IBDP Economics Chapter 7 Notes

the theory of firm II


These notes have specially been curated by expert teachers to simplify and enlighten concepts given in IB The Theory of the Firm-II HL. The notes are comprehensive in nature and are sufficient to study the chapter in depth and one need not look for other resources beyond the notes provided on our website which can be accessed for free. The notes for The Theory of the Firm-II IBDP HL are available on our official website and can be downloaded for free. The material made available on Tychr’s website is available for all IBDP subjects and is specially curated after an extensive amount of effort to ensure that the notes are in consonance with the IB curriculum and are an amalgamation from various textbooks prescribed by the IBO.

In this chapter we study about profit maximization in the short run and in the long run in various market structures. Allocative efficiency refers to the efficient utilisation of resources when P = MC and productive efficiency refers to when production takes place at minimum ATC. In a perfectly competitive market the firm in the long run achieves both allocative efficiency and productive efficiency. In a Monopoly profit maximization occurs when MR = MC. Unlike the perfectly competitive markets in a monopolist market there is allocative and productive inefficiency due to lack of social surplus. In monopolistic competition there is price and non price competition and the firms make normal profits.

Neither allocative nor productive efficiency is achieved in the long run equilibrium of the firm in monopolistic competition. It is very important for students to understand the differences between perfect competition and Monopoly and monopolistic competition which is given in the form of tables in the chapter. Next we study about oligopoly. Game theory is a mathematical technique analysing the behaviour of decision makers. And the study about Nash equilibrium and prisoner’s dilemma help us in understanding and analysing the strategic behaviour of the firms in an oligopoly. The chapter also gives in-depth study about the two types of oligopoly- collusive and non collusive. Lastly we also look at the three necessary conditions for price discrimination and the effects of the same in the market. This chapter covers a lot of important and basic concepts for understanding day-to-day and practical economic activities and thus the students should make sure to clear their concepts.