ferozkhan shaikh eco2nd assig

8/8/2019 Ferozkhan Shaikh Eco2nd Assig

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MA in Media & Communication

Media Economics & Enterprise Management

By

Feroz Khan Shaikh

Id no: 2010MAMED1006

Manipal University- Dubai



ABSTRACT

In economics, markets are classified according to the structure of the industry serving the

market. Industry structure is categorized on the basis of market structure variables which are

believed to determine the extent and characteristics of competition. Those variables which have

received the most attention are number of buyers and sellers, extent of product substitutability,

costs, ease of entry and exit, and the extent of mutual interdependence [Baumol, 1982; Colton, 1993].

According to Gregory Mankiw in Principles of Economics “A market is a group of buyers and

sellers of a particular good or service. The buyers of a group determine the demand for the

product, and sellers as a group determine the supply of the product.”

Markets can be in the form of an organized activity, such as where a buyer and seller meet a a

specific time and place, and a third person will help them to set the prices and arrange for it

sale There is another form of a market which is less organized; here the sellers are in different

location and do not meet each at a common place, and at any particular time. There is third

person or an auctioneer who decides the price. Each seller post a price and each buyer decides

how much to buy at each store. Even though the market is not organized, a group of buyers and

sellers forms a market.

n the traditional framework, these structural variables are distilled into the following

taxonomy of market structures:

In economics, market structure (also known as market form) describes the state of a marketwith respect to the degree or intensity of competition among buyers on one side and amongsellers/ producers on the other side. Market micro-structure is also distingiushed by the process of price discovery, the differentiation / homogeiety of products,the process of bidding, the trade/ exchange settlement mechanism, the symmmetry or assymetry of thedispersal of market relevant information among the individual parties to each transaction of

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http://www.westga.edu/~bquest/1997/ecnmkt.html#1982

http://www.westga.edu/~bquest/1997/ecnmkt.html#Colton


http://www.westga.edu/~bquest/1997/ecnmkt.html#1982




trade/ exchange. This is the subject of market morphology. Based on the variouschracteristic status/ values, different types of markets are given different names like perfectcompetition, monopoly. oligopoly, duopoly, monopolitic competition, oligopolisticcompetition., monopsony, oligopsony etc. but each defines the term a bit differently.Economists look at the overall market structure with the goal of defining and predicting

consumer behavior Market structure, or market form, competitive structure, is the state of amarket with respect to competition, measured by number and distribution of firms,indicating the competitivity of the market.

Major market structures from most competitive to least:

QUESTIONS

I) What are Supply and Demand? How do they work together to maintain a balanced

economic system.

If you are buying grocery for your home, you will notice the prices of goods go up and downso often. Have you ever wondered, what could be the reason? Well, one of the reasons is thelaw of supply and demand. To understand supply and demand we must first understand what ismarket?

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http://www.econguru.com/econ/market.shtml





According to Gregory Mankiw in Principles of Economics “A market is a group of buyers andsellers of a particular good or service. The buyers of a group determine the demand for the product, and sellers as a group determine the supply of the product.”

Markets can be in the form of an organized activity, such as where a buyer and seller meet a aspecific time and place, and a third person will help them to set the prices and arrange for itsale There is another form of a market which is less organized; here the sellers are in differentlocation and do not meet each at a common place, and at any particular time. There is third person or an auctioneer who decides the price. Each seller post a price and each buyer decideshow much to buy at each store. Even though the market is not organized, a group of buyers andsellers forms a market.

Let us look at example; a new car is to be introduced in India. The car maker has to decidewhat is the target market, are they looking at rich people, who like a car with all facilities, or amiddle income person who looks for a an economic car, pretty basic. After this, the makersmust decide how many of the car to manufacture so they are not stuck with too many. Thenthey will decide how to charge for the car- what will an average price, a buyer willing to pay.

They would need to charge enough for the car to cover the costs of manufacturing,advertisements, services, warranty etc. Since they also wish to make a profit on the car, theywill also want to figure that cost as well, what will be the break even. If they are introducing acar for an middle income people, and they found out that it is not affordable or its not worth the price, there will be too many or an oversupply. If they prices are low, cost will not be coveredand little profit will be made as if it may sell very well. The company would lose money andmay even have to close. As the economics principles states, usually as price rise, supply or amount of a product increases and as prices fall, the supply decreases as more people will beable to afford the product.

Demand

If the manufactures are able to develop a truly excellent car, there will be probably a highdemand for the car. Also, if it is well advertised, more people will come to know and will beinterested to buy. If another car maker entering the market, with a better car, more economical,the demand for will drop and thus the price would to drop to sell it.

From the above example, let us analyze how a market works, if the price of car rose Rupees20,000, people buy less car. People might go for a two wheeler instead. If the price of car fellRupees 20,000, people will buy more cars. There is a relationship between price and quantitydemanded and this is called law of demand. “When the price of good rises, the quantitydemand of the good falls, and when the price falls, the quantity demanded rises”.

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Let us assume a new rent a car company buy 1 car each month to improve its business, think if he gets a car half the price he buy two, if he gets a car one third of the price, he might buysthree cars. And if the price goes up he will be buying less no of cars. When the prices reach atan unexpected level, he might stop buying cars. This a demand schedule, shows “a relationship between price of a good and the quantity demanded, holding constant everything else thatinfluences how much consumers of the good want to buy.”

Price Quantity Total Quantity

Demanded

1 Lakhs 1 1

50,000 1 2

25,000 1 4

( Table 1: Demand Schedule)

(Figure : Demand curve)

“The Demand curve is defined as the relationship between the price of the good and theamount or quantity the consumer is willing and able to purchase in a specified time period, given constant levels of the other determinants--tastes, income, prices of related goods,

expectations, and number of buyers”

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0

20,000

40,000

60,000

80,000

100,000

120,000

1 2 4

Quantity demanded

P r i c e



(Figure2- change in quantity due to change in price)

A shift in the demand curve is caused by a change in any non-price determinant of demand.The curve can shift to the right or left.

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0

20000

40000

60000

80000

100000

120000

1 2 3 4 5

Quantity demanded

P r i c e

I

II

D



Figure 3 (A demand curve shits to the right when quantity is increased)

A rightward shift represents an increase in the quantity demanded (at all prices), whilst aleftward shift represents a decrease in the quantity demanded. Here are several determinants of individual demand. Let us consider our previous example of a rent a car company to buy cars,each month, and what affect their decision.

Price: If the price rises, they would buy fewer cars, or even stop buying new cars. If the priceof cars fell, buyers will buy more cars. When the prices of good rises, the quantity demanded of the goods will also fall.

Income: During recession in Dubai, many people lost the jobs and cutting the expenses from

food, travel etc. People stop going to restaurants when they lost the jobs. The demand for eating outlets falls when incomes falls.

Price of related goods: Suppose the price of motorbikes falls. According to the law of demandwell will buy more motorbikes. And most probably we will buy fewer cars. When a fall in price of one good reduces the demand for another good, the two good are substitutes. If the price of substitute good increases, then the demand for the other good would increase asconsumer switches their consumption patterns.

Substitutes and complements:

“When a fall in the price of one good reduces the demand for another good, the two goods arecalled substitutes: Example: DVDs and VHS are substitutes since with the decrease in price of DVDs, will have VHS almost out of the market, thus increasing more of DVDs.

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0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

P r i c e



“When a fall in the price of one good increases the demand for another good, the two goods arecalled complements”. Ticket price for cinema and Popcorn are complements when there is fallin price for Cinema tickets, we increase the consumption of Popcorns.

.Tastes: It is an obvious that if you are used to drive a car not motorbike, you will buy a car

even if the price goes up a little.

Expectations: Your expectations also determine the demand for a good or service today. Think about someone getting promoted as a manager, he will definitely spend more money buyingluxury goods to maintain some social status. Or if you are expecting a bonus next month, youwill most probably spend more money for grocery.

Intangible Goods, a demand for an intangible good can be based of a future event or a futurecontract like , Reliance stock price in Jan 2011, Value of shares in $ as on June 2011, Price of wheat during monsoon season in India.

Inferior goods are type of good for which demand declines as the level of income or real GDP

in the economy increases. This occurs when a good has more costly substitutes that see anincrease in demand as the society's economy improves. Example, taking buss pass in a publictransport and forgo their own forms of transportation in order to cut down costs. Normal goodsare “the one that experiences an increase in demand as the real income of an individual or economy increases” Example might be buying a brand new car; when someone gets promoted.

Diminishing marginal utility: Let us look at example where a buyer, buys more and more pairsof black trousers, his/her increase in satisfaction with having yet another new pair falls, so the price he is willing to give up also falls. After a few new pairs, the thrill is gone (or at least it'sdeclining).

Supply

In a market, sellers identify the quantity to be supplied depending on the demand. The law of supply states when there is an increase in price of a product, the supplier want to produce andsupply more. As they produce more quantity the total cost increase proportionately, and profitincreases. The ratio to the total cost and quantity of the product increases; this is known as themarginal cost of production. In a market, total supply represents the quantities suppliers arewilling to sell over a range of prices for any give time period. Here, the relationship between price and supply is positive. Factors that determine important in determining supply behavior include, the number of sellers producing and selling the same product, Technologicaladvantage a seller have with others, Price of Raw Materials used for production, Weather, Price

of other goods could be produced.

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Price Quantity Total Quantity Supplied

1 1 1

2 1 2

3 1 3

4 1 4

(Table 2: Supply schedule)

The supply schedule shows at each price, the additional number of units that would be offered(quantity) and the total number of units that would be offered (total quantity supplied). Supplyschedule can show, at each price, the total number of units that would be profitable to beoffered.

Figure 4 ( Supply curve, as production increases, the additional (marginal) cost of production also increases)

Market supply, when they are new firms entering a market the supply increases and market

price for a good goes down, sometimes the supplier may decide deliberately to limit supply bycontrolling production through the use of quotas, this will reduce the supply and force the priceupwards. When more suppliers are entered the ranges of choices are also improved.

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0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1 2 3 4

Quantity supplied

P r i c e



(Figure5- change in quantity due to change in price)

If there is a change in price will affect the quantity that is profitable. As price rises, more unitesare Profitable and supplier will increase the quantity supplied.

Supply curve can shit to the right when a decline in labor cost reduces the cost f producing eachunit of the good, and a greater quantity of units is profitable at each price. An improvement intechnology will reduce no of resources required for each unit, and thus reducing the cost o producing each and increasing unit profitable at each price. If sellers believe the future price is

now lower than previously, they will choose to bring in the units which they kept in inventoryfor sometime. Supply curve can shit to the right when the labor cost increases, and producingeach unit is expensive. A decline in technology, increases number of resources, increasing thecost of production of each unit, and decreasing the units produced.

The law of supply and demand will move toward a point that equalizes quantities supplied andDemanded, a corrective action will take place in any market during sometime. Let us look at

the example of Dubai Real-estate market, when the prices of property were higher, moredevelopers, resellers where entering the market, and there was surplus of property available inthe market. This had led to a corrective action of drastically reducing the Rents/ Sales Price.

A market attains equilibrium when both the demand and the supply intersect each other. Thiscan be shown in a curve. Here in the below curve, as we can see, the demand and the supplymeet at a point this is the point where the market attains equilibrium. This is the optimum pointwhere both the consumer and the supplier get maximum satisfaction and profit out of the product respectively. It is the point where the market is in a stable condition.

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0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1 2 3 4

Quantity supplied

P r i c e

I

II

S



Figure6- Equilibrium)

When a market reaches this point, it tends to stay at this point. If there is a surplus or shortage,the Market will move the price towards an equilibrium point. There are times whengovernment intervenes and fix a price below the market equilibrium price. (Examples arelottery, cigarette etc). Sellers sometimes have excess in quantity supplied or a surplus. Theseller suppose has five units supplied to the market at a price of $4, the quantity demanded isonly 2 units. Here the price is high for 5 units to be profitable, so only 2 units would be purchased in the market. Surplus results in an unplanned increased in inventory levels. Theseller need to decrease the amount offered and increase the quantity demand, until a surplus nolonger occurs. “When a price is below the equilibrium price, the quantity demanded exceedsthe quantity supplied.” A shortage is when a supplier will raise the price and many buyers wantto buy them, it will move toward the equilibrium. In a market where quantity demanded is 5

units, quantity supplied 2 units. ( if the supplier has only first two units, it will be low enoughto be profitable, at $2, suppose if the supplier has 4 units at the same price, the buyer will besatisfied.

Example, a person who bought a home in Dubai during 2006-2007, at that time demand for thehomes in Dubai was quite high, and the supply was not enough to meet the requirements. Therewere substitutes for a new home, such as an apartment or renting a house.As the need for home rose, the sellers were selling homes for a little higher price because theyknew people are looking to purchase. But after recession, and when more expatriates have leftDubai, the supply was great, sellers found themselves lowering the price to try and have their home picked over another substitutes.

“A change in quantity supplied, means a movement along the supply curve, corresponding to achange in price. A “change in supply” refers to a shift of the entire supply curve, caused by achange in something other than a change in price (i.e., the determinants of supply”(http://www.csun.edu/bus302/Lab/ReviewMaterial/micro3.pdf)

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0

1

2

3

4

5

6

1 2 3 4

Quantity

P r i c e



There are many factors that caused a change in the supply and demand for homes in Dubai.Supply was influenced by the increasing number of people coming to Dubai, Surrounding area,facilities provided. At that time when looking for a home, there were several available in thearea but the purchasing demand was very competitive. To compete with the supply, the price of home as well as some incentives like giving more key money had to be offered in order to meetthe purchasing demand. When the demand for homes was high and supply was low, manyDevelopers, Resellers entered the market and sold the homes for a higher price. But currentlyin Dubai, where the supply is quite high, and the demand is very low, Sellers are selling thehomes at much lower price with some incentives from their side like more discounts on full payment, maintenance free etc. In the current market, the supply is high due to foreclosures, job loss, and rise in cost of living.

II) As a consumer, study a media firm. Consider the following:

a) Production Function

“A production function is a mathematical relationship between the inputs a firm uses and theoutput the firm generates”. Let us assume there are three basic inputs in a media companyworkers (staff) , capital ( machines) and technology”. Technology here can be visual editing,use of lights, re-recording etc.

Let us look at Digital Media industry; every part of part of the enterprise has a productionfunction. So, when you ask different parts of the enterprise the same questions you will getdifferent answers. The main functional of a digital media company is to create the technologyfor digital media- it’s OS, equipment and applications.

Developers answer- to enable a system through which the users can interact with other.Designers will do the design of the application, interface. Sales, look at prospect and turn theminto orders, Supply chain, Take orders and turn them into invoices, Finance, Take invoices andturn them to cash.

Firstly let us discuss what is output and input (land, labor, capital, financial), output issomething produced by a firm, and an input is raw materials used to create an out put in mediaindustry could be ( newspaper, a microblog site, News, TV Programs, movies etc.

The inputs used in media production are:

1. Artist/ Staff- We can hire and fire these people when needed, if you want to cut on the cost

or increase the productivity etc.2. Equipments- we can take it for rent, or have own, like camera, visual mixers, lights etc.3. Recording Studio- We can again use own studio or have a rented one.4. Set (indoor/ outdoor) – depending on the need we can decide where to shoot.

We need to identify the fixed cost and variable costs. Fixed costs “cost of an input that does notchange when the level of output changes”. Eg: a recording studio owned the company,

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equipments owned. Variable costs” cost of an input that changes as level of output changes”Staff, Duration of a Recorded Program, Visual Effects to be used etc.

Example above:

No of workers Cookies produced

1 502 903 1205 150

Production function will work best if the company is a short-run. A short run “Period of time over which some of the firm’s commitments and most are variable and can be changed with productionneeds.” In a media industry, a short run firm has a advantage not want to build a studio that could

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Quantity of Output

(cookiesper hour)

150140

130

120

110

100

90

80

70

60

50

4030

20

10

Number of WorkersHired

0 1 2 3 4 5

Production function



produce more movies than it was ever likely to sell. By outsourcing, the firm can increase production quickly if the product becomes popular they can think about setting up a studio andthings like that.

A production function looks at every possible combination of factors, assuming the mostefficient available methods of production are used. It could the measure the marginal

productivity of a particular factor of production and determine the cheapest combination of production. “The marginal product of any input in the production process is the increase in thequantity of output obtained from an additional unit of that input”. Example: when a mediacompany owner finds that the effort to create two distinct sets of copy for advertising iscounterproductive and does not result in enough additional sales to justify the effort.

When all other things remaining constant, and if only one input is increased a point will bereached where each additional input produces less output than the previous input this is calleddiminishing return. E.g.: New media staff has been hired, each additional worker contributeless and less to production because it has limited amount of camera, lights, and other equipment required for media production.

“Diminishing returns always apply in the short run, and in the short run every firm will facediminishing returns. This means that every firm finds it progressively more difficult to increaseits output as it approaches capacity production”.

A total cost-curve shows the relationship between the quantity a firm can produce and its costsdetermines pricing decisions. When the recording studio is crowded, each crew member addless to production, reflecting diminishing marginal product. Here is the production function isat fault. Also when the recording studio is crowded, producing an additional output requires alot of addition crew members and thus very costly. When the quantity, the no of crew membersare increased the total-cost curve will be steep.

When the marginal product declines, the production function becomes flatter. This is known asDiminishing Marginal Product. Example: it is usually possible to increase the output of afarm by adding more labor , fertilizers, or water-but only up to a certain extent. After thatthe production graph will become flatter.

Production Function and Total cost Curve

The total cost curve graphically represents the relation between total cost and the quantity of production.

b) Total Cost and Total Revenue

Total Cost is the amount a firm receives from the sale of its output.

A firm’s cost of production includes all the opportunity costs of making its output of goodsand services.

Costs: Explicit vs. Implicit:

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Explicit costs; direct money spend for factors of production, eg paying wages to mediaworkers, rent paid to the apartment, equipments used for media production etc.Implicit costs; do not require a cash outlay; these are intangible costs that are not easilyaccounted for. E.g. the time and effort that an owner puts into the maintenance of the

company rather than working on expansion. Let us look an example now for both costs and how it is calculated.

You need $100,000 to start your business.The interest rate is 5%.

• Case 1: borrow $100,000 Explicit cost = $5000 interest on loan

• Case 2: use $40,000 of your savings,Borrow the other $60,000

Explicit cost = $3000 (5%) interest on the loan

Implicit cost = $2000 (5%) foregone interest you could have earned on your $40,000.

Economic Profit versus Accounting Profit:

Accounting profit = total revenue minus total explicit costs

Economic profit = total revenue minus total costs (including explicit and implicit costs)Accounting profit ignores implicit costs, so it’s higher than economic profit.

When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. Economic profit is smaller than accounting profit.

c) Different type of costs incurred by a typical firm.

In a typical scenario a media firm has many different costs, from paying for Equipmentsthrough to the paying the rent or the Electricity bill. But we need to be careful on how toclassify these costs as a business can analyze its performance and make better-informeddecisions.

We can classify the costs in to two types a) Fixed and Variable b) Direct and Indirect Costs

Fixed costs are those costs that do not vary with the quantity of output produced. Examples of fixed costs are: Rent, Salaries of Media activists, Electricity, Insurance etc.Variable costs are those costs that do change as the firm alters the quantity of output producede.g.: Raw Materials, Workers Wages, Energy/ fuel for machines.

Direct Costs: costs that can be identified directly with the production of raw materials. Indirectcosts: costs which cannot be matched against each product because they need to be paidwhether production of good/services takes place. E.g.: Rent on the premises, you have to make

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payment whether the product has started or not. If you are able to identify the costs to the right parts of P&L account, the breakeven point for the business can easily identified.

Total Fixed Costs: The sum of all costs required to produce the first unit of a product. Thisamount does not vary as production increases or decreases, until new capital expenditures are

needed. Total Variable costs : t depends on the quantity of output produced and is equal to zerowhen no output is produced variable costs are those costs which vary with the output level produced, such as workers’ wages, material inputs, etc

Average Costs: The average cost is the total cost divided by the number of units. Thus, if a firm produces 10,000 units of output for a total cost of $25,000, the average cost of each unit is$25,000/10,000 units, or $2.50 per

Average Fixed Costs (AFC)- Average fixed cost is the total fixed cost per unit of outputincurred when a firm engages in short-run production , AFC can be calculated by dividing fixedcost/ quantity (FC/Q).

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Tot Total costs= Total Fixed Costs + Total Variable Costs

Quantity Total Cost Fixed Cost Variable Cost

0 $ 3.00 $3.00 $ 0.001 3.30 3.00 0.30

2 3.80 3.00 0.80

3 4.50 3.00 1.50

4 5.40 3.00 2.40

5 6.50 3.00 3.50

6 7.80 3.00 4.80

7 9.30 3.00 6.30

8 11.00 3.00 8.00

9 12.90 3.00 9.90

10 15.00 3.00 12.00

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Average Variable Costs (AVC)Average Total Costs (ATC)ATC = AFC + AVC

Marignial Costs

Sunk Costs

III) Explain the ranges of elasticity. State the relationship between total revenue and

elasticity. How far is elasticity helpful in business decisions?

Elasticity is a “measure of how much buyers and sellers respond to changes in marketconditions”. The price elasticity of demand is commonly divided into three elasticityalternatives-- perfectly elastic, unit elastic, and perfectly inelastic--depending on the relativeresponse of quantity to price.

Determinants of Price elasticity of demand

1. Availability of close substitutes: the larger the number of close substitutes for the good thenthe easier the household can shift to alternative goods if the price increases. Choosing between

two different detergent powders because of price increase.

Necessities vs. Luxury: If the good is a necessity item then the demand is unlikely to change for a given change in price.

Definition of market: Consumers being more aware of small changes in price of expensivegoods compared to small changes in the price of inexpensive goods.

Time Horizon:

Perfectly elastic – “Quantity demanded changes infinitely with any change in price.” Perfectly

elastic demand can occur, in theory, when buyers have the choice among a large number of perfect substitutes in the consumption of a good, also when sellers have the choice among alarge number of perfect substitutes in the production.

Perfectly elastic curve

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If the price should change by an infinitesimally small amount, then quantity explodes to aninfinitely large amount or drops to zero here. Demand is very very close (substitutes –in-consumption) readily available. Example paper clips produced by Quad company.Supply, imperfect substitutes readily available, any quantity of good can be produced, as thereis no increase in production cost and price, and be altered between goods.Eg: The production cost of combining labor, kitchen utensils, mayonnaise, cheese, and bread

are one dollar per sandwich. This cost is the same for one sandwich or one billion sandwiches.

Perfectly Inelastic: “Quantity demanded does not respond to price changes”. The quantity is

essentially fixed. It does not matter how much price changes, quantity does not change.

Buyers have no choice in consumption of a good, sellers have no choice in production of agood.

Unit Elastic: “Quantity demanded changes by the same percentage as the price”.

The percentage change in quantity is equal to the percentage change in price. Forexample, a 22 percent change in price induces a equal 22 percent change in quantity

demanded. Buyers chose from among a modest number of substitutes in the consumption

of goods, suppliers choose among modest number of substitutes in production.

Consider a firm facing a downward sloping demand curve. The totalrevenue the firmreceives is the price of the good multiplied by thequantity sold. That is:

Total revenue = Price × Quantity Sold

The price elasticity of demand tells us what happens to total revenue when prices: itssize determines which effect – the price effect or the quantity effect – is stronger.When the price increases, the unit sold sells for a higher price, which tends to raisethe revenue and whenthe fewer units are sold the revenue will be reduced

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Total Revenue and elasticity

Total revenue is the amount paid by buyers and received by sellers of a good.

an elastic demand curve, an increase in the price leads to a decrease in quantity

demanded that is proportionately larger. Thus, total revenue decreases.

Inelastic Demand: an increase in price leads to a decrease in quantity that is proportionately smaller and TR increases. Elastic Demand : when an increase in the priceleads to a decrease in quan Income elasticity of demand measures how much the

quantity demanded of a good responds to a change in consumers’ income.

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IV) Define the term ‘returns to scale’. Explain the different stages of returns that a firm

goes through. Mention the significance of economies and diseconomies of scale in relationto this.

“It is a situation in which we study the behavior of output when all the factors are varied in thesame proportion. It is applicable in the long run.”

There are 3 aspects of returns to scale

a) Increasing returns to scale – occurs when a given percentage increase in all factor inputs in the same ratio causes proportionately greater increase in output

Scale of production Output

1 Machine + 2 Laboures 4 Chocolates2 machine + 4 Laboures 8 Chocolates

2 Constant returns to scale :- Under this percentage increase in all factor inputsin the same proportion causes equal percentage increase an output


1 Machine + 2 Laboures 1 Chocolate2 machine + 4 Laboures 2 Chocolates

3 Diminishing returns to scale :- When a percentage increase in all factor inputsin the same ratio causes proportionately lesser increase in output is known asdiminishing returns to scale


1 Machine + 2 Laborers 1 Chocolate2 machine + 4 Laborers 1.5 Chocolate

Returns to scale are concerned with changes in the level of output as a result of changes inthe amount of factor inputs used.

Economies of scale are concerned with changes in cost per unit of output. Eg:. If doublingoutput can be achieved with total cost less than doubling, you can achieve economies of scale. If doubling output can only be achieved with total costs more than doubling, you arefaced with diseconomies of scale.

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Economies of scale in production mean that production at a larger scale (more output) can be achieved at a lower cost. This is common in industries with large fixed costs, with hugeequipments and larger production unit. Here the cost of the equipment will be paid zeroeven with no output. The more output the more the cost of this equipment can be spreadamong more units of good. This is common in highly capital intensive industries such as

pharmaceuticals, chemical, petroleum and Automobiles etc. This is also because here theaverage costs decline as the outputs are increased, it is cheaper to produce the average unitas more units are produced, and economies of scale.

Increasing returns to scale in production means that an increase in resource usage, y% willresult in an increase in output by more than y%. when you increase the labor in analuminum plant , the aluminum production will be increased more. One of the advantage isthat economic of scale can generate trade gains because reallocation of resources can raise productivity and it efficiency,

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ferozkhan shaikh eco2nd assig

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