Theme 3 · Microeconomics · Papers 1 and 3
Business behaviour and the labour market
Microeconomics inside the firm. How costs, revenue and profit behave, how the market structure a firm sits in shapes its choices, and how wages and employment are set in the labour market. Every topic guide follows the same path: the big picture, the theory, the application, and the paragraph you would write in the exam.
Topics in this theme
Topic pages
Work them in order if the theme is new to you: the cost and revenue toolkit comes first, the market structures build on it, and the labour market then reuses the same logic with wages in place of prices.
Business growth
Why firms grow or stay small, organic growth against integration, and why some demerge. Introduces the long-run average cost curve.
3.2Business objectives
Profit maximisation and its rivals: revenue maximisation, sales volume maximisation and satisficing, on one cost-and-revenue diagram.
3.3Revenue, costs and profits
AR, MR and total revenue; short-run and long-run costs; economies of scale; normal and supernormal profit. The toolkit the structures below lean on.
3.4.4Oligopoly
Interdependence, the payoff matrix, collusion and cartels, price wars and non-price competition.
3.4.5Monopoly and price discrimination
The monopoly diagram and supernormal profit, the costs and defences of monopoly, and who wins from price discrimination.
3.4.6Monopsony
When the buyer has the power: wages and employment below the competitive outcome, and what restrains a dominant employer.
3.4.7Contestable markets
Why the threat of entry can discipline an incumbent as effectively as actual competition, and what sunk costs do to that threat.
3.5The labour market
Derived demand and marginal revenue product, the supply of labour, and how wages are set in competitive markets.
3.5.3Wage differentials and immobility
Why surgeons earn more than baristas, why labour is slow to move between jobs and places, and what migration changes.
3.6The minimum wage
Wage floors in competitive and monopsonised labour markets, and why the predicted job losses so often fail to appear.
3.6Government intervention
Price caps, merger control, regulation and the protection of suppliers and employees, with the limits of each.
Efficiency
Allocative, productive, dynamic and X-efficiency: the yardsticks the market structures are judged against.
Content coming
Perfect competition
The benchmark model: price takers, free entry, and profit competed away in the long run.
Content coming
Monopolistic competition
Many sellers, differentiated products: short-run profit, long-run normal profit.
Content coming
Where the marks live
This is the most diagram-heavy theme in the course, and the essay questions on Papers 1 and 3 lean on it hard. The topic guides model the paragraph you need: a loaded topic sentence, one applied chain of reasoning, and an evaluation of that same chain. The skills pages teach the method in full.