INDUSTRIAL ECONOMICS AND ITS

APPLICATION

Dr.M.MADHAVAN
Asst. Prof. of Economics
A.A. Govt. Arts College
Namakkal – 637 002
Tamil nadu, India
Introduction
• Industrial economics is a distinctive branch of economics which deals with
the economic problems of firms and industries and their relationship with
society.
• In economic literature it is known by several names such as
• “Economics of industries;
• ‘industry and Trade’
• Industrial Organization and Policy’;
• ‘Commerce’ and
• ‘Business Economics’, etc.,
• The name industrial economics ‘was adopted in the early fifties perhaps
through the writing of P.W.S. Andrews.

Industrial Economics and its Applications - Dr. M.Madhavan

• The producer produce the product with the help of various factors
of production viz., Land, Raw materials, Labour, capital, etc.,
which are scares in nature.
• Given such scarcity, he has to take decisions about production and
distribution.

Industrial Economics and its Applications - Dr. M.Madhavan

Elements of Industrial Economics
• There are two broad elements of industrial economics.
• The first one, known as descriptive element, is concerned with the
information content of the subject. It deals with the information about
the competitor, natural resources and factors of production and
government rules and regulations related to the concerned industry.
• The second element of the subject is concerned with the business policy
and decision making. This is the analytical part dealing with topics such
as market analysis, pricing, choice of techniques, location of plant,
investment planning, hiring and firing of labour, financial decisions,
product diversification and so on. It is a vital part of the subject and
much, of the received theory of industrial economics is concerned with
this.

Industrial Economics and its Applications - Dr. M.Madhavan

The Basic Issues of Industrial Economics

• What commodities he should produce?

• What should be the level of output?
• What kind of technology he should adopt?
• Where should he produce the products?
• What should be the size of factory?
• What should be the price level for his product?
• What should be the wage rate he should pay for his workers?
• What should be maximum advertisement cost he can spent?
• Should he borrow from banks or elsewhere?

Industrial Economics and its Applications - Dr. M.Madhavan

Scope of Industrial Economics
Industrial Efficiency Organizational form and alternative
motives of the firm
Elements of Market Structure Demand Analysis
Cost Theory and optimum size of the firm Market concentration
Diversification, Integration & Merger Market structure & Innovation
Determinants of Profitability Industrial Finance & Accounting
Analysis of Financial Ratios and Investment Decisions
Relationships
Pricing Decisions Growth of the firms
Industrial Location Analysis Government Regulation of Industries and
Capital & Labour Productivity Production Function

Industrial Economics and its Applications - Dr. M.Madhavan

MICRO ECONOMICS & INDUSTRIAL ECONOMICS

• To view industrial economics as a

development of microeconomics is quite
understandable. Both are concerned with
the economic aspects of firms and
industries seeking to analyze their behavior
and draw normative implications. However,
there are some differences between the two.

Industrial Economics and its Applications - Dr. M.Madhavan

 Difference Between Micro & Industrial Economics
Micro economics Industrial Economics
It is a formal, deductive and abstract discipline, less formal, more inductive in nature.

by and large assumes profit maximization as the
goal of the firm and tells us to maximize it subject
to given constraints. It is passive in approach.
Industrial economics does not believe in single
goal of profit maximization. It searches the goals of
the firm from the revealed facts. It concentrates on
the constraints which impede the achievement of
the goals and tries to remove them. It is an active
discipline in this sense.

being abstract, does not go into operational details Does go into the depth of such details.
of production, distribution and their aspects of the
firms and industries.

Further, the conclusions derived form the It is free from such limitations because of its
microeconomics may not be testable empirically emphasis on empiricism.
and therefore, we may not assess their predictive
efficiency.
Industrial Economics and its Applications - Dr. M.Madhavan
 Discussion Topics

INDUSTRIAL DIVERSIFICATION PRICE-COST MARGIN

PRODUCTIVITY PRODUCTION FUNCTION

CAPACITY UTILIZATION INDUSTRIAL LOCATION

Industrial Economics and its Applications - Dr. M.Madhavan
DIVERSIFICATION
• Diversification is a corporate strategy to enter into a new market
or industry which the business is not currently in, whilst also creating
a new product for that new market.
• Diversification is “spreading of its operation by a business over
dissimilar economic activities”
• The concepts
• Industrial Diversification – Diversification of industrial activities not
related to its earlier operation or industry.
• Product Diversification or vertical integration (Vertical Merger) –
Integration of intermediate products.
• Merger – Integration of two or more firms.

Industrial Economics and its Applications - Dr. M.Madhavan

 Why You Should Diversify

Why Diversification is important

• Let's say you have a mobile phone company. If
your competitor reduce the tariff plan, you are
also compelled to reduce your tariff plan. Or
you have to quit from your business.
• If you have diversified industrial activity you
can manage the loss from your other industries.

Industrial Economics and its Applications - Dr. M.Madhavan

Why Diversification is important ……
• Avoiding Downturns
• Competitive Defense
• Stabilizing Influence
• Company Risks

Industrial Economics and its Applications - Dr. M.Madhavan

PRICE – COST MARGIN
• This concept is different from the traditionally familiar accounting
concepts of profitability.
• Selecting appropriate principle for pricing the commodities and
services, also influence the level of profitability.
• The subject has a long history of emphasising the principle of
marginal-cost pricing as the most appropriate basis.
• Price-cost margin measures the surplus of income or profit
generated in an enterprise over the aggregate cost incurred in
producing a given volume of output.
• Price-cost margin is an important economic indicator of this
surplus income.
Industrial Economics and its Applications - Dr. M.Madhavan
PRODUCTIVITY & PRODUCTION FUNCTION
• Productivity
• A measure of the efficiency of a person, machine, factory, system, etc., in converting inputs
into useful outputs.
• Productivity is computed by dividing average output per period by the total
costs incurred or resources (capital, energy, material, personnel) consumed in that period.
Productivity is a critical determinant of cost efficiency.

• PRODUCTION FUNCTION
• Production function explains the relationship between physical inputs to physical output.
• Firms use the production function to determine how much output they should produce and
how effectively we can use the factors of production (LLKO)
• given the price of a good, and what combination of inputs they should use to produce given
the price of capital and labor.

Industrial Economics and its Applications - Dr. M.Madhavan

Capacity Utilisation
• Capacity utilisation is a measure of the
extent to which the productive capacity of a
business is being used. It can be defined as:
“The percentage of total capacity that is
actually being achieved in a given time
period”
• Why the study of capacity utilization is
important?
Industrial Economics and its Applications - Dr. M.Madhavan
Industrial Location
• The aspect of industrial location is important for every economy.
• Industrial location supports profitability of the industrial unit.
• The goal of an entrepreneur is profit maximization.
• Planned scientific location supports profitability.

• The development of industrial activities leads to the development

of industrial location concepts

Industrial Economics and its Applications - Dr. M.Madhavan

Evaluation of Industrial Location
Theory
• Three German Economists were most interested in plant location
theory. Viz., Launhardt, Von Thunen and Weber. Among them
Launhardt and Weber have made a theory that is known as ‘Least
Cost Theory’ of Plant Location.
• Weber (1909), Palander (1935) and Hoover (1937, 1948) indicated
that cost of production were the chef determinants of location of
industry.

Industrial Economics and its Applications - Dr. M.Madhavan

Various Stages of Plant Location
• Stage 1 : The buyers were to be concentrated at a given point and
sellers were free to locate any where in an area surrounding the
consumption center.
• Stage 2 : The Cost is equal at all locations. Demand factor is most
important here, which could be treated as a variable. In this stage
buyers are scattered over an area and demand for the output of a
firm is accepted as a variable factor. In this situation sellers
become a locational monopolists.
• Stage 3 : Both cost and demand are variable. It means for location
both are to be considered.

Industrial Economics and its Applications - Dr. M.Madhavan

Least – Cost Locational Theories
• Weber’s Theory of Industrial Location.
• Weber’s analysis emphasized on location of manufacturing units and
considered costs such as transport cost, labour cost and land cost due to
agglomeration influencing industrial location .
• He has classified raw materials into two groups
• [i] ubiquities and
• [ii] Localized
• Ubiquities like bricks, clay and water are available everywhere but localized material is
like wood, coal, or iron are available only at certain places.
• Localised materials are classified into two categories
• Pure Materials and
• Gross Materials

Industrial Economics and its Applications - Dr. M.Madhavan

• Pure Materials - The materials which are add the whole or
bulk of weight to the finished product Example - Cotton, wood,
etc.,.
• Gross Materials –The materials which are loose their weight in
the process of manufacturing. Example - Wood, coal, Iron, tea,
sugarcane, etc.,
• The weight losing material attract the industry to the place where
it is available. All localized materials do not attract industries.

Industrial Economics and its Applications - Dr. M.Madhavan

• According to Weber’s theory two factors are most important in
determining the location of an industry.
• Transport cost
• The industrial units has to choose that location in such a way that the transport
costs are minimum. It made by two factors, weight of the goods to be transported
and distance to be covered. Total weight to be transported during the whole process
of production is termed as locational weight.
• Labour cost
• The labour location and its power to attract industries depends on labour cost index
and locational weight. The ratio between cost of labour per ton of product has been
termed by Weber as the labour cost index.

Industrial Economics and its Applications - Dr. M.Madhavan

Von – Thunen’s Locational Theory
• Von – Thunen has given location theory for agriculture. Here the
location decision depends upon the difference in the cost at a given
crop at alternative sites.
• The cost differences are due to land rent and the expense of
transportation.

Industrial Economics and its Applications - Dr. M.Madhavan

Sargent Florence’s Theory of Location
• Weber’s theory was based on deductive approach. It has been
criticized by many economists.
• Sargent Florence emphasized on inductive approach.
• He use statistical data for measuring the degree of location.
• According to him, the economic activities are related to
population. It means the economic activities are just not depends
on geographical area but working population of the country are to
be considered.

Industrial Economics and its Applications - Dr. M.Madhavan

Sargent Florence’s Theory of Location ……..
• Sargent has used two important concepts in his theory of location.
They are :
• Location factor
• Location factor indicates the centralization or otherwise of an industry. If the
location factor index greater than unity, there is a tendency of centralization. If it is
less than unity, the otherwise is true.
• Coefficient of localization
• It indicates the propensity of concentration of industries. This has no relation as
such with the area. If the percentage of workers over different areas is also given in
percentage, the variance between the two percentages is divided by 100 which give
the coefficient of location. If the coefficient is zero, it mean that the industries are
evenly distributed over all areas. If the coefficient is unity or one, it indicates
concentration of industries in one area.

Industrial Economics and its Applications - Dr. M.Madhavan

Dr.M.Madhavan
Department of Economics
Arignar Anna Government Arts College
Namakkal – 637 002
manimadhavan@gmail.com

Industrial Economics and its Applications - Dr. M.Madhavan