quantity of output in monetary terms. The various kinds of cost concepts help a manager totake right decisions. Cost function explains the relationship between the amounts of coststo be incurred to produce a particular quantity of output. Short run cost function givesinformation about the nature and behavior of various cost curves. Long run cost functiontells us how it is possible to obtain more output at lower costs in the long run. Thus, theknowledge of both production function and cost functions help a business executive towork out the best possible factor combinations to maximize output with minimum costs.Economies of scale, in merger, refers to the cost advantages that a business obtains due to
expansion. There are factors that cause a producer’s average cost per unit to fall as thescale of output is increased. “Economies of scale” is a long run concept and refers to
reductions in unit cost as the size of a facility and the usage levels of other inputs increase.Diseconomies of scale are the opposite. The common sources of economies of scale arepurchasing (bulk buying of materials through long-term contracts), managerial (increasingthe specialization of managers), financial (obtaining lower-interest charges whenborrowing from banks and having access to a greater range of financial instruments),marketing (spreading the cost of advertising over a greater range of output in mediamarkets), and technological (taking advantage of returns to scale in the productionfunction). Each of these factors reduces the long run average costs (LRAC) of production byshifting the short-run average total cost (SRATC) curve down and to the right. Economies of scale are also derived partially from learning by doing.
Economies of scale is a practicalconcept that is important for explaining real world phenomena such as patterns of international tra
de, the number of firms in a market, and how firms get “too big to fail”. The
exploitation of economies of scale helps explain why companies grow large in someindustries. It is also a justification for free trade policies, since some economies of scalemay require a larger market than is possible within a particular country
for example, it would not be efficient for Liechtenstein to have its own car maker, if they would only sell totheir local market. A lone car maker may be profitable, however, if they export cars toglobal markets in addition to selling to the local market. Economies of scale also play a role
in a “natural monopoly.”
3. Discuss the features of monopolistic competition and the method of pricedetermination in monopolistic competition
Perfect competition and monopoly are the two extreme forms of market situations, rarely to befound in the real world. Generally, markets are imperfect. A number of attempts have been made bydifferent economists like Piero
Shraffa, Hotelling, Zeuthen and others in the early 1920’s, Mrs JoanRobinson and Prof Chamberlin in 1930’s to explain the behavior of imperfect competition.
Characteristics of Monopolistic Competition