Production and market structures
Economics · WAEC and JAMB · SS2 and SS3
Links the factors of production to how firms actually behave. The four market structures are a standard comparison question.
What you need to know
- Factors of production and their rewards: land earns rent, labour wages, capital interest, entrepreneur profit.
- Division of labour raises output and skill but causes monotony and over-dependence.
- The law of diminishing returns operates in the short run, when at least one factor is fixed.
- Economies of scale lower average cost as output grows; diseconomies raise it when a firm grows too large.
- Perfect competition: many buyers and sellers, identical products, free entry, perfect knowledge, firms are price takers.
- Monopoly: one seller, no close substitute, barriers to entry, firm is a price maker.
- Monopolistic competition: many sellers with differentiated products, as with soap or soft drinks.
- Oligopoly: a few large firms, interdependent decisions, often non-price competition.
Key terms
- Fixed cost
- A cost that does not vary with output, such as rent. It must be paid even at zero output.
- Variable cost
- A cost that rises and falls with output, such as raw materials.
- Normal profit
- The minimum return needed to keep an entrepreneur in the industry. It is treated as a cost.
Formulae
Total cost = fixed cost + variable costAverage cost = total cost / outputProfit = total revenue - total cost
Worked example
A firm has fixed costs of N50,000 and variable costs of N300 per unit. It sells at N500. How many units must it sell to break even?
- Contribution per unit = 500 - 300 = N200
- Break-even output = fixed cost / contribution
- = 50,000 / 200
Answer: 250 units
The mistake to avoid
Normal profit is a cost, not a surplus. A firm earning only normal profit is breaking even in economic terms, not failing.
In the exam
For market structure comparisons, use a table: number of sellers, nature of product, entry barriers, price control. Four rows, four marks.