OxfordAQA International AS and A-level Economics: Market structures, firms' objectives and competition (9640)

This guide follows the OxfordAQA International AS and A-level Economics specification (version 1.2; first teaching September 2020, International AS from May/June 2021, International A-level from May/June 2022). It covers sections 3.1.4.1 (market structures), 3.1.4.2 (the objectives of firms) and 3.1.4.3 (competitive markets). Section 3.1 is International AS content and is also examined in the full International A-level. Section 3.5 (quantitative skills) can be assessed in any unit, so the calculations here use it. Monopoly, monopoly power and the competitive market process are separate statements in the specification and are not taught here.

Use it with the revision notes and the practice set. Related pages: The operation of markets and the markets practice set. Course hub: OxfordAQA A-level Economics. Checklist: printable checklist. To find weak spots first, try the free diagnostics.

All names and figures below are invented for teaching and do not describe any real firm, market or country.

What the specification asks for

Section	What you must be able to do
3.1.4.1	Recognise that markets are organised in different ways and that this shapes firms’ behaviour; separate structures by how many firms compete, how different their products are and how easily newcomers can enter
3.1.4.2	Explain that profit matters to most firms; know other objectives (survival, growth, market share); appreciate that objectives affect behaviour
3.1.4.3	State the main characteristics of a perfectly competitive market; explain how price is set by demand and supply; explain why a competitive market is likely to earn smaller profits than one run by a few big firms; understand factors affecting competitiveness, including the number of firms and barriers to entry

Two limits are stated in the specification. You are not required to draw or use the traditional theory-of-the-firm diagrams, and you do not need the formal model of perfect competition with its diagrams. Marks come from clear reasoning, numbers used correctly and evaluation. A detailed knowledge of firms’ objectives is also not required: you need to be aware that they vary and that they change behaviour.

3.1.4.1 Market structures

A market structure is the way a market is set up: how many firms compete, how alike their products are, and how easily new firms can enter. These features shape how firms behave, for example whether they must accept the going price, compete on quality or hold prices above costs.

Three things set one structure apart from another.

1. Number of firms. Many small sellers means each has little influence. A few large sellers means each can affect the market.
2. Degree of product differentiation. Identical products can only compete on price. Differentiated products (branding, quality, location, service) give each seller a little say over what it charges.
3. Ease of entry. Where entry is easy, high profits attract new firms. Where it is blocked, high profits can last.

Illustrative market in Country A	Firms	Product	Entry	Closest to
Sacks of grain	400 farms	Identical	Easy	Perfect competition
Hair salons in one town	30	Differentiated by style and location	Fairly easy	Many firms with differentiated products
Mobile network services	4 firms hold nearly all sales	Branded, similar	Very costly	A few large firms (oligopoly)
Water pipe network in one region	1	No substitute	Blocked	Monopoly

Real markets sit on a spectrum, so use the words “closest to” or “has features of”. The salon market shows why: it has many sellers like the grain market, but each salon can set a price a little above or below rivals because customers do not see them as identical.

Why structure affects behaviour. A grain farm that charges above the market price loses its customers, so it takes the price. A mobile network with a large share must consider how rivals react to every price change, and it may spend heavily on advertising. A salon competes on style and convenience as well as price. The structure sets the pressures the firm faces.

3.1.4.2 The objectives of firms

Profit is total revenue minus total costs: profit = TR − TC, where TR = price × quantity. For most firms, profit is an important objective because it rewards owners and pays for investment. The specification names other objectives: survival, growth and increasing market share. Different objectives lead to different decisions.

Objective	Typical behaviour
Profit	Cuts costs, raises price where demand allows, drops unprofitable lines
Survival	Cuts price or costs to stay in business, delays investment
Growth	Accepts low profit to expand sales or open new sites
Market share	Cuts price or spends on promotion to win customers from rivals

Worked example: one firm, three objectives

Alder makes garden chairs in a small town. Fixed costs are £12,000 a month and variable costs are £50 per chair. The market sells 8,000 chairs a month in total. Use TR = P × Q, TC = fixed + variable, profit = TR − TC.

Plan 1 (profit focus): price £80, sells 500 chairs.

• TR = 80 × 500 = £40,000
• TC = 12,000 + (50 × 500) = 12,000 + 25,000 = £37,000
• Profit = 40,000 − 37,000 = £3,000; profit margin = 3,000 ÷ 40,000 = 7.5%
• Market share = 500 ÷ 8,000 = 6.25%

Plan 2 (growth and market share): price £68, sells 800 chairs.

• TR = 68 × 800 = £54,400
• TC = 12,000 + (50 × 800) = £52,000
• Profit = £2,400; market share = 800 ÷ 8,000 = 10%

	Plan 1	Plan 2	Change
Sales (chairs)	500	800	+60%
Revenue	£40,000	£54,400	+36%
Profit	£3,000	£2,400	−20%
Market share	6.25%	10%	+3.75 percentage points

Plan 2 raises sales by (800 − 500) ÷ 500 × 100 = 60%, and share rises by 3.75 percentage points. A percentage-point change is a difference between two percentages; do not call it 3.75%. A firm that values growth or share would pick Plan 2 despite 20% less profit. A profit-focused owner would pick Plan 1. The objective explains the behaviour.

Survival

Survival matters when conditions turn bad. Suppose a downturn cuts Alder’s price to £56 for the same 500 chairs.

• TR = 56 × 500 = £28,000. TC is still £37,000. Loss = £9,000.
• Each chair adds 56 − 50 = £6 above variable cost, so 500 chairs add £3,000 towards fixed costs.

Alder loses £9,000 if it keeps producing. If it stopped producing and still had to pay the £12,000 fixed costs, the loss would be £12,000. In the short run it is better to continue, because revenue covers variable costs. If the price fell to £48, below variable cost of £50, producing would lose £13,000 (TR £24,000 against TC £37,000), worse than the £12,000 loss from stopping. A firm aiming to survive might accept a short-run loss; it cannot do so for ever, because in the long run revenue must cover all costs.

Break-even helps: quantity at break-even = fixed costs ÷ (price − variable cost per unit) = 12,000 ÷ (80 − 50) = 400 chairs. Check: TR = 32,000 and TC = 12,000 + 20,000 = 32,000.

Evaluation. Objectives are not fixed. A new firm may seek growth, then switch to profit when established. Growth can also serve profit in the long run if it brings lower unit costs. Firms with several owners or managers may disagree on objectives, and that is a reason the specification asks only for an awareness of the variety.

3.1.4.3 Competitive markets

A perfectly competitive market is an extreme case with these main characteristics:

• many buyers and many sellers, each too small to affect the price
• identical (homogeneous) products
• freedom of entry to and exit from the market, with no barriers
• buyers and sellers well informed about prices

Real markets rarely match this exactly. Some farm produce and some commodities come closest.

Price set by demand and supply

In such a market, no single firm sets the price. It is determined by the interaction of market demand and market supply, and each firm is a price taker.

Worked example. In Country A, the market for standard sacks of grain (quantities in thousands of sacks per month, price in £ per sack):

• Demand: Qd = 1,000 − 40P. Supply: Qs = 20P − 200.
• Equilibrium: Qd = Qs, so 1,000 − 40P = 20P − 200, so 1,200 = 60P and P = £20.
• Quantity: Qd = 1,000 − 800 = 200 and Qs = 400 − 200 = 200, so Q = 200 thousand sacks.

One farm supplies 0.2 thousand sacks, so its share is 0.2 ÷ 200 × 100 = 0.1%. If it asks £22 for an identical sack while buyers know rivals charge £20, it sells nothing. Its own output decisions cannot move the market price, because its share is tiny.

Now suppose a rise in demand makes Qd = 1,120 − 40P.

• 1,120 − 40P = 20P − 200, so 1,320 = 60P and P = £22, Q = 240 thousand. Check: Qs = 20 × 22 − 200 = 240.

Why profits tend to be lower in competitive markets

Suppose the typical farm’s average cost is £20 a sack. At £22, each sack earns £2 of supernormal profit, so the market earns 240 × 2 = £480 thousand. This attracts entry. Entry shifts supply right, say to Qs = 20P − 80.

• 1,120 − 40P = 20P − 80, so 1,200 = 60P and P = £20; Q = 1,120 − 800 = 320 thousand.
• Price has fallen by (20 − 22) ÷ 22 × 100 = −9.09%, and output has risen by (320 − 240) ÷ 240 × 100 = +33.3%.
• Profit per sack is now 20 − 20 = £0 supernormal (normal profit only).

Chain of reasoning: no barriers → supernormal profit signals opportunity → new firms enter → market supply rises → price falls → supernormal profit disappears. In the long run, profit stays near normal.

In a market dominated by a few large firms, barriers to entry stop this adjustment. If the same demand rise happened and entry were blocked, the price would stay at £22 and the £2 per sack could persist. Fewer rivals also means less pressure to cut prices.

Evaluate it. Profit is not always higher in a concentrated market. If economies of scale cut the large firms’ average cost to £16 and they sell at £21, output is 1,120 − 840 = 280 thousand and profit per sack is 21 − 16 = £5, a total of £1,400 thousand. Consumers pay 5% more than the £20 competitive price, but costs are lower. Other qualifications: a price war between the few firms can cut profit; the threat of entry can restrain prices; and a competitive market can still make high profit in the short run, as the £480 thousand showed.

Factors affecting competitiveness

Factor	Effect on competitiveness
Number of firms	More firms: more rivalry, less individual control over price
Barriers to entry	Higher barriers: fewer new rivals, less competition. Examples: high start-up costs, legal protection, strong brand loyalty, existing firms’ cost advantages from scale
Product differentiation	More differentiation: each firm has some control over its price
Information	Better-informed buyers can switch more easily, so firms face tougher competition

Common errors

• Writing that a firm in a competitive market “sets the price”. It takes the price.
• Calling a 3.75 percentage-point rise in share “3.75%”.
• Saying competitive markets never earn profit. They can in the short run; it is the long run that matters.
• Treating profit, growth and survival as the same. A growth objective can mean lower profit now.
• Describing barriers to entry without saying how they affect the number of firms.

Next steps

Test yourself with the practice set, then use the revision notes.

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.