OxfordAQA International AS and A-level Economics: Market structures and firm aims (9640) – Revision Notes

These notes condense sections 3.1.4.1 to 3.1.4.3 of the OxfordAQA International AS and A-level Economics specification (version 1.2; International AS from May/June 2021, International A-level from May/June 2022). Section 3.1 is International AS content, also examined in the full International A-level. Section 3.5 quantitative skills can be assessed in any unit. For full explanations use the study guide; for questions use the practice set. Course hub: OxfordAQA A-level Economics. Checklist: printable checklist. Check your gaps with the free diagnostics. Related: The operation of markets revision notes.

The specification says you do not need to draw the traditional theory-of-the-firm diagrams or know the formal model of perfect competition with its diagrams. Monopoly and monopoly power are separate statements and are not covered here. All figures on this page are invented for illustration.

Key definitions

Term	Meaning
Market structure	The way a market is set up: how many sellers, how alike their goods are, how open it is to newcomers
Product differentiation	Features that make one seller’s good stand apart from rivals’ (brand, quality, location, service)
Barrier to entry	Any obstacle that stops newcomers joining the market easily
Price taker	A seller too small to influence the market price, so it accepts whatever price the market sets
Total revenue	Price × quantity
Profit	Total revenue − total costs
Supernormal profit	Profit above the level needed to keep a firm in the market
Normal profit	The minimum profit needed to keep the firm in the market
Market share	Firm’s sales ÷ total market sales × 100
Survival, growth, market share	Non-profit objectives named in the specification

3.1.4.1 Market structures: the three distinguishing features

1. How many firms compete
2. How different the products are
3. How easily new firms can enter

Rule of thumb: many firms + identical product + free entry = most competitive; one firm + blocked entry = least competitive; most real markets lie between.

Market (illustrative)	Firms	Product	Entry	Closest to
Street stalls selling the same fruit	Many	Identical	Easy	Highly competitive
Cafes in a city centre	Dozens	Differentiated	Fairly easy	Many sellers, differentiated
Domestic flights on one route	2 or 3	Similar	Costly	A few large firms

Why it matters for behaviour: structure decides whether a firm takes the price, competes on quality and branding, or watches rivals’ reactions.

3.1.4.2 Objectives of firms

• Profit is an important objective for most firms.
• Other objectives: survival, growth, increasing market share.
• Objectives affect behaviour. A detailed knowledge of each objective is not required.

Objective	Likely behaviour
Profit	Cut costs, set prices to earn more, close weak lines
Survival	Cut price or costs, delay investment, accept short-run loss
Growth	Accept lower profit now to expand
Market share	Price cuts and promotion to win customers

Method in steps: comparing two plans.

1. Revenue = P × Q for each plan.
2. Total cost = fixed + (variable cost per unit × Q).
3. Profit = TR − TC.
4. Market share = firm’s Q ÷ market Q × 100.
5. Compare changes in percent; for share, use percentage points.
6. Link the plan to the objective that would favour it.

Worked reminder. A small print shop (invented). Plan A: price £10, 3,000 jobs, fixed costs £9,000, variable £4 per job. Plan B: price £8.50, 4,500 jobs.

• A: TR = 30,000; TC = 9,000 + 12,000 = 21,000; profit £9,000.
• B: TR = 38,250; TC = 9,000 + 18,000 = 27,000; profit £11,250.
• Market of 30,000 jobs: share 10% to 15%, a rise of 5 percentage points.

Here the growth plan also raises profit, because the extra sales add £4.50 each above variable cost: (8.50 − 4) × 4,500 = 20,250 against (10 − 4) × 3,000 = 18,000, a difference of 2,250. Not every growth plan sacrifices profit; check the numbers.

Break-even quantity = fixed costs ÷ (price − variable cost per unit). Print shop at Plan A: 9,000 ÷ 6 = 1,500 jobs. Margin of safety: (3,000 − 1,500) ÷ 3,000 = 50%.

Survival logic (short run): keep producing if price is above variable cost per unit, because each unit adds towards fixed costs. Stop if price is below variable cost. Long run: revenue must cover all costs.

3.1.4.3 Competitive markets

Main characteristics of perfect competition:

• many buyers and sellers, none able to influence price
• identical products
• no barriers to entry or exit
• good information on prices

Price: set by the interaction of market demand and supply. Each firm is a price taker.

Method in steps: finding equilibrium from equations.

1. Put the demand and supply equations equal to each other.
2. Rearrange to find P.
3. Put P back into both equations; they must give the same Q.

Worked reminder: Qd = 500 − 10P and Qs = 20P − 100 give 600 = 30P, so P = 20, Q = 300. After a demand rise to Qd = 560 − 10P: 660 = 30P, P = 22, Q = 340.

Entry reminder: if typical average cost is £20 a unit, the price of £22 gives £2 of supernormal profit on each of 340 units, £680 in total. Entry shifts supply to Qs = 20P − 40: 560 − 10P = 20P − 40, so 600 = 30P, P = 20, Q = 360. Price falls by (20 − 22) ÷ 22 × 100 = −9.09% and quantity rises by (360 − 340) ÷ 340 × 100 = +5.88%. Supernormal profit is now zero.

Why profits are likely lower than in a market dominated by a few large firms (chain of reasoning):

1. No barriers.
2. Supernormal profit attracts entry.
3. Supply increases.
4. Price falls.
5. Supernormal profit disappears, leaving normal profit.

Where a few firms dominate and barriers are high, entry cannot compete the profit away, and with few rivals there is less pressure to cut price.

Evaluation points (use two or three):

• Short run: a competitive market can earn supernormal profit before entry occurs.
• Large firms may have lower costs from economies of scale, so profit can be high even at a lower price.
• A price war between the few firms can reduce profit.
• The threat of new entry can restrain large firms’ prices.
• How quickly entry happens depends on how high the barriers are in practice.

Factors affecting competitiveness: number of firms; barriers to entry (high start-up cost, legal protection, brand loyalty, cost advantages of large existing firms); degree of product differentiation; how well informed buyers are.

Must-know distinctions

• Profit versus revenue: a plan can raise revenue and reduce profit.
• Percent change versus percentage-point change.
• Price taker versus price setter.
• Short-run versus long-run profit in competitive markets.
• Supernormal versus normal profit.

Quick self-test

1. Name the three features used to tell market structures apart.
2. Give the formula for profit.
3. A firm sells 400 items at £25 with fixed costs of £4,000 and variable costs of £10 per item. Find profit.
4. Its market sells 5,000 items. A growth plan raises its sales to 600. Find the change in market share in percentage points.
5. State two other objectives of firms besides profit.
6. Why is a farm in a perfectly competitive market a price taker?
7. Solve Qd = 800 − 20P and Qs = 30P − 200 for the equilibrium price and quantity.
8. Give the five-step reason profits tend to be lower in a market with no barriers to entry.
9. Give two factors that affect how competitive a market is.
10. Give one reason a competitive market might not earn smaller profits than a market run by a few big firms.

Answers

1. How many firms compete, how different the products are, how easily new firms can enter.
2. Profit = total revenue − total costs.
3. TR = 400 × 25 = £10,000; TC = 4,000 + 4,000 = £8,000; profit £2,000.
4. Before 400 ÷ 5,000 = 8%; after 600 ÷ 5,000 = 12%; a rise of 4 percentage points.
5. Any two of: survival, growth, increasing market share.
6. It is too small to affect the market price and sells an identical product, so charging more loses all its buyers.
7. 800 − 20P = 30P − 200, so 1,000 = 50P, P = 20; Q = 800 − 400 = 400.
8. No barriers, supernormal profit attracts entry, supply rises, price falls, supernormal profit disappears.
9. Any two of: number of firms, barriers to entry, product differentiation, information.
10. In the short run, supernormal profit can exist before entry; or large firms’ economies of scale may leave them with lower costs; or a price war may cut the few firms’ profit.

Where marks are usually lost

• Saying a firm in perfect competition “chooses” its price.
• Quoting a market share change in percent instead of percentage points.
• Treating survival, growth and profit as identical objectives.
• Computing profit from revenue alone, forgetting fixed costs.
• Listing characteristics without linking them to price, profit or behaviour.
• Stating that competitive markets earn no profit, without distinguishing short and long run.
• Asserting that big firms always earn more profit, with no evaluation.
• Using real-world statistics you cannot support.

Official syllabus

OxfordAQA International AS and A-level Economics specification (9640), version 1.2, published by OxfordAQA International Examinations. First teaching September 2020; first International AS exams May/June 2021; first International A-level exams May/June 2022.