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Market structure

Production in the Short Run versus Production in the Long Run
• In the short run at least one of the factors of 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 one input is variable. • In a two-input production model, in the short run, the changes in the output (physical product) are the result of changes in the variable input.

Short Run ATC, AVC & SMC Cost Curves

53 .82 K= 20 L= 7 .LATC K= 10 L= 6 .51 K= 30 L=8 LATC Q o 61 141 195 .

Long-Run Average Total Cost Rs. (SATC)1 (SATC)2 (SATC)3 LATC 0 Q .

.Economies and diseconomies of scale • Economies of scale refers to the phenomena of decreased per unit cost as the number of units of production increase.

and the marginal cost of producing a good or service decreases when each additional unit of production is added.• The initial investment in capital is diffused through an increase in production. .

.• Economies of scale means a reduction in the per unit costs of a product as a firm's production increases.

The amount of goods produced grows significantly faster than the plant's cost of operation. and one worker. If another worker is added to the machine he or she is able to produce an additional amount of goods without adding significantly to the factory's cost of operation. Hence. . and. relative to the size of the market). especially. the cost of producing an additional good is less than the good before it. or unit of production. and an economy of scale emerges.Where do Economies of Scale Occur Most? • Economies of scale tend to occur in industries with high capital costs in which those costs can be distributed across a large number of units of production (both in absolute terms. begins to work on the machine and produces a certain number of goods. • A common example is a factory: – An investment in machinery is made.

Types of Economies of Scale • Internal Economies of scale • External Economies of scale .

the average cost begin to fall because of: – Technical economies made in the actual production of the good. For example. salesmen. intensively. etc. large firms can use expensive machinery.Internal Economies of Scale • These are economies made within a firm as a result of mass production. . – Managerial economies made in the administration of a large firm by splitting up management jobs and employing specialist accountants. As the firm produces more and more goods.

– Financial economies made by borrowing money at lower rates of interest than smaller firms. – Marketing economies made by spreading the high cost of advertising on television and in national newspapers. across a large level of output. .

. – Research and development economies made when developing new and better products.– Commercial economies made when buying supplies in bulk and therefore gaining a larger discount.

Internal Economies of Scale • Technical Economies of Scale – The Law of Increased Dimensions • Cubic law can be applied where cubic volume increases more than proportionate to surface area – Economies of linked processes • Production processes can be linked together with one integrated plant – important in mass production which requires complex manufacturing 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 .

.Diseconomies of scale • Diseconomies of scale are the forces that cause larger firms to produce goods and services at increased per-unit costs.

– Poor labour relations may develop in large companies. As the firm increases production.Internal Diseconomies of Scale • These occur when the firm has become too large and inefficient. . – Management becomes out of touch with the shop floor and some machinery becomes over-mannedcosts increase. – Lack of communication in a large firm means that management tasks sometimes get done twice. eventually average costs begin to rise because: – The disadvantages of the division of labour take effect. – Decisions are not taken quickly and there is too much form filling.too many people doing different jobs add to costs.

External Diseconomies of Scale • These occur when too many firms have located in one area • Local labour becomes scarce and firms now have to bid wages higher to attract and retain new workers • Land and factories become scarce and rents begin to rise • The local traffic infrastructure become congested and so transport costs begin to rise .

Market structure • the number of firms producing identical products .

Market structure and price determination • Market structure in the basis of competition – Perfect competition – Imperfect competition – Monopoly .

Perfect competition • Large number of producers offer a homogeneous product to a very large number of buyers of the product • Example: stock exchange .

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 .Perfect competition • Features: – – – – – – – Large no.

pure competition • Perfect competition minus perfect mobility and knowledge = pure competition .Perfect vs.

• Types – Monopolistic competition – Oligopoly – Duopoly . Price of candidates post recession.Imperfect competition • A number of firms sell identical or differentiated products with some control over the price of their products • Example : “jobless recovery”.

the products are substitutes. clothing etc. are not exactly alike) • Example: restaurant .. but. .Monopolistic competition • many competing producers sell products that are differentiated from one another (that is. with differences such as branding.

• Characteristics: – Intensive competition – Interdependence of business decisions – Barriers to entry – Examples: Aviation.Oligopoly • A few are sellers • Differentiated or homogeneous products. Communication. etc .

politics . • Example: visa and master card.Duopoly • A situation in which two companies own all or nearly all of the market for a given type of product or service.

Monopoly • Indian opium that the drug is chiefly supplied to the world – Government monopoly • OG&E . Oklahoma Gas & Electric Company • Indian railway organization • Some medicine companies .

– Totally Blocked Entry . technological. legal obstacles – Advertising .• Pure Monopoly • exists when a single firm is the sole producer of a product for which there are no close substitutes • Characteristics – Single Seller .no reasonable alternative products – "Price Maker" .the firm exercises considerable control over price because it is responsible for the quantity supplied.monopolies may or may not advertise • monopolist selling luxury good can advertise to increase demand • monopolist selling utilities/necessities will not advertise .a one producer of a specific product – No Close Substitutes .no competitors because of economic.

Sources and types of monopoly • • • • Legal restrictions Control over key raw materials Efficiency Patent rights .

Price determination .

100 and from next he can take just Rs. From 1 he can charge Rs.Price discrimination • First degree: to take away the entire consumer’s surplus • Second degree: different prices to different economic class of consumers • Third degree: total output is divided into the markets and pricing done accordingly to maximize profit • Normal autos running as share auto.10 .

• Monopsony. in which there is only one buyer of a good. • Oligopsony. in which there is a small number of buyers. .