New A Level
Economics
Theory of
the Firm
Resources for Courses
Diagram Disaster
Resources for Courses
Teacher Instructions
This resource provides a straightforward exercise in which students need to study
each of the Theory of the Firm diagrams provided, and identify the most likely title
for the diagram.
Suggested solutions are provided below (although do of course reward students who
correctly identify alternative solutions!).
Suggested Solutions
1 Monopolistic competition in the long run (earning only normal profit but still
operating at the profit maximising point)t
2 A firm in imperfect competition operating at a point where productive efficiency
is achieved or operating at minimum efficient scale
3 Oligopoly kinked demand curve / discontinuous marginal revenue curve / stable
price in oligopoly with homogeneous goods
4 Natural monopoly / loss-making natural monopoly
5 Loss-making firm in perfect competition in the short-run
6 A firm with price-making power operating in a highly contestable market or limit
pricing or a firm with a business objective of normal profit
7 A firm operating at a point where it suffers from diseconomies of scale
8 A price-discriminating monopoly with two distinct sub-markets
Diagram disaster
For each of the diagrams below, decide what the correct title for each diagram should be.
Diagram 1
Possible titles for the diagram
MC
Costs/
Revenue
AC
P
MR
AR
Q
Quantity
Diagram 2
Possible titles for the diagram
MC
Costs/
Revenue
AC
P
MR
AR
Q
Quantity
Diagram 3
Possible titles for the diagram
Costs/
Revenue
MC
P
AR
MR
Quantity