Economies of Scale and Market Structure
-
Upload
pyare-shri -
Category
Documents
-
view
216 -
download
0
Transcript of Economies of Scale and Market Structure
-
8/2/2019 Economies of Scale and Market Structure
1/32
Market structure
-
8/2/2019 Economies of Scale and Market Structure
2/32
Production in the Short Runversus Production in the Long Run
In the short run at least one of the factorsof production remains unchanged (fixed).
In the long run all factors of production
are variable. In a two-input production process, in the
short run, only oneinput is variable.
In a two-input production model, in theshort run, the changes in the output(physical product) are the result of
changes in the variable input.
-
8/2/2019 Economies of Scale and Market Structure
3/32
Short Run ATC, AVC & SMC CostCurves
-
8/2/2019 Economies of Scale and Market Structure
4/32
LATC
61 141 195
.82
.53
.51
Q
LATC
o
K= 10
L= 6
K= 20L= 7 K= 30
L = 8
-
8/2/2019 Economies of Scale and Market Structure
5/32
Long-Run Average Total Cost
(SATC)1
(SATC)2
(SATC)3
LATC
Rs.
0
Q
-
8/2/2019 Economies of Scale and Market Structure
6/32
Economies and diseconomies ofscale
Economies of scale refers to thephenomena of decreased per unit cost asthe number of units of production increase.
-
8/2/2019 Economies of Scale and Market Structure
7/32
The initial investment in capital is diffusedthrough an increase in production, and themarginal cost of producing a good or
service decreases when each additionalunit of production is added.
-
8/2/2019 Economies of Scale and Market Structure
8/32
Economies of scale means a reduction inthe per unit costs of a product as a firm'sproduction increases.
-
8/2/2019 Economies of Scale and Market Structure
9/32
Where do Economies of ScaleOccur Most?
Economies of scale tend to occur in industries with highcapital costs in which those costs can be distributedacross a large number of units of production (both inabsolute terms, and, especially, relative to the size of themarket).
A common example is a factory: An investment in machinery is made, and one worker, or unit of
production, begins to work on the machine and produces acertain number of goods. If another worker is added to themachine he or she is able to produce an additional amount ofgoods without adding significantly to the factory's cost of
operation. The amount of goods produced grows significantlyfaster than the plant's cost of operation. Hence, the cost ofproducing an additional good is less than the good before it, andan economy of scale emerges.
-
8/2/2019 Economies of Scale and Market Structure
10/32
Types of Economies of Scale
Internal Economies of scale
External Economies of scale
-
8/2/2019 Economies of Scale and Market Structure
11/32
Internal Economies of Scale
These are economies made within a firm as aresult of mass production. As the firm producesmore and more goods, the average cost begin to
fall because of: Technical economiesmade in the actual production of
the good. For example, large firms can use expensivemachinery, intensively.
Managerial economiesmade in the administration ofa large firm by splitting up management jobs andemploying specialist accountants, salesmen, etc.
-
8/2/2019 Economies of Scale and Market Structure
12/32
Financial economies made by borrowingmoney at lower rates of interest than smallerfirms.
Marketing economiesmade by spreading thehigh cost of advertising on television and innational newspapers, across a large level ofoutput.
-
8/2/2019 Economies of Scale and Market Structure
13/32
Commercial economies made when buyingsupplies in bulk and therefore gaining a largerdiscount.
Research and development economiesmadewhen developing new and better products.
-
8/2/2019 Economies of Scale and Market Structure
14/32
Internal Economies of Scale
Technical Economies of Scale
The Law of Increased Dimensions
Cubic law can be applied where cubic volume increases morethan proportionate to surface area
Economies of linked processes Production processes can be linked together with one integrated
plant important in mass production which requires complexmanufacturing processes
Large-scale indivisible units of capital machinery
Capable of high productivity Huge units of capital require a vast output in order to reduce the
average cost per unit
Specialisation and Division of Labour
-
8/2/2019 Economies of Scale and Market Structure
15/32
Diseconomies of scale
Diseconomies of scale are the forcesthat cause larger firms to produce goodsand services at increased per-unit costs.
-
8/2/2019 Economies of Scale and Market Structure
16/32
Internal Diseconomies of Scale
These occur when the firm has become too large andinefficient. As the firm increases production, eventuallyaverage costs begin to rise because: The disadvantages of the division of labour take
effect- too many people doing different jobs add tocosts.
Management becomes out of touch with the shopfloor and some machinery becomes over-manned-costs increase.
Decisions are not taken quickly and there is too muchform filling.
Lack of communication in a large firm means thatmanagement tasks sometimes get done twice.
Poor labour relations may develop in largecompanies.
-
8/2/2019 Economies of Scale and Market Structure
17/32
External Diseconomies of Scale
These occur when too many firms have locatedin one area
Local labour becomes scarce and firms nowhave to bid wages higher to attract and retainnew workers
Land and factories become scarce and rentsbegin to rise
The local traffic infrastructure become congestedand so transport costs begin to rise
-
8/2/2019 Economies of Scale and Market Structure
18/32
Market structure
the number of firms producing identicalproducts
-
8/2/2019 Economies of Scale and Market Structure
19/32
Market structure and pricedetermination
Market structure in the basis ofcompetition
Perfect competition
Imperfect competition
Monopoly
-
8/2/2019 Economies of Scale and Market Structure
20/32
Perfect competition
Large number of producers offer ahomogeneous product to a very largenumber of buyers of the product
Example: stock exchange
-
8/2/2019 Economies of Scale and Market Structure
21/32
Perfect competition
Features:
Large no. of buyers and sellers
Homogeneous product
Perfect mobility of factors of production Free entry and free exit
Perfect knowledge about the market conditions
No government interference
Absence of collusion and independent decision -making
-
8/2/2019 Economies of Scale and Market Structure
22/32
Perfect vs. pure competition
Perfect competition minus perfect mobilityand knowledge = pure competition
-
8/2/2019 Economies of Scale and Market Structure
23/32
Imperfect competition
A number of firms sell identical ordifferentiated products with some controlover the price of their products
Example : jobless recovery. Price ofcandidates post recession.
Types
Monopolistic competition Oligopoly
Duopoly
-
8/2/2019 Economies of Scale and Market Structure
24/32
Monopolistic competition
many competing producers sell productsthat are differentiated from one another(that is, the products are substitutes, but,
with differences such as branding, are notexactly alike)
Example: restaurant , clothing etc.,
-
8/2/2019 Economies of Scale and Market Structure
25/32
Oligopoly
A few are sellers
Differentiated or homogeneous products.
Characteristics: Intensive competition
Interdependence of business decisions
Barriers to entry
Examples: Aviation, Communication, etc
-
8/2/2019 Economies of Scale and Market Structure
26/32
Duopoly
A situation in which two companies own allor nearly all of the market for a given typeof product or service.
Example: visa and master card, politics
-
8/2/2019 Economies of Scale and Market Structure
27/32
Monopoly
Indian opium that the drug is chieflysupplied to the world Government
monopoly OG&E , Oklahoma Gas & Electric
Company
Indian railway organization Some medicine companies
-
8/2/2019 Economies of Scale and Market Structure
28/32
Pure Monopoly
exists when a single firm is the sole producer of a
product for which there are no close substitutes
Characteristics Single Seller - a one producer of a specific product
No Close Substitutes - no reasonable alternative products "Price Maker" - the firm exercises considerable control over price
because it is responsible for the quantity supplied.
Totally Blocked Entry - no competitors because of economic,technological, legal obstacles
Advertising - monopolies may or may not advertise monopolist selling luxury good can advertise to increase demand monopolist selling utilities/necessities will not advertise
-
8/2/2019 Economies of Scale and Market Structure
29/32
Sources and types of monopoly
Legal restrictions
Control over key raw materials
Efficiency Patent rights
-
8/2/2019 Economies of Scale and Market Structure
30/32
Price determination
-
8/2/2019 Economies of Scale and Market Structure
31/32
Price discrimination
First degree: to take away the entire consumerssurplus
Second degree: different prices to different
economic class of consumers
Third degree: total output is divided into themarkets and pricing done accordingly to
maximize profit
Normal autos running as share auto. From 1 hecan charge Rs.100 and from next he can take
just Rs.10
-
8/2/2019 Economies of Scale and Market Structure
32/32
Monopsony, in which there is only onebuyer of a good.
Oligopsony, in which there is a smallnumber of buyers.