Theory of the Firm
BY: Kimberly Lin
Mehul Christian
What is Profit?
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Revenue (total money earned) – Costs
Opportunity Cost needs to be added to
cost
2 Types of Profit:
- Normal Profit
-Abnormal ( Super-normal) Profit
A Sliding Scale…
Monopoly
Oligopoly
Monopolistic
Competition
Number of firms INCREASE
Perfect
Competition
Monopoly
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Only one firm controls the market
Monopoly is identified by the percentage of
stocks they have in the industry
Barriers to entry:
- Patents, International trade restrictions
Governments try to limit the power of
monopolists
The firm have no competition, and have the
control over the price
Oligopoly
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Approximately 2 firms in a single market
Microsoft & Apple, Coke and Pepsi
Interdependence
Collusion could happen
Monopolistic Competition
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Firms in an industry with distinct products
of their own, but have similar functions
No barriers of entry
Lessens price competition
Perfect Competition
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There are many small firms in the market
Identical products are sold by all firms
Perfect knowledge of prices and
technology
There are no barriers of entry
There is lots of competition
Leads to “normal profit” in the long run
Doesn’t really exist in the real world