5 1.2 Profit Concepts 5 2 CHARACTERISTICS OF MARKET STRUCTURES 6 2.1 Characteristics of Market Structures 6 2.2 Types of Market Structures and their Characteristics 10 2.3 Differences between Perfect and Imperfect Markets 13 2.4 Level of Competition 16 3 BEHAVIOR OF FIRMS I: PRICE AND OUPUT DECISIONS, TYPES OF PROFITS 18 3.1 Profit Maximising Equilibrium 18 3.2 Types of Profits 20 3.3 Equilibrium of a Firm with Imperfect Information (Cost-Plus Pricing) 28 3.4 Price and Output Decisions for Oligopolies 29 3.5 Price and Output Decisions in Contestable Markets 33 3.6 Alternative Objectives of Firms 35 4 BEHAVIOR OF FIRMS II: STRATEGIES TO INCREASE PROFITS 39 4.1 Strategies to Raise Revenue 39 4.2 Strategies to Reduce Costs 48 4.3 Growth Strategies 52 5 PERFORMANCE AND EVALUATION OF MARKET STRUCTURES 57 5.1 Key Concepts and Criteria 57 5.2 Impact on Society’s Welfare Across Market Structures 60 6 GOVERNMENT INTERVENTION FOR MARKET DOMINANCE 67 Reference Text (Optional): 1. Case, Fair, Oster. Principles of Economics, Special Edition for ACJC, Pearson, 2013. Chapters 12 - 15. 2. John Sloman, Economics, 8th Edition, Prentice Hall. Chapters 6-8. 3. Mankiw, Quah & Wilson. Principles of Economics, An Asian Edition, CENGAGE Learning. Chapters 14-17.

© ACJC Economics Dept/2025/Firms and Decisions (2): Market Structure 2 WHAT IS THIS TOPIC ABOUT? In Part 1 of “Firms and Decisions – Production & Cost,” we learnt that a firm’s primary objective is profit maximisation, making cost concepts essential. In this next part, we explore how varying levels of competition across industries affect firms' revenues. By considering both revenue and costs, firms are better positioned to maximise profits. We will also examine cases where firms may pursue alternative objectives due to specific constraints or exceptions. In “Firms and Decisions (2) – Market Structure”, we will examine the characteristics, the behaviour as well as evaluate the performance of firms in both perfect and imperfect markets. You will learn about these four market structures: • Perfect competition (many small firms, each without market power) • Imperfect markets: o Monopoly (one firm with huge market power) o Oligopoly (few big firms dominating the market, each with strong market power but firms are inter-dependent) o Monopolistic competition (many small firms, each with weak market power) In understanding and evaluating the behaviour and performance of such firms, the focus will be on the following key questions: • How do firms determine their equilibrium output and price? • How do they compete with other firms in the same industry? • What are the implications of their behaviour from society’s point of view? In evaluating their decisions, you may want to weigh the benefits and costs of their actions, not only to the firms themselves but to consumers, other firms, and the society at large.

© ACJC Economics Dept/2025/Firms and Decisions (2): Market Structure 3 LEARNING OUTCOMES Enduring Understanding: • The primary aim of firms is to maximise profit. • The stronger the barriers to entry, the fewer the number of firms, and hence the stronger the market power possessed by existing firms in the industry. • Firms make decisions by comparing the marginal benefits and marginal costs of their actions. • The firm’s performance is evaluated based its on efficiency and welfare impact on society. • Where market dominance is present in industries producing essential goods and services, the concerns relating to inefficiency and inequity may prompt government to intervene through public policy measures. Essential Questions • Should firms use price or non-price competition strategies to achieve their objective of profit maximisation? • What are the factors that influence a firms’ price and output decision? • Is it desirable to have more competition in all industries? • Should government intervene to ensure greater competition?

© ACJC Economics Dept/2025/Firms and Decisions (2): Market Structure 4 1. OBJECTIVES OF FIRMS (RECAP) This section is a summary of what you have in Firms and Decisions (1) – Production & Cost. Primary Objective: Profit Maximisation • Profit is the difference between Total Revenue (TR) and Total Cost (TC). Firms can increase profit by either raising total revenue and/or reducing total cost. • The primary assumption is that all firms aim to maximise profit. • By the marginal principle, total profit will be maximised at the output level where MR=MC. • This output level is termed the firm’s equilibrium output and the corresponding price is the firm’s price. 1.1 REVENUE AND COST CONCEPTS Total Revenue (TR) • Firm’s earning from sale of total output • Price x Output (P x Q) Total Cost (TC) • Summation of the total fixed cost and total variable cost • TC = TFC + TVC • TC = AC x output produced Average Revenue (AR) • Earning per unit of output • Total Revenue (P x Q) Total Output (Q) • AR = P Average Cost (AC) • Total cost of production per unit of output • AC =AFC+AVC • Total Cost (TC) Total Output (Q) Marginal Revenue (MR) • Increase in total revenue that results from production of one additional unit of output • Change in TR (TR) . Change in Output (Q) Marginal Cost (MC) • Increase in total cost that results from production of one additional unit of output • Change in TC (TC) . Change in Output (Q) 1.2 PROFIT CONCEPTS Summary: Economic Profit TR and TC relationship Normal Profit TR = TC, or TR – TC = 0 Supernormal Profit TR > TC, or TR – TC > 0 Subnormal Profit (Losses) TR < TC or TR – TC < 0

© ACJC Economics Dept/2025/Firms and Decisions (2): Market Structure 5 2. CHARACTERISTICS OF MARKET STRUCTURES • There are 4 types of market structure which can be classified broadly into perfect (i.e. perfectly competitive) and imperfect markets (i.e. monopolistic competitive, oligopol istic and monopolistic) based on the level of competition in the markets. • In perfect competition, competition amongst firms is very high (many firms competing against each other). The level of competition falls as market becomes more imperfect (with fewer firms competing). • The market structures can be determined in terms of the following characteristics: (A) Barriers to entry (B) Number and size of firms in the industry (C) Nature of product (whether products are homogeneous or differentiated) (D) Perfect/Imperfect information and knowledge 2.1 CHARACTERISTICS OF MARKET STRUCTURES (A) Barriers To Entry • Barriers to entry refer to restrictions or constraints that make entry of new firms into an industry difficult or impossible. The existence of barriers to entry makes the market less contestable and less competitive. • The strength of the barriers to entry influences the number and size of firms in the market and hence the market power of each firm. o Strong barriers to entry protect incumbent firms by restricting entry of new firms. With fewer firms in the industry, this will imply the presence of a few large firms (oligopoly) or in the extreme case, a single firm (monopoly) in the market. o In contrast, in the absence of barriers to entry or presence of weak barriers to entry, it will give rise to many small firms (perfect competition & monopolistic competition). Types of Barriers to Entry A1. Cost barriers (economies of scale) • In the previous set of notes, we described production techniques in whic