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Mod
ProdMark
Introd
O
dule 2
uction,ket Stru
uction
Outcomes
Costs cture
In thchoiintroimpmarexplYou
In tea corun we wa modetemonthe mpris
Upo
and Pro
his module, wice of technooduced the d
plications of orginal cost anlain the concu will also ex
erms of markompetitive firmarket condwill introduconopoly mar
ermination, pnopoly. Anotmonopolisticoners’ dilem
on completio
give examtechnolog
explain th
distinguis
distinguis
explain so
define the
describe sdiseconom
find the br
critique thabout how
ofit, and
we will examology in ordedefinitions ofopportunity cnd per unit cocepts of econxplore on bre
ket structure,rm, its decisiditions and loce types of imrket. We willprice discrimther imperfecc market. La
mma and its a
on of this mo
mples of the rgy.
he particular
sh between p
sh between h
ome implicat
e relationship
some goods smies of scale
reak-even lev
he reasoningw much to pr
C5
d
mine the relater to maximisf economics ccost and defiosts. For pro
nomies of scaeak-even ana
, you will firion to shut doong-run markmperfectly col explain mo
mination of a mctly competistly, oligopo
application on
dule you wil
role of input
meaning of c
roduction in
historical and
tions of oppo
p between ma
subject to (a)e.
vel of output
given by maroduce.
Economic Env
tionship betwse efficiencycost and profine the relatioduction in loale and disecalysis.
st explore thown, relationket entry / exompetitive mnopoly outpumonopoly antive market t
olistic modelsn oligopoly w
ll be able to:
prices in the
cost and prof
the short run
d incremental
ortunity cost.
arginal cost a
) economies
t for a simple
anagers of a
vironment of B
ween input py. You will bfits. We willonship betwe
ong run, we wconomies of s
he output decnship betweexit adjustmenmarkets, startiut and price nd social costo be introdus and the conwill be discu
e choice of
fits in econom
n and the lon
l costs.
.
and per unit
of scale and
e product.
competitive
Business
87
rices and e
l explain een will scale.
cision of en short-nt. Then ing with
sts of a uced is ncept of ussed.
mics.
ng run.
costs.
d (b)
firm
Module 2
88
Term
T
minology
erminology
y
Breaanal
Econscal
Econscop
Marg
Mon
infer econannouncin
explain thlong-run m
describe t
describe hthe price t
explain wcustomers
identify th
describe m
compare ocompetitio
name the between p
articulateapplies to
explain wcorrect anoligopolis
ak-even lysis:
nomies of e:
nomies of pe:
ginal produc
nopoly:
nomic principng a competi
he relationshimarket adjus
the types of i
how a monopto charge.
why a monopos.
he social cost
monopolistic
outcome undon.
chief marketperfect comp
e the concepto oligopoly.
what an oligopnd incorrect dstic models o
Givenmany have tis also
Firm etotal c
Cost-stwo orcost th
t: Extra is hirethe chthe am
Monothat hahighly
ples from anitive firm’s d
ip between sstment.
imperfectly c
poly determi
olist charges
ts of monopo
cally competi
der monopoli
t structures thpetition and m
t of prisoners
polistic moddescriptions operate.
n the companunits of a pa
to sell to covo called cost-
experiences cost as a resu
saving occurr more produhan for each
output produed. Marginal hange in totalmount of labo
opoly consistas no close sy differentiat
n in-depth budecision to sh
hort-run mar
competitive m
ines the quan
s different pri
oly.
itive market
istic competi
hat occupy thmonopoly.
s’ dilemma a
del is and distof the way d
ny's fixed andarticular prodver all its cos-volume-prof
a fall in the lult of its expa
rs when it is pucts togetherproduct sepa
uced when anproduct is c
l product (∆Qour employe
ts of a single substitutes; thted from the
siness news hut down.
rket conditio
markets.
ntity to produ
ices to differ
structure.
ition and per
he spectrum
and state how
tinguish betwdifferent
d variable coduct does a cts of productfit analysis.
long run averansion.
possible to pr at a lower parately
n additional alculated by Q) by the chad (∆L).
seller of a prhus the produproducts of a
story
ons and
uce and
rent
rfect
w it
ween
ost, how company tion? It
rage
produce per-unit
worker dividing
ange in
roduct uct is all other
Prod
Introd
uction,
uction
Moncom
Olig
Opp
Pricdisc
Prod
Pureperf
Costs
Prodservas inresomosthe rprod
Bussectservthat fishprocothe
nopolistic mpetition:
opoly:
portunity cos
e crimination:
duction:
e competitionfect competit
and Pro
duction is thevice that has nputs. Rememources are thest businessesresult of thisduced.
sinesses and ttors dependinvice (also kno
extract or cuing and agriccessing gooder industries.
firms
Monowith s
Oligopfirms from eprodusale.
t: The coit. Thecost oacquir
A firmcustomcosts osame.
The pa good
n or tion:
Pure cidentiinformcheapbuy th
ofit
e process of economic vamber that nae three econo include all t
s production,
the industrieng on the typown as ‘tertiultivate naturculture. The
ds, and includ Finally, the
C5
opolistic comslightly differ
poly consistswhose produeach other th
uct design, pr
ost of somethe opportunity
of all those thre that item.
m selling the mers for diffof producing
rocess of trad or service t
competition ccal products
mation – all fpest inputs, anhe cheapest p
transformingalue. Resourcatural resourcomic resourcthree of these the quantity
s in which thpe of productary’). The prral resourcessecondary se
des manufactservice secto
Economic Env
mpetition conrentiated pro
s of a relativucts are typichrough some romotional ef
hing is what y cost of an ihings that mu
same producferent prices g for the two
ansforming a that has econ
consists of min an enviro
firms know wnd all consumproducts.
g a set of resces used in pces, capital reces used in pre factors of p
y of a good o
hey operate ftion: primaryrimary sectors, such as minector involveturing and coor includes t
vironment of B
sists of moreoducts.
ely small numcally differencombination
fforts and pla
you give upitem refers toust be forgon
ct to differeneven thoughcustomers a
set of resournomic value.
many firms pronment of fulwhere to buymers know w
ources into aproduction aresources, androduction. Inproduction. Or service tha
fall into one oy, secondary,r includes inning, forestryes fabricatingonstruction, atrade industri
Business
89
e firms
mber of ntiated n of ace of
p to get o the ne to
nt h the are the
rces into
roducing ll
y the where to
a good or re known d human nputs for Output is at is
of three , or dustries y, g or among ies (both
Module 2
90
retainfosect
Cho
In pfromintencertmor
Sup$10a suyou of ficom
Theshoware amorcapisubsadoplabowithTechintenunit
T
Tabalte
Howwhobusiof o
il and wholeormation indutors, they all
oice of tec
producing a cm several pronsive procesain quantity re capital and
ppose you hav0,000 you ha
upply of matediscover tha
five possible mbination of w
e combinationwn in Table available. Tere workers anital) to produstituted for opt labour-savour. They canh machines ahniques B, Cnsive. Technts of labour b
Technique
A
B
C
D
E
ble 2.1 Inputernative tech
w does a busio want to eariness’s produ
output with th
esale) such asustries. Despfollow the sa
chnology
certain good ocesses usingss employs mof output. C
d less labour
ve started a save saved. Yerials. Beforeat you can mproduction pworkers and
ns of labour 2.1. Five dif
echnique A isnd fewer macuce 1,000 diaone another. Iving technolon automate aand can substC, and D are nique E is thebut 10 units o
Units of C
1
ts required thnologies
iness decide rn as much pructive efficiehe least costl
s banking anpite the differame product
or service, bg a different
more labour aonversely, a to produce t
small compaYou rent a buie hiring work
make 1,000 ‘Sprocesses, ea
machines.
and capital efferent techns most labouchines (10 unapers per dayIf labour becogies; that is
assembly linetitute capital increasingly e most capitaof capital.
Capital (K)
2
3
4
6
10
to produce 1
which produrofit as possiency, which mly mix of inp
d insurance, rences betwetion principle
businesses cacombination
and less capitcapital- inte
the same qua
any, ‘Simple ilding to usekers or buyinSoft Diapers’ach involving
employed in niques of produr- intensive nits of labou
y. However, icomes more es, they can sues by replacinfor land whemore capita
al-intensive,
Units o
1,000 diaper
uction procesible should trmeans makin
puts. Selectin
and the neween these threes.
an typically cn of inputs. Atal to produc
ensive procesantity of outp
Diapers,’ wi as a factory
ng sewing ma a day by usi
g a different
each processducing 1,000since it requi
ur and two uninputs can alexpensive, fiubstitute caping human been land is sca
al- (and less lrequiring on
of Labour (L
10
6
4
3
2
rs by means
ss to use? Owry to maximing a given qung the most e
w ee
choose A labour-ce a ss uses put.
ith , and buy achines, ing one
s are 0 diapers ires
nits of lso be irms can ital for eings arce. labour-) nly two
L)
of
wners ise the uantity efficient
S
What a
Study skills
are costs
procon t
Use prod
T
Solu
s?
To dus fiyourof aMorEcoand
Whaits opaysetc.)to cocost
Youhowmea
Totaprod
cess, thereforthe prices of
the followinduces the sam
Technique
A
B
C
D
1. The pricoptimal
2. Which pC, or D?
utions:
1. Techniq
2. Techniqtechniqu
determine whfind the seemr diapers bus
an altruistic dre likely, how
onomists normthis assumpt
at is a firm’soutput (diapes to buy inpu) is called itsover costs. Wt. That is,
ur objective iw a firm goesasure its total
al revenue isduces times t
re, depends bthese inputs.
ng informatiome amount o
Units of
2
5
9
14
ce of both labproduction t
production te?
que C is best
que A uses mues.
hat a cost is, mingly obviousiness. It is cdesire to provwever, you stmally assumtion works w
s profit? The ers) is called uts (fabric, abs total cost. YWe define pro
Profit = T
is to make yos about maximl revenue and
s the easy parthe price at w
C5
both on the q.
on for the nexf output.
f Capital
bour and captechnique: A
echnique is th
(least cost).
more units of
you must beus answer to conceivable tvide nearby ftarted your be that the go
well in most c
amount thatits total revebsorbent fille
You get to keofit as a firm
Total revenu
our firm’s prmising profitd its total cos
rt: it equals thwhich it sells
Economic Env
quantity of ea
xt two quest
Units of La
15
8
3
1
pital is $1 perA, B, C, or D?
he most labo
The total cos
labour than a
egin with thewhat costs a
that you startfamilies of inbusiness to mal of a firm icases.
t the firm recenue. The amer, workers, eep any reven
m’s total reve
e − Total cos
rofit as large t, we must cost.
he quantity os its output. I
vironment of B
ach input use
ions. Each te
abour
r unit. What ?
our intensive:
st is $12.
any of the ot
e firm’s objecare by focusited your firmnfants with d
make money. is to maximi
ceives for themount that yo
sewing machnue that is nonue minus it
st.
as possible. onsider fully
of output thef you produc
Business
91
ed and
echnique
is the
: A, B,
ther
ctive. Let ng on
m because diapers.
se profit,
e sale of our firm hines, ot needed ts total
To see y how to
e firm ce 1,000
Module 2
92
‘SofThe
In thon tcomther
Op
Whecostcostthat incluservweesuspoppexpe
Firmcostoutsbecarecobuilestimoppcostbetwbetwstuddeciincluaccoresu
Thecasemondiapthis econwillif yo$10is tofull-
Ecoopp
ft Diapers’ ae measuremen
he example gthe choice of
mbination of tre is more to
portunity c
en measuringt. The cost oft of an item ritem. When
ude all the ovices. When yek to go on a pending yourortunity costenses associa
ms face two tts are paymenside of it. Expause they incords. These cldings, machmates of whaortunity costts relate to thween explicitween how ecdy how firmsisions are baude both whountants keepult, they mea
e difference be of ‘Soft Dianey as a manpers businesscost, it neve
nomist, howel affect the deour wage as 0 to $200 pe
oo costly and-time manag
onomists defiortunity that
nd sell them nt of your fir
given above f the Techniqthe two inputhis than can
costs
g costs, econf something refers to all thn economists
pportunity cyou close dofishing trip,
r operation tet. For economated with you
types of costnts made by plicit costs aclude all the costs include inery and maat owners givt of pursuinghe resources pt and implici
conomists ands make prodused on both e
hen measurinp track of thesure the expl
between econapers’ factor
nager, your acs. Because noer shows on tever, will coecisions you a manager o
er day, you md choose to sher.
ine as opportt results from
at $1 a diaprm's total cos
as in Table 2que (A to E), uts and the prn be seen in t
nomists alwais what you ghose things tspeak of a fiosts of makin
own your busthe amount
emporarily wmists, this cour fishing ac
ts: explicit coa business to
are also referrcosts that apsuch items a
aterials. In cove up by bein
g this course provided by it costs highld accountantuction and prexplicit and
ng a firm’s coe money thatlicit costs bu
nomists and ary. When youccountant wio money flowthe accountanunt the forgomake in you
f a T-shirt prmight decide hut down the
tunity cost thm some cours
er, your totast, however,
2.1, your totawhich in tur
rices of the inthe first insta
ays use the cogive up to gethat must be irm’s cost ofng its outputsiness of makof income th
would be a reost is as real activities.
osts and implo other businred to as acc
ppear in the bas payments ontrast, implng involved of action ovethe owners. ights an impts analyse a bricing decisioimplicit cost
osts, economt flows into a
ut often ignor
accountants u give up theill not count ws out of thent’s financiaone income aur diaper busroducing comthat running e factory in o
he value of anse of action, e
l revenue is $is more chal
al cost wouldrn depends onnputs. Howevance.
oncept of oppet it. The oppforgone to a
f production, t of goods anking diapers hat you forgoeal cost to yoas the out-of
licit costs. Exnesses or peocounting costbusiness accomade for wo
licit costs arewith a businer another. ImThis distinct
portant differbusiness. Ecoons. Becausets, economistic costs. By and out of firre the implici
is easy to seee opportunitythis as a cos
e business to al statements.as a cost becasiness. For exmpany rises f
your diaper order to beco
ny sacrificedeven if no ou
$1,000. llenging.
d depend n the ver,
portunity portunity acquire
they nd for a
o by ou, the f-pocket
xplicit ople ts ounting orkers, e ness – the mplicit tion ence onomists e the ts contrast, rms. As a it costs.
e in the y to earn t of your pay for . An ause it xample, from business
ome a
d utright
Distinguishing
monbusibothcostA, a(pric
The
As fyou Anosacrestimby wor $
Eco
between
In aonlydeemconsare ccostincr
A suexpecourcleaconsany doesone normcons
For locaownmak
netary paymeiness are all th explicit andts of producinare $210 – twced at $20 an
e implicit cos
1. The oppup in thi
2. The oppthe firm
for the first ccould depos
other implicitrifice by wormate the valuworking for s$130, represe
onomic costs
$340
n relevant
analysing the y those relevmed relevantsidered in a dconsidered irts are relevanremental and
unk cost, somenditure thatrse of action
arly irrelevansidered to bedecision abo
s not changethat does ch
mally, but nosidered relev
example, Mal fruits and vner figures thke a reasonab
ent is made. the opportund implicit cong 1,000 dia
wo units of lan hour of ma
sts consist of
portunity cosis business.
portunity cosm that you hav
cost, you migsit your $100t cost would
rking as the mue of your wsomeone elseents the oppo
s =
Exp
t and irre
cost of a parant to the det if it will be decision. Correlevant. Twnt are the critd the fixed ve
metimes refet is not affect. Based on th
nt. The oppose relevant becout a future ce with the levhange with thot always, covant.
other’s Day vegetable mahere is enougble profit. Ho
C5
Thus, the ecnity costs invsts. Therefor
apers per dayabour ($5 perachine work)
f two compon
st of the capit
st of your owve establishe
ght estimate t0,000 in a ban
be the wagemanager of y
work as $100,e. The sum o
ortunity costs
plicit costs
$210
elevant co
rticular quesecision at han
affected by sts not affectwo commonlteria called r
ersus variable
rred to as histed by any dehe definitionsite of sunk ccause it is decourse of actvel of questiohe level of quonsidered irre
falls on the warket buys 10gh local demaowever, the e
Economic Env
onomic costvolved in prore, for ‘Soft Dy based on, ler hour) and 1.
nents:
tal investmen
wn time as theed.
that, rather thnk account a
e that you as your company, which is whof these two cs for ‘Soft Di
+ Impli
$
ost
tion, economnd should be the choice oted by the ouly used waysrespectively se.
storical cost,ecision conc
n of relevant ccost is incremefined as a cotion. Fixed coon or output. uestion or ouelevant, whil
weekend and00 rose bouqand to sell alestimate turn
vironment of B
s encountereoduction and Diapers,’ theet us say Tec10 units of ca
nt that you h
e owner man
han making and earn $30 the owner ofy. You mighhat you woulcosts ($30 + iapers’. Ther
icit costs
$130
mists recommconsidered. f alternativesutcome of a ds to determinsunk versus
, is a prior erning a futucost, sunk co
mental cost. Tost associatedost is the cosA variable c
utput. Fixed cle variable co
d the owner oquets for $5 ell 100 at $10 ns out to be w
Business
93
ed by a include
e explicit chnique apital
have tied
nager of
diapers, a day.
f the firm ht ld earn $100),
refore,
mend that A cost is
s being decision ne which
ure ost is This is d with st that cost is cost is ost is
of the each. The each to
wrong.
Module 2
94
S
Study skills
By mthis histothe rboubouunso
Eco
Wheknow
If thprofwhefromgaincost$34
Eco
YouThe cost
1.
2.
mid-afternoostage, the $5orical or sunroses at a lowquets - sunkquets pickedold flowers.
onomic pro
en economicwn as econo
his gives a nefit, or a loss. en you have cm it. If 1,000ned by produts of $340 ar0):
onomic profi
$660
ur brother hasrevenue from
t of each use
The opportu
A. $5, t
B. $8, t
C. $1, t
D. $2, t
The econom
A. -$8,
B. $8, t
C. -$2,
D. $2, t
on, 40 bouqu5 that was pa
nk cost. It canwer price sho. In fact, if th
d up for comp
ofit
c costs are suomic profit.
egative figureThe daily ec
calculated to diapers sold
ucing is $1,00e deducted, w
it =
To
s a plot of lanm each use iis zero.
unity cost of u
the value in u
the value in u
the differenc
the differenc
mic profit of u
the value in
the value in t
the differen
the differenc
uets remain uaid for the flonnot be retrieould be indephe owner muposting, it m
ubtracted from
e, the busineconomic profotal revenue ad at a price of00 ($1×1,000we get an eco
otal revenue
$1,000
nd that has ths $5, $6 and
using the lan
use R.
use T.
ce in value be
ce in value be
using the lan
n the use T.
the use T.
nce in value b
ce in value be
unsold. Whatowers is irreleved. A decispendent of th
ust pay to havmight be worth
m total reven
ess faces a nefit of ‘Soft Dand subtractef $1 each, th0 shirts). Whonomic prof
- Econ
hree alternat$8, respectiv
nd for use S i
etween use R
etween use T
d for use S is
between use
etween use T
t should be dlevant. It is asion to sell thhe price paidve the unsoldh giving awa
nue, the exce
egative econoDiapers’ remaed economic
hen the total rhen the econofit of $660 ($
nomic costs
$340
tive uses: R, Svely. The acc
is —
R and S.
T and S.
s —
T and S.
T and S.
done? At a he rest of
d for the d ay any
ess is
omic ains
c costs revenue omic
$1,000 −
S, and T. counting
Time a
Produ
as a facto
uction in t
3.
Solu
or in the d
Theverybusihandthe lof suthercannthescostassuall tor v
the short
Thequanmanmacagri– thshorknowincluexam
The local vehe wishes ateach cantalomaking —
A. a tot
B. a tot
C. a no
D. a no
utions:
1. B. Oppoalternati
2. C. Econtotal coscosts are
3. A. Totaltotal revdifferen
determin
e time period y important iiness decisiodled by dividlong run. Reupply and de
re are certainnot be changse resources its that are irrumes there istheir resourcevariable and t
run
e previous secntities of onenufacturing, cchinery they iculture, ther
he land availart run are known as variabude the laboumple, as the
egetable and t the market poupe is $0.50
tal economic
tal economic
ormal profit o
ormal profit o
ortunity cost ive: Use T.
nomic profit ists. Accountie $8 (the rev
l profit is totvenue is $20.nce is an econ
ation of r
in which a fin determininon. In the ecoding time peremember thatemand and p
n resources suged within this either sunk
relevant to a s enough times. Consequetherefore rele
ction showede or more of companies uuse or the size is typicallyable for farmown as fixedble inputs. Tyur and materowner of ‘So
C5
fruit vendor price of $2 e
0. He chooses
c profit of $1
c profit of $2
of $15.
of $20.
is the value
is total revening costs are
venue from U
tal revenue le.00 and total nomic profit
relevant c
firm’s cost stng which cosonomic analyriods into twt this distinctrice elasticityuch as land, fe time periodk or fixed. Thshort-run dece for manageently, all longevant to a pa
d that short ra business’s
usually cannoze of their fa
y an additionming. Inputs thd inputs. Inpuypically, varirials a busineoft Diapers,’
Economic Env
can sell as meach. Total cos to sell 10 c
5.
20.
of the highe
nue (which fo zero, but ec
Use T).
ess total costcost is $5.00of $15.00.
cost
tructure is bests are relevaysis of cost, t
wo basic typetion was alsoy. In the shofactory spaced allowed. Thus, there wicision. Longers to vary thg-run costs a
articular busin
run is the per inputs canno
ot adjust the qactories on a nal quantity thhat cannot buts that can biable inputs iess uses in pr you are con
vironment of B
many cantaloost to him ofantaloupes. H
st (next-best)
or Use S is $onomic oppo
t. For the ven0. Therefore,
eing considerant to a particthe time factos: the short ro used in the
ort run, we ase, and machihe cost of usill always be
g-run analysishe costs of utare either incness decision
riod during wot be varied.quantity of short notice.hat cannot bee adjusted in
be adjusted ain the short rroduction. Fo
nsidering adju
Business
95
oupes as f carrying He is
)
$6) minus ortunity
ndor, , the
red is cular or is run and analysis
ssume inery that sing e certain s tilising
cremental n.
which In
. In e varied
n the are run or usting
Module 2
96
Total,
average
yourhavewithinpunumthe
and marg
To iempin towithmeainpuvariagaisee wor– re
Coluincraddianaloutpthe qextrprodchanGre
(1) LP
Wor
Tab
Coluprodwor
r current proe already bouhout a considut for your bu
mber of workshort run.
ginal pro
increase prodploy more of otal product, h a given woasure of a comut in making iable inputs, in, let us lookwhat happen
rkers employmains consta
umns 1 and 2reases, total pition to total lysing produput producedquantity of l
ra output product is calculnge in the amek capital let
Labour Total roduct (L) rkers per day
0
1
2
3
4
5
6
ble 2.2 Produ
umns three aducts for ‘Sorkforce’s ave
oduction of 1ught three sederable delayusiness in the
kers you emp
duct
duction of a cf all variable
which is therkforce. Thempany’s scavirtually all such as natuk at ‘Soft Dins to total proyed is changeant.
2 of Table 2product increproduct, two
uction in the sd per worker abour (L) emduced when lated by divi
mount of labotter ‘delta,’ w
(2) MargiProduct (
(Packs of diaper day
uction in the
and four of Toft Diapers’. erage product
,000 packs (ewing machiny. Hence, thee short run. H
ploy, so labou
certain goodinputs includ
e overall quane employmenle of productproducts. Ho
ural resourcesapers’. Say yoduct for youed but the num
.2 show thateases until tho other conceshort run. Avand is found
mployed. Maran additiona
iding the chaour employewhich signifi
nal (Q) apers
y)
(3) A
(Pac
0
480
1,000
1,350
1,600
1,700
1,650
e short run
Table 2.2 listWhen you emt is 450 pack
10 diapers pnes and cann
e three machiHowever, your represents
d or service, ading workersntity (Q) of o
nt of labour ition, since laowever, busis or semi-proyou conduct ur business wmber of sew
t as the numbhe fifth workeepts are impoverage produd by dividingrginal produal worker is hange in total pd (∆L). (Theies a change
Average Produ(∆Q/∆L)
cks of diapers pday)
4
52
35
25
10
-
t the marginamploy three
ks of diapers
er pack) a danot acquire mines represenou can changs a variable in
a business ms. The result output assocs a convenie
abour is a varinesses also uocessed gooda few experi
when the numwing machine
ber of workerer is hired. Inortant when
uct is the quag total producct, in contrashired. Marginproduct (∆Q
e symbol ∆ isin some vari
ct
er
(4) (Packs o
per
80
20
50
50
00
50
al and averagworkers, theper day (1,3
ay. You more nt a fixed e the nput in
must is a rise iated nt riable use other
ds. Once iments to mber of es - three
rs n you are
antity of ct (Q) by st, is the nal ) by the s the iable.)
(Q/L) of diapers r day)
0
480
500
450
400
340
270
ge e 50
Dimin
The th
ishing m
hree stage
diapof thproddivi
Ave
Mar
NotbecoMea
arginal re
Theprodretufixeunitincrdimflowfalsethe ffoodconccorr
es of pro
The2.1, bottgrap
In thraterangthis becototathe b
pers, three wohis worker isduct (1,350 piding the diff
erage produc
rginal produc
e that marginomes negativanwhile, aver
eturns
e marginal prduction in th
urns, at some ed input – thets of the variareasingly sca
minishing marwerpot to groe, then, as yoflowerpot wod supply couclusion suggrect.
oduction
e total producand its marg
tom graph. Bph’s first ran
he top graph, giving the cge, marginal second rang
omes flatter. l product decbusiness.
orkers). If a s 250 packs, packs) from tference by th
t =
To
ct =
Cp
w
nal product pve at the samrage product
roduct valuese short run. Apoint – as m
e marginal prable input (fo
arce fixed inprginal returns
ow food. If thou used moreould rise at a
uld be providgests that the
ct for ‘Soft Dginal product
Both graphs cge, marginal
’s first rangecurve a positproduct beg
ge continues tIn the final r
creases. Poin
C5
fourth workewhich comethe new total
he change in
otal product (
Number of workers (L)
Change in totaproduct (∆Q)
Change in workforce (∆L
peaks when tme point that t peaks at tw
s in Table 2.According to
more units of roduct will st
for example, wput (for exams, consider whe law of dime labour, the a faster and fed from this law of dimin
Diapers’ is sht and average
can be dividel product rise
e, total produtive slope thains to fall buto rise but atrange, margi
nts in this las
Economic Env
er is added, ts from subtral product (1,6the workforc
(Q)
=
al )
=
(1
L)
the second wtotal producto workers.
2 reflect a lao the law of da variable intart to decreaworkers) are
mple, land). Fwhat would hminishing ma
total producfaster rate unsingle pot. T
nishing marg
hown in the te product are
ed into three es as more w
uct rises at a hat gets steepeut is still posit a lower rateinal product st range will n
vironment of B
the marginal acting the ol600 packs), ace from three
1,350
3
,600 –1,350)
(4-3)
worker is hiret begins to dr
aw that appliediminishing nput are addease since thee being addedFor the law ohappen if youarginal returnct of food grontil the worldThe absurdityginal returns
op graph of Fe shown in thranges. In th
workers are ad
higher and her. During thitive. Total pe, so that the falls below znever be cho
Business
97
product d total and e to four:
= 450
)
= 250
ed and rop.
es to marginal ed to a new d to an
of u used a ns were own in d’s entire y of this must be
Figure he he bottom dded.
higher he second product in
curve zero and osen by
Module 2
98
Figu
Notmar480diapwordecrhas prod250 prodsharand prodappa
ure 2.1
ice that as thrginal produc, whereas the
pers. This prorkers increasereases (law oa marginal p
duct of 350 ppacks of dia
duct. As the nre equipmentmore worke
duction of diarent in both
he number ofct increases. e second woroperty is calles beyond staof diminishinproduct of 52packs, and thapers. This prnumber of wt and work in
ers are hired, iapers. Increah figures, dep
f workers incThe first worrker has a mled increasinage I (stages
ng or decreas20 diapers, thhe fourth worroperty is ca
workers incren more croweach additio
asing and dimpicted in Figu
creases withinrker has a marginal produ
ng returns. Ass II and III), tsing returns).he third workrker has a maalled diminisheases, additioded conditio
onal worker cminishing maure 2.1.
n stage I, themarginal produ
uct of 520 pas the numberthe marginal. The secondker has a mararginal produhing margina
onal workers ons. Hence, acontributes learginal produ
e uct of acks of r of product
d worker rginal uct of al have to
as more ess to the uct are
S
Study skills
Use
L(w
1.
2.
3.
Solu
the followin
Labour workers)
0
1
2
3
4
5
6
Total produc
A. 70 u
B. 73 u
C. 78 u
D. 86 u
Average pro
A. 10 u
B. 12 u
C. 14 u
D. 15 u
Diminishing
A. first
B. seco
C. third
D. four
utions:
1. C. Total(13 x 6)
2. C. With adds 10 product
3. C. The mrespectivworker.
ng table to an
Total Product
0
15
32
48
60
—
—
ct, if six wor
units of outpu
units of outpu
units of outpu
units of outpu
oduct, if five
units of outpu
units of outpu
units of outpu
units of outpu
g returns set i
t
ond
d
rth
l product is a.
4 workers, tmore units tdivided by t
marginal provely are 15,
C5
nswer the nex
Marginal Product
—
—
—
—
—
10
—
rkers are emp
ut.
ut.
ut.
ut.
workers are
ut.
ut.
ut.
ut.
in with the
average produ
total product to make a totthe number o
ducts of the 17, and 16. T
Economic Env
xt three ques
AverageProduct
—
—
—
—
—
—
13
ployed, is —
employed, i
wor
uct times the
is 60 units. tal of 70. Aveof workers (7
first, secondThe decline b
vironment of B
stions.
e
—
is —
rker.
e number of w
The fifth woerage produc
70/5).
d, and third wbegins with t
Business
99
workers
orker ct is total
workers the third
Module 2
100
The pr
roduction
n function
Firmthat firmbusiand whefixecostbusiare wtypiall ivari
Cosreflediscsee Tabprodmeaprod
YoucostincucosthowtimeprodTab$10
Her prodlaboThezerobunbun
A fithe tcostprodThecostfixe
n to the t
ms incur costthey plan to
m’s productioinesses use fvariable cos
en a businessed inputs suchts, (TVC) in iness adjustswages and pical fixed cosnputs, both f
iable costs at
sts and produects its producussed in the how these re
ble 2.3. This ducer. From asures of costduction and p
ur neighbourts, which do urred even if ts include the
w many T-shie bookkeeperduced, the boble 2.3 shows0.
variable cosduced, includour. The more third columo if she produdle consists dles) T-shirt
irm’s total cototal cost in tt. While margduct, per-uniese costs are rts. Hence, theed cost, avera
total-cost
ts when theyo sell. In thison process anfixed and varsts. Fixed coss changes its h as machinecontrast, rela the quantityayments for st is the cost fixed and vart each quantit
uction are twouction functilast chapter,
elated measutable presentdata on a firt which will pricing decis
’s total cost cnot vary with
f the firm proe rent she payirts she produr to pay billsookkeeper’s s your neighb
sts, which chde the cost ofre T-shirts sh
mn of the tableuces nothingof 20 units) o
ts and so on.
ost is the sumthe fourth coginal cost is it costs are exrelated to a bere are three age variable c
t curve
buy inputs tmodule, we
nd its total coriable inputs,sts, or total fiquantity of o
ery and land.ate to variabl
y produced. Tmaterials usof machinerriable, and isty of output.
o sides of theon, whereas , is a reflectio
ures are derivts cost data om’s total costurn out to b
sions in futur
can be divideh the quantit
oduces nothinys because thuces. Similars, regardless salary is a fibour’s fixed
hange as the ff materials su
he makes the e shows the v
g, $56 if she pof T- shirts a
m of fixed anolumn equalsbased on cha
xpressed in tbusiness’s fixseparate typ
cost and ave
to produce thwill examin
ost. In the sho they face co
fixed costs, (Toutput since . Variable cole inputs, whThe most impsed in producry. Total costs found by ad
e same coin. the firm’s suon of its cost
ved, consideron your neighst, we can debe useful where chapters.
ed into two tty of output png at all. Youhis cost is thrly, if she neof the quantixed cost. Thcost, which
firm alters thuch as fabricmore materivariable costproduces oneand $106 if s
nd variable cos fixed cost panges in a buterms of a sinxed costs, vapes of per-unrage cost.
he goods ande the link beort run, just aorrespondingTFC), do notthese costs r
osts or total vhich change wportant variaction, whereat (TC) is the dding fixed a
A firm’s totupply curve, ts relationshir the examplehbour – the T
erive several en we analys
types. The fixproduced, areur neighboure same regar
eeds to hire aity of T-shirt
he second colin this exam
he quantity oc, thread, inkial she needst. The variabe bundle (eacshe produces
osts. In Tablplus total varusiness’s totangle level of ariable costs nit costs: aver
d services tween a as
g fixed t change relate to variable when a able costs as the sum of
and
tal cost
ips. To e in T-shirt related
se
xed e r’s fixed rdless of a full-ts lumn in
mple is
f output k, and s to buy. ble cost is ch two (20
le 2.3, riable al output. and total rage
(1
Quaof Ou[Q] (of u
Tab
Whedivibundiviof $
1) (2)
antity utput Tens nits)
Total Fixed Cost
[TFC]
0 100
1 100
2 100
3 100
4 100
5 100
6 100
7 100
8 100
9 100
10 100
ble 2.3 Meas
Averagewhich yits total
Similarlunit of ovariable
The avefound in
en three bunided by the todle. Similarlided by three$51.33. Let u
(3)
Total Variable
Cost
[TVC]
0
56
106
154
205
263
332
416
519
646
801
sures of tota
e fixed cost (you derive by
product (Q).
ly, average voutput, whiche costs (TVC
erage fixed, an columns fiv
dles are prodotal product,ly, the $254 ve bundles of Tus observe the
C5
(4) (5
Total Cost
[TC]
AverFixeCo
[AF
100
156 100
206 50
254 33
305 25
363 20
432 16
516 14
619 12
746 11
901 10
l and averag
(AFC) is the y dividing the.
variable cost h you derive
C) by total pro
average variave, six, and s
duced, the bu giving an avvariable costT-shirts, resue calculation
Economic Env
5) (6)
rage ed st
FC]
AverageVariable
Cost
[AVC]
0.00 56.00
0.00 53.00
.33 51.33
.00 51.25
0.00 52.60
6.67 55.33
4.29 59.42
2.50 64.87
.11 71.77
0.00 80.10
ge cost
fixed cost pee business’s
(AVC) is theby dividing
oduct (Q).
able, and aveseven.
usiness’s fixeverage fixed ts at this leveulting in an ans:
vironment of B
(7)
e e
Average Total Cost
[ATC]
0 156.00
0 103.00
3 84.67
5 76.25
0 72.60
3 72.00
2 73.71
7 77.37
7 82.88
0 90.10
er unit of outfixed costs (
e variable cothe business
erage total co
ed costs of $cost of $33.3
el of productiaverage varia
Business
101
(8)
Marginal Cost
[MC]
56
50
48
51
58
69
84
103
127
155
tput, (TFC) by
ost per s’s
osts are
100 are 33 per ion are able cost
Module 2
102
Ave
$33
Ave
$51
Avecost
Aveeachthe Tfixeaver
Avc
Althtell prodrisesnumprodto $
MC
As wconcdecithesaboumartotatota
erage fixed c
.33 per batch
erage variabl
.33 per batch
erage total cot per unit of o
erage cost is h quantity ofT-shirt make
ed cost is $33rage total cos
verage total cost (AC)
84.66
hough averagus how muchduction. The s when the fi
mber is the mduction from254, so the m
C = (Chan
(Cha
will be even cepts of averiding how mse concepts dut her costs orginal cost exl cost. Averal cost is divid
ost (AFC)
h (of 10 shirt
e cost (AVC
h (of 10 shirt
ost (ATC) (oroutput.
the sum of af output. Theer produces t3.33 and the ast of $84.66.
=
Averacost
3
ge total cost th total cost wlast column
irm increasesmarginal cost.m two to threemarginal cost
nge in total c
nge in quant
clearer in thrage total cos
many T-shirts do not actuallof productionxpress, informage total costded evenly o
=
ts) =
C) =V
ts) =
r simply ‘ave
average fixedrefore, for exthree bundlesaverage vari
age fixed t (AFC)
+
33.33
tells us the cwill change a
in Table 2.3s production. For example (units) of Tt of the third
cost) =
tity)
e next chaptest and marginto produce.
ly give your n. Instead, thmation that it tells us the over all the u
Fixed costs
Variable costs
th
erage cost’)
d cost and avxample, in cos (units) of Table cost is $
+
Average cost (A
51.
cost of the typas the firm al3 shows the a
n by one unit e, if your nei
T-shirts, totald (unit) of T-s
∆TC =
∆Q
er, your neignal cost extreKeep in minneighbour n
he average tos already concost of a typ
units produce
(TFC) total p
(Q)
$154
3 shirts
s (TVC) tota
(Q)
$254
hree shirts
is the busine
erage variabolumn seven
T-shirts, the a$51.33, givin
variable AVC)
33
pical unit, it lters its levelamount that of output. Thighbour incrl cost rises frshirts is $48.
305-254
4 - 3
ghbour will fiemely useful
nd, however, new informatotal cost and ntained in he
pical unit of oed. Marginal
product
al product
ess’s total
le cost at n, when average ng an
does not of total cost his eases
rom $206 .
= 51
find the l when that
tion the
er firm’s output if cost tells
Cost ccurves an
us thof o
nd their s
Grapenaboutpcostdatafollo
Figu
In pwheaverFiguThevertcurvvari
Thesomecon
Wheformnumincraverflatt
he increase ioutput.
shapes
phs of the coble us to see put increasest has on the aa in Table 2.owing about
ure 2.2
previous studen you were rage and marure 2.2 graph
e horizontal atical axis meaves: average iable cost (AV
e cost curves me features thnomy. Let us
The sha
The sha
The rela
en no shirts amula is zero, mber. Averagreases, since rage fixed coter as output
n total cost t
ost data in Tathe pattern o
s. They also haverage varia3 or the grapmarginal co
dy sections, ganalysing therginal cost hehs your neig
axis measureasures margitotal cost (AVC) and mar
shown here hat are comms examine th
ape of margin
ape of averag
ationship betw
are producedmeaning tha
ge fixed cost the denomin
ost curve hasrises.
C5
that arises fro
able 2.3 are pof change of help us to visable and averphs in Figureost’s impact o
graphs of supe behaviour elp you analyhbour’s costs the quantitinal and aver
ATC), averagrginal cost (M
for your neigmon to the cohree features
nal cost.
ge total cost.
ween margin
d, the denomat average fixthen falls as
nator in the fos a negative (
Economic Env
om producin
presented in the differentsualise the imrage total coe 2.2, we canon average v
pply and demof markets. Syse the behavts using the dty the firm prrage costs. Th
ge fixed cost MC).
ghbour’s T-sst curves of min particular
nal and avera
minator of thexed cost is anthe business
ormula rises.(downward)
vironment of B
ng an addition
Figure 2.2 at measures ompact that msts. Using eitn observe thevariable cost:
mand proved Similarly, grviour of firm
data from Taroduces, and he graph sho(AFC), avera
shirt companmany firms i:
age total cost
average fixen infinitely hs’s total prod. Therefore, tslope which
Business
103
nal unit
and f cost as
marginal ther the
e
useful raphs of ms. able 2.3.
the ows four age
ny have in the
t.
ed cost high duct the becomes
Module 2
104
YouTo uof aalwalargincrrefleAt vaverunitoutpfallsaverrises
Thetotaof thbuncost
Nowaverbehathat morto revari
In thresoequiand prodresuprodresuwith
Supmacpersa teaoutpworis antwo teamcont
ur neighbourunderstand w
average fixedays declines
ger number oreases becausects the shapvery low leverage total costs. Average toput reaches ss to $72 per brage total coss substantiall
e bottom of thl cost. This qhe firm. For dles. If she pt rises above
w that you harage variableaviour of mamarginal co
re of a good oeview a conciable input’.
he short run, ources or inpuipment. As araw materia
duced. At firult in increasduct). Howevult in decreash a simple nu
ppose one perchinery, prodson is joined am produce 2put contributrker is 100 ann example ofworkers are
m may cause tinue increas
’s average towhy this is sod cost and ave
as output risf units. Averse of diminis
pes of both avels of outputst is high becotal cost then
six bundles obundle. Whest starts risinly.
he U-shape oquantity is soyour neighbo
produces morthe minimum
ave scrutinisee and averagearginal cost itost decreases or service is cept referred
a firm must uts such as l
additional amals are combirst, additionasing amountsver, eventualsing or diminumerical exa
rson, workinduces 100 un
by another w250 units of ted by each wnd the marginf increasing r
e joined by stthe margina
sing.
otal cost curvo, remember erage variabses because trage variableshing marginverage fixed , such as onecause the fixn declines as
of T-shirts peen the firm prng again beca
occurs at the ometimes calour’s compare or less tham of $72.
ed the impace total cost, ytself. Why dand then, at produced? Tto in econom
work with aand, factory
mounts of varined with theal units of thes of additionally, the additnishing margmple.
ng with a fixenits of outputworker. The output. From
worker, the mnal product oreturns to thetill more peoal product of
ve is U-shapethat averagele cost. Averthe fixed coste cost typicalnal product. A
cost and avee or two bunded cost is spr
s output increer hour, whenroduces morause the aver
quantity thalled the mini
any, the effician this amoun
ct that marginyou may won
does economisome point,
To answer thmic theory as
a certain fixeor office spa
riable inputs e fixed inputse variable inpal output (alstional inputs ginal product
ed amount of. Now suppotwo of them
m the standpomarginal prodof the seconde variable inpple, sustainethe addition
ed (saucer-she total cost is rage fixed cot is spreadinglly rises as ouAverage totaerage variabldles per hourread over oneases until thn average tote than six burage variable
at minimises mum efficienient scale is nt, her avera
nal cost has onder about thic analysis asstarts to incr
is question, ws ‘the returns
d quantity oface, machinesuch as labo
s, more outpuputs are assuso called marare expected
t. We can see
f factory spacose further th
working togoint of the adduct of the fid worker is 1put, labour. A
ed effort to wal workers to
haped). the sum
ost g over a utput l cost le cost. r,
nly a few he firm’s tal cost undles, e cost
average nt scale six
age total
on he ssume rease as we need s to a
f ery and our hours ut is med to rginal d to e this
ce and hat this gether as dditional irst 150. This As the
work as a o
Shift in short-r
At saddithe f
To emarintoassupaysis, inHowrate wor
MC
Thevari
run cost c
Thepricproddowaverdow
On tprod(ATmarvaridow
some point, hitional workefixed inputs.
explain the rrginal cost, wo the scheduleume that labos W (Wage rn fact, the chwever, when
× ∆L). Recarker is each p
C = ∆TVC
∆Q
erefore the reiable input ca
1. When a (when itdecrease
2. When a variablemargina
3. When a (when itmargina
curves
e cost curves ces. An increaduced from t
wnward. If thrage total cos
wnward at hig
the other handuction mov
TC) curves dorginal cost (Miable factor o
wnward but le
however, theers will start
elationship bwe have extene of numbersour is the onlrate) per houhange in totathe firm hire
all that the chperson's marg
C =
Wa
elationship bean be present
firm experiets marginal pe.
firm experiee input (whenal cost will in
firm experiets marginal pal cost will be
shift with chase in technothe same inpuhe technologyst curve movgher levels o
nd, a decreases the averagownward but
MC) curves uof productioneaves the AF
C5
e marginal prto diminish
between returnded the exas shown in Tly variable in
ur to employ l variable coes ∆L workehange in outpginal product
age rate × ∆L
∆Q
etween margted as follow
ences increasproduct incre
ences decrean a firm’s mancrease.
ences constanproduct neithe constant ov
hanges in tecological leveuts or resoury requires moves upward aof output.
se in the pricege fixed costt leaves the aunchanged. An moves the AFC curve rem
Economic Env
roduct resultibecause of th
rns to variabample in the pTable 2.3. In nput in this eeach worker
ost if one worrs, total variaput resulting t. Therefore,
= Wage
∆Q/∆
ginal cost andws:
sing returns teases), its ma
sing (diminiarginal produ
nt returns to her increases ver the range
chnology or cel that allowsrces moves thore capital, aat low levels
e of the fixedts (AFC) andaverage variaA decrease inAVC, ATC,
main fixed or
vironment of B
ing from the he limits imp
ble input and previous parathis example
example, andr. Thus, the wrk hour is hirable cost is (from the add we can say
rate =
W
∆L
d return to th
to its variablarginal cost w
shing) returnuct decreases
a variable innor decrease
e of output pr
changes in res more outputhe cost curvea fixed input,of output an
d factor of d average totaable cost (AVn the price ofand MC curvunchanged.
Business
105
posed by
agraph e, we
d the firm wage rate red. (Wage ditional that:
Wage rate
MPL
he
e input will
ns to its s), its
nput es), its roduced.
esource t to be es , then the
nd
al cost VC) and f a ves
Module 2
106
S
Produ
Study skills
uction in t
Cost
a.
b.
c.
Solu
the long r
Theindushoradjulaw in thtake
Eco
Theof pphen
In threprwithof Aposithanplanthan
t curves shift
technology c
the prices of
marginal pro
A. only a
B. only b
C. a and b
D. a and c
ution:
Discuss you
run
e long run is tustry can be art run – suchusted in the loof diminishi
he short run. e advantage o
onomies a
e term ‘econoproduction asnomenon is i
his figure, wresents a certh this plant cATC1. ‘Plant itioned to then Plant 1, signt is able to pn the smaller
ft if —
changes
f factors of p
oduct change
ur answer wit
the period inadjusted. So
h as machinerong run. Becing marginalIn this sectio
of this flexib
and diseco
omies of scals a firm increillustrated in
e see that thetain amount oapacity is ab2’ represent
e right of Plagnifying that produce grea
one, i.e., the
roduction ch
es.
th your tutor
n which quan, even those ry, buildingscause all inpul returns no lon, we review
bility to reduc
nomies of
le’ is definedeases all its inn Figure 2.3.
e average totof capacity. A
ble to producs a greater pr
ant 1. In addiover a certai
ater amounts e unit cost of
hange
.
ntities of all rinputs that h, and cultivauts can vary onger has thw the variouce its costs in
f scale
d as the decrenputs of prod
tal cost curveAt its most ee Q1 units ofroduction caition, it is locin range of oof output at
f ATC2.
resources usehad been fixeated land – cain the long re same impo
us ways a firmn the long run
ease in the unduction. This
e, labelled ‘Pefficient poinf output at a uapacity becaucated on a lowutput, the lara lower aver
ed in an ed in the an be run, the ortance as m can n.
nit cost s
Plant 1,’ nt, a firm unit cost
use it is wer level rger rage cost
Figu
Somincrphenfasteincr200 The
Div
As AscalPerfjobsmorthe dprodeverprepthe t
Spe
In massoraisehaveeffic
Not of p
2Nophen
ure 2.3
metimes ‘ecoreasing returnomenon2 iner than the grease in input
per cent. In e following ar
vision of la
Adam Smithle of productforming fewes. As a resultre quickly thadivision of laduction. For rything expaparation or setasks they do
ecialised cap
most manufacociated with tes the quantie more speciciently than b
every firm bproduction. F
t to be confunomenon.
nomies of scrns to scale. Indicating thatrowth rates ots results in mthis case, as re the main c
abour and s
h illustrated mion and worker tasks allowt, Smith concan the numbabour is just example, if a
ands, then woervice, thus mo.
pital
cturing industhe use of spity of all its iialised functibefore.
benefits fromFor example:
used with retu
C5
cale’ is used Increasing ret the firm’s oof its inputs. more than 10the firm exp
causes of eco
specialisa
more than twker specialisaws workers tcluded that qer of workeras prevalenta very small orkers can bemaking both
stries, a greatpecialised mainputs, for exions, so that
m all these fac
urns to varia
Economic Env
interchangeaeturns to scaloutput growsFor example
00 per cent inpands, the peonomies of s
ation
wo centuries aation can go to become mquantities of ors producing t today in labrestaurant w
egin to speciasets of work
ter scale of pachinery. If axample, capitit performs f
ctors when it
able input, wh
vironment of B
ably with thele is a long-tes at a rate thae, a 100 per cncrease in ouer-unit cost dcale.
ago, increasehand in han
more efficient output tend tthem. The im
bour-intensivwhere workeralise in eithekers more eff
production isa car manufatal equipmenfewer tasks m
t increases it
hich is a sho
Business
107
e term erm
at is cent utput, say drops.
es in the d. at their
to rise mpact of ve rs do er food ficient in
s acturer nt can more
ts scale
rt-term
Module 2
108
Thecost
TheDecprodpercto itexpe
Figurun the lie ogreafirmshor
FigueconWhesaidoutprun to b
Figu
Firms thborrow
Size maare verymanagem
Oversizand indi
e resulting inct to rise.
ese are reasoncreasing returduction by a centage. For ts output risinect the ATC
ure 2.4 showaverage-totashort-run aveon or above tater flexibilit
m gets to choort run, it has
ure 2.4 also nomies and den long-run a
d to be econoput increasesaverage totae constant re
ure 2.4
hat have a higat the lowest
ay not alwaysy large may bment coordin
ed firms expirect labour.
crease in the
ns for disecorns occur whcertain perceexample, a 1ng by only 7associated w
ws how shortal-cost curve erage-total-cthe long-run ty firms haveose which shto use whate
shows a longdiseconomieaverage total
omies of scales, there are saal cost does neturns to scal
gh level of dt possible int
s offer the firbecome bureanation and co
perience a dis
ese types of c
onomies of schen a businesentage but se100 per cent75 per cent. Inwith bigger p
t-run and lonis a much fl
cost curve. Incurve. These
e in the long hort-run curvever short-ru
g-run averags of scale as l cost declinee. When longaid to be disenot vary withle.
debt will usuaterest rate.
rm a cost advaucratic and ontrol proble
sproportionat
cost may cau
cale, or decress expands inees output risexpansion inn terms of Fi
plants to shift
ng run costs aatter, saucer-
n addition, ale properties arun. In essen
ve it wants ton curve it ch
ge cost curve well as cons
es as output ig-run averageconomies ofh the level of
ally not be ab
vantage. Firminflexible, w
ems.
te increase in
use the averag
easing returnnputs to a prose by a smalln all inputs migure 2.3, tht up and to th
are related. T-shaped curvll the short-ruarise becausence, in the loo use. Howevhose in the pa
reflecting bostant returns increases, th
ge total cost rf scale. When
f output, there
ble to
ms that with
n staff
ge total
ns. oduct’s ler
may lead his can he right.
The long-ve than un curves e of the
ong run, a ver, in the ast.
oth to scale. ere are rises as n long-e are said
ExpcomdiffeexpaeffeshorfromaverWithinpu
Withcurvthe tthis outprun ATCplanaver
Conteeteto scscalitemunitbusithe of e
R
• Specap
• Indicap
• Prorise
• Ecorepper
• Dis
• Low
• Sprand
• Man
Tab
pressing this mpany) expanferent short-ruansion of the
ects of the incrt-run averagm economiesrage cost is fh economiesuts, so that av
h the secondve (from ATCtotal costs ofsecond time
put of cars riaverage cost
C3 to ATC4).nt’s output israge cost cur
nstant returnser-totter havicale) and at ile). Constant
m requires repts of output. Iiness that expsame percenconomies of
Reasons for ec
ecialisation in thpital.
ivisible nature opital equipment.
oductive capacites faster than pu
onomies in mainlacement parts sonnel.
counts from bu
wer cost of raisi
reading of promd-development
nagement effici
ble 2.4
differently, ands its assemun average ce plant, the cucreased outpuge cost curves of scale or ifound by divis of scale, ouverage cost f
d plant expanC2 to ATC3) f inputs rise ae, so the averses. With thet curve not o. This shift res rising less rrve rises as th
s to scale areing at its higits low end, dreturns to sc
peating exacIn objective pands inputs
ntage. The flof scale and di
conomies of sc
he use of labou
of many types o
ty of capital equurchase price.
ntaining invento and maintenan
lk purchases.
ng capital fund
motional and rescosts.
iencies (line an
C5
assume that ombly plant thrcost curve forurve shifts tout. When the
e falls from Aincreasing reiding total co
utput rises mofalls as the sc
nsion, the shireflects con
at the same rrage cost curve final plant enly shifts to eflects disecorapidly than the production
e what you mgh end, econodiseconomiecale usually rtly the same terms, const
s a given percowing table, iseconomies
cale R
r and • Dico
of • Inprat
uipment • Mapro
ory of nce
• Dilab
s.
search-
d staff).
Economic Env
our firm (sayree times. Ear each plant o the right, de plant is firsATC1 to ATCeturns to scalost by the quore rapidly thcale of produ
ft of the shorstant returns rate when theve moves hoexpansion, ththe right butonomies of sthe total costn of cars con
might expect –omies of scales of scale (deresult when mtasks used toant returns tocentage and Table 2.4 suof scale.
Reasons for di
sproportionate osts.
put market impetes driven up).
anagement coooblems.
sproportionate bour.
vironment of B
y, a car-makiach time, it fasize. With ea
demonstratingst expanded, C2. This shiftle. Remembeuantity of outhan the total uction expand
rt-run averagto scale. Ou
e plant is exporizontally ashe company’t also rises (fscale. Since tt of input cosntinues to inc
– the middlele (increasingecreasing retmaking moreo produce pro scale occursees output rummarises th
iseconomies o
rise in transpor
erfections (e.g.
ordination and c
rise in staff and
Business
109
ing aces a ach g the the
t results er that tput. cost of ds.
ge cost utput and panded s the ’s short-from the sts, the crease.
of the g returns turns to e of an revious r in a rise by he causes
of scale
rtation
, wage
control
d indirect
Module 2
110
Eco
In thadvawheper-costprodVCRetc. unuexceeach
Anogoowheto udrindevesimi
The
As pdecrimpgoodoincostthe pexamcurrproc
Figu
onomies o
he long run, antage of ecoen it is possib-unit cost that savings is thducts. For exRs, DVD plaThese latter sed floor spaess capacityh product.
other way thads or service
en Pepsico exutilise its backnks) to anotheelopment, chilar in these t
e learning
pictured in Freases as its t
prove with prd or service,ng. This incret of productioproduction pmple, researcrently used; ecesses or pro
ure 2.5
of scope
it is also posonomies of sble to producan for each prhe sharing of
xample, certaayers and comproducts are
ace in the stoin this mann
at a companyes that requirxpanded intokground in oer (chips, tachannels of ditwo product
curve
Figure 2.5, thtotal cumula
ractice. Over its workers ease in labouon. But otherprocess are alchers may finengineers maoduct designs
ssible for mancope. This coce two or moroduct separf a companyain electronicmputers are ne displayed oores. The usener reduces th
y can utilise re similar skio the snack anone type of facos and friedstribution angroups.
he learning cative output in
the long runare expected
ur productivir people besilso expectednd less-costlay develop ms.
nagers to ideost-saving ph
ore products tately. A key ’s fixed cost c stores that nnow selling Con racks that e of this retailhe average to
economies oills and expernd fast-food ast-moving c
d chicken). Thnd marketing
urve shows tncreases. Its
n, as a firm pd to get betterity will then ides the direc
d to improve wy substitutes
more efficient
entify ways thenomenon otogether at a factor in thiby multiple
normally selCDs, videos,occupy othel establishmeotal cost of se
of scope is torience. For ebusiness, it w
consumer itemhe product
g know-how a
that a firm’s rationale is
produces morr at what thedecrease thect labour invwith practice
s for raw matt production
to take occurs lower s form of
l TVs, , DVDs erwise ent’s elling
produce example, was able m (soft
are very
unit cost that you re of a ey are e unit olved in e. For terials
Break-even ana
Thecalleset itherat thaccocomstart
alysis
WhaAftethis,an iralteris rethe peven
BreaconcbookanalpartprodanalevenvariMorhow
Supkilothis,comcostas a
Rent
Utilitie
Wage
Intere
Insura
Misce
Total
Tab
e learning cured learning-cits price at a re is the posshe outset. Thompany the h
mpany’s costst to become p
at is to be doer all, even if, in fact, is thrrelevant cosrnative selececovered is aproblem, wen analysis.
ak-even analcept of relevks on financlytical techniticular produduction: that lysis is cost-vn problem miable cost, horeover, once
w much profit
ppose your programs of sea, we first div
mponents. Fixt is shown onaverage varia
Total Fix
es
es
st payment on loan
ance
ellaneous
ble 2.5 Mont
rve has playecurve pricingrelatively lowibility that it
he greater demhigher accums are broughtprofitable.
one about thof they are ignhe logic of dest is one that cted by the dea separate isse can turn to a
lysis is perhavant cost. Youe, accountingique address
uct does a comis, to 'break
volume-profimore explicitlow much volu
it passes thet will it earn
rofessor deciafood per movide his montxed cost is prn a per-unit bable cost (AV
xed Cost
$
$
$
n $
$
$
$
thly cost of o
C5
ed an importg. This approw level to stit will earn mmand will acmulated volumt down the le
ose costs thatnored, they mesignating a must be incu
ecision makeue altogethera commonly
aps the most u will find ing and marketes the basic qmpany have even?” Ano
fit analysis. Ty. That is, giume does it h
e break-even as its volum
ides to open onth must he thly costs intresented as abasis. VariabVC):
1,200 Averageseafood
400
2,350
1,500
400
150
6,000
operating a
Economic Env
ant part in thoach advocatimulate deminimal profit
ccelerate the me of produearning curve
t are not relemust still be pcost as irreleurred, regarder. The questr. To underst
y used techniq
widely usednformation oting as well aquestion: “Hto sell to covther name fo
This label desiven the comhave to sell tpoint and be
me increases?
a seafood stosell to break
to their fixeda total figure,ble cost per u
Variable C(Average Varia
e wholesale price pe
seafood stor
vironment of B
he strategic ates that a firm
mand, even tht or even inculearning effection. As thee, the compa
vant to a decpaid for. Howevant. By defdless of the tion of how ttand this aspque called br
d application on this subjecas economic
How many unver all its cosor break-evenscribes the b
mpany’s fixedto break evenecomes profi?
ore. How mak even? To and and variable, while the va
unit is also re
Cost per Unit ble Cost or AVC)
er kilogram of
re
Business
111
approach m should hough ur a loss ects that e any will
cision? wever, finition,
this cost pect of reak-
of the ct in cs. This nits of a sts of n reak-
d and n? itable,
any nswer e ariable ferred to
$ 3.00
Module 2
112
To f
QBE
Whe
P
that deciissubrea
Figu
Thewhi‘conprodall tconcpoin
Althbreaopermorcomdete
find the brea
E = TF
P – A
ere QBE = T
TFC =
P =
AVC =
P – AVC =
must be incuision maker.
ue altogether.ak-even analy
ure 2.6
e logic of brech the sellingntribution maduct sold reathe fixed costcept can alsont occurs wh
hough our exak-even analyrations. To bre difficult tim
mponents, parermined for m
ak-even point
FC
AVC
The break-ev
Total fixed
Selling pric
Average var
‘Contributio
urred, regardThe question
. To understaysis.
ak-even analg price exceeargin’ per un
aches the points of a produ
o be shown gen the firm’s
xample is quiysis applies o
be sure, largeme dividing rticularly whmany differe
t, we use the
ven quantity o
cost
e of the prod
riable cost of
on margin’ p
dless of the an of how thiand this aspe
lysis is very eds the averanit of productnt where the
uct, the firm bgraphically. Is total cost li
ite simple, wonly to smal
er and more ctheir costs in
hen fixed andnt products.
following eq
of product so
duct
f the product
per unit of pro
alternative ses cost is reco
ect of the pro
straightforwage variable t sold. Whentotal contrib
breaks even. In Figure 2.6ine crosses th
we do not wanl and uncomcomplex busnto fixed andd variable coBut no matte
quation:
old
t
oduct sold
elected by theovered is a seblem, we tur
ward. The amcost is called
n the amount bution margin
The break-e6, the break-ehe total reven
nt to imply thmplicated bus
inesses mighd variable sts have to ber how comp
e eparate rn to
ount by d the of n covers
even even nue line.
hat iness ht have a
be plicated
S
Activ
Study skills
vity 2.1
Activity
the sale
For Q reas w
Solu
Lim
Thisthe kof cmantechevenprocevenby cscheothegiveHowactufirmquitmorsect
Whycerta
situation, thees so that the
the total reveepresents thowell as the co
ution:
Setting TR – 12.
Hint: TC =
mitations o
s review of bknowledge oertain busine
nufacturing ohnique can ben analysis seceeds to deten. In order toconsumers atedule of pricer words, breen price and wever, it doeually sell. Secm’s average vte possible fore of a good otion guides y
y are many fain size and
ere still remacontribution
enue TR = 3ousands of unontribution m
R =TC, Q = 65 = 20.
= TFC (= 12
of break-ev
break-even anof a firm’s fixess decisionsor marketing e, it is still su
elects only onermine how mo consider tht different pres and break
eak-even anacost structurs not providecond and mo
variable cost or a firm’s avor service is
you through t
firms likely tothe disecono
C5
ains the basicn margin cov
2.5Q and totnits, determin
margin.
6. Contribut
0) + TVC (
ven analys
nalysis shoulxed and varis or in the anstrategies. H
ubject to sevene price for amuch a firm e possibility ices (the pric
k-even pointsalysis determre needs to see any indicatore importantis constant. I
verage costs produced. T
the economic
o experienceomies of scal
Economic Env
c concept of vers fixed cos
tal costs TC ne the break-
tion margin
(= 12.5Q).
is
ld give you aable costs ca
nalysis of parHowever, as ueral shortcoma particular phas to sell atof different
ce elasticity os would haveines how muell in order totion of how mt, this analysIn certain cirto either dec
To explain whc analysis of
e economies le after some
vironment of B
generating est.
= 120 +12.5-even level o
n = P- AVC
a good idea oan help in therticular useful as thismings. First, product and tt this price toamounts demof demand),
e to be construch a firm wio break evenmany units itsis assumes thrcumstances,crease or incrhy, the next s
f short-run co
of scale up t point beyon
Business
113
nough
Q where of output
= 32.5
of how e making
s break-
then o break manded a whole
ructed. In ith a
n. t will hat a , it is rease as study
ost.
o a nd that?
Module 2
114
Mark
Introd
ket Stru
uction
cture
TermthouprobHowthat and prodsectpracon pdeci
Ma
Trad
Puran echeaprodbecadempricfirminfopricreduof th
Theand infobetw
ms such as ‘mughtful discubably have wwever, you m
distinguisheother classic
duction decistion is to acqctice you gainpricing, markisions made b
rket struct
ditional price
1. Pure com
2. Monopo
3. Oligopo
4. Monopo
re competitioenvironment apest inputs ducts. Firms ause the pric
mand and supce up and excms are sellingormation aboce above the muce its price bhe market an
e other three mby an enviro
ormation mayween the pro
1. Monopodifferen
2. Oligopoproductssome coplace of
monopoly’ aussions of buworking definmay not knowes one of thesc market modsions that con
quaint you mon in applying
ket entry, maby firms in t
ture
e theory delin
mpetition.
olistic compe
oly.
oly.
on consists ofof full informand all consuoperating in
ce of their propply. Excess cess supply wg exactly the ut all firms’ market pricebelow the m
nd can sell al
market formonment of iny be one of thducts of riva
olistic compentiated produc
oly consists os are typicall
ombination of sale.
and, less ofteusiness and glnitions of thew a great dease market typdels shed lignfront you atore closely wg their princiarket departutoday’s busin
neates four b
etition.
f many firmsmation – all umers know
n pure compeoduct is detedemand for t
will drive thesame producprices, a firm
e. Converselymarket price s
l that it want
ms are charactncomplete infhe bases for
al suppliers.
etition consiscts.
of a relativelyly differentia
of product de
n, ‘oligopolylobal economese words in al about the epes from ano
ght on the typt work. The p
with these preiples will giv
ure, implicit cness world.
basic market
s producing ifirms know wwhere to buy
etition are calrmined by ththe product w
e market pricct and consumm will sell noy, the firm haince it is smats to at the m
terised by prformation. Inconsumers’
sts of many f
y small numbated from eacesign, promot
y’ appear in mics and youyour vocabu
economic behother, nor hopes of pricingpurpose of thedictive modve you a perscollusion and
forms:
identical prowhere to buyy the cheapelled price takhe market forwill drive thece down. Sincmers have fuothing if it raas no incentivall relative to
market price.
oduct differen fact, lack odifferentiatin
firms with sl
ber of firms wch other throtional efforts
u ulary. haviour w these g or his study dels. The spective d other
oducts in y the est kers rces of e market ce all ull aises its ve to o the size
entiation f ng
lightly
whose ough s and
Key as
The ou
ssumptio
utput dec
Firmare cup ooligof itall iis wown
ons used
Theyou in th
In athe f
Thoown
cision of
In edictcommussupp
A pefirmextr
3. Monopoclose suthe prod
ms operating called price or down to pugopoly, the fits product. Ets customers
worth the extrn price becau
in the mi
ere are two keshould revie
he four types
1. The firmprofit. Ttime horrun profmore coperiod.
2. The oppincluded
analysing a fifirm posits th
1. Should oit be sel
2. If so, ho
3. And if w
ose firms open price. There
a firm in
conomic anaates its abilit
mpetition, thest sell their pply and dema
erfectly comm can set the reme, a seller
oly consists oubstitutes; thuducts of all ot
in monopolimakers becaursue their orm’s ability
Each firm cans, since the rera price beinguse there are
icroecon
ey assumptioew before loos of markets.
m’s primary oThis may notrizons typicafits may induompetitive m
portunity cosd in the cost
irm’s pursuithat its manag
our companyling this part
ow much sho
we are able to
erating in perefore, this qu
a perfect
alysis, the typty to determie managers oroduct at theand and can
mpetitive marprice by conr without com
C5
of a single seus the producther firms.
istic competiause they canobjectives. Into set prices
n raise its pricemaining cusg asked. In ano direct com
omic the
ons used in thoking at pric
objective is t, however, b
ally extend buce the entry
market for the
st of producinof doing bus
t of short-rungers must ad
y be in this bticular produ
ould we prod
o set the pric
rfectly compeuestion does
tly compe
pe of marketine its price.
of a firm havee price determonly decide
rket consists ntrolling the smpetition cou
Economic Env
eller of a proct is highly d
ition, oligopon adjust the pn monopolisti
derives fromce to some estomers beliea monopoly, mpetitors.
ory of the
he economiccing and outp
the short-rune the case foeyond the shof new com
e firms later i
ng a particulasiness – econ
n profit, the eddress three b
business? In ouct at all?
duce?
ce, what price
etitive markenot apply to
etitive ma
t in which a fIn the extrem
e no power tomined by thehow much o
of numeroussupply of outuld control th
vironment of B
duct that hasdifferentiated
oly and monprice of theiric competitio
m the differenextent withoueve that the pthe firm can
e firm
c theory of firput decision-
n maximisatioor oligopoly, hort run. High
mpetitors to cain the plannin
ar good or senomics costs.
economic thebasic questio
other words,
e should we
ets cannot seo them.
arket
firm is compme case of peo set price. T
e market forcoutput to prod
s sellers, andtput. At the ohe price by k
Business
115
s no d from
opoly r product on and ntiation ut losing product set its
rms that making
on of where h short-ause a ng
ervice is .
eory of ns:
should
charge?
et their
peting erfect
They ces of duce.
d no one opposite keeping
Module 2
116
the desi
In aprodby acust
To cinfomaxthat Ecoa firbe asignprodprof
Figudetecan chooprodat a had lureare comequi
Figu
TabdiscexpeColubusiperfrem
supply at a leired price.
a perfectly coduct differena seller to raitomers to oth
calculate potormation on pximise econo
a firm’s ownonomic profitrm cannot seable to sustainificantly greduct, the firmfits might als
ure 2.7 showermined by thsell its produoses to chargduct, it will llower price,some of the
ed from othersmall; selling
mpetitive firmilibrium pric
ure 2.7
ble 2.6 suppocussed in secterience to exumn 1 in theiness that is nfectly compe
mains constan
evel relative
ompetitive mntiation. Theyise the price wher suppliers
tential profitspotential reveomic profit. Aner could obt is a profit thll its productn. However,
eater than them may have aso attract new
ws a typical fhe interactionucts only at tge a higher plose all its cu either; this scapacity and
r firms, but itg for less is n
m faces a demce. In other w
orts this analytion 2.1, was
xpand your pe table showsnamed ‘Men
etitive firm –nt ($10 in this
to demand s
market, there iy all sell a stawould simplbecause all
s, firms mustenues from sAs you remembtain in the behat a firm eart for more th if the marke
e cost it incuran incentive w competitor
firm in this inn of many suthis price, no
price, given thustomers. Thestrategy woud the size to t does not. Tnot practical
mand curve thwords, the dem
ysis. Supposs so successf
product line ins different qun’s Shirt Com
the quantitys example). T
so that it wou
is no way selandardised ply result in a are selling th
t combine thsales. The gomber, normaest alternativrns in excess
han its cost toet gives the frs to produceto expand its
rs into the ma
ndustry. The uppliers and o less and no hat its rivals e firm should
uld have madmeet the nee
These perfectl. Therefore, hat is horizonmand is perf
e your ‘Soft ful that you dnto adult clo
uantities of shmpany’. For ay sold varies wTotal revenu
uld support th
llers can exeproduct. Any
complete loshe same prod
eir cost analyoal of a firm al profit is theve business. s of normal po produce, it firm a price te one unit of s output. Lararket.
price $10 is demanders. more. If theare selling th
d not sell its de sense if theds of the cusly competitiva perfectly ntal at the mfectly elastic
Diaper’ busidecided to usothing – menhirts sold by a price taker while the pri
ue in column
he
ercise any attempt
ss of duct.
yses with is to e return
profit. If will not
that is f its rge
The firm e firm he same product
he firm stomers ve firms
market .
iness, se your ’s shirts. this new – a
ice three is
obtafourTheis thFor incr
As aprodthe fcase
(1)Sold
Tab
Out
Yououtpa pe(capinduthe fcour
Loo(mathe cat thhowquesimp(AT
Youmaxbecaincr(MR(MCthenextrMC
ained by mulr is obtained e most importhe change in example, wh
reases from $
also illustrateducts are in tfirm demande and only in
) Quantity d (Q) Shirts per day
4
5
6
7
ble 2.6 Men’
tput decis
u are now in put at which eriod of time pital) or its giustry is also ffirm must berse of the ye
ok carefully aarket) on the current markhe outset of t
w much of thistions and ot
portant curveTC) curve.
u can answerximising conause the pricreases. If the R) exceeds thC) – that is, Mn the extra rera cost incurr
C, profit is ma
ltiplying pricby dividing tant informatotal revenue
hen output in$40 to $50, s
ed in the diagturn equal to d curve is alsn this case, th
(2) Price (P) per shirt
$10
$10
$10
$10
s shirt comp
ions: Shor
a position toprofit is maxin which eac
iven plant. Ffixed. But me prepared toar.
at the Figureleft and a sin
ket price is $this section –is product shthers, one nes are the mar
r ‘How muchndition, MR =ce is constant
additional phe additionalMR > MC thevenue from red to producaximised.
C5
ce by quantitytotal revenue
ation here is ge caused by ncreases fromo the margin
gram, the firmthe market p
so its averagehe firm’s dem
(3) Total Revenue (TR
= P×Q)
$40
$50
$60
$70
pany
rt-run prof
o put costs anximised. As dch firm faces
Furthermore, many things co react to them
e 2.8. Once angle represen10. To restat
– should this hould the firmeds to have trginal cost (M
h to produce?= MC. As out (price takerrofit associatl costs associhen profit incselling an ad
ce it and prof
Economic Env
y. Average re by the quangiven by mara one-unit ch
m four to fivenal revenue is
m’s equal avprice: MR = e revenue curmand curve is
(4) AveraRevenue (
TR/Q)
0
0
0
0
fit maximis
nd revenue todiscussed eas a constraintthe number an change inm: e.g., its pr
again we havntative firm ote the basic qfirm be in bu
m produce? Tthe firm’s coMC) and ave
?’ by recallinutput increaser) whereas, Mted with anoiated with thicreases. Contdditional unitfit decreases.
vironment of B
revenue in contity of outpurginal revenuhange in quae, total revens $10 ($50 –
verage and mAR = P. Therve (AR). Bus also its MR
age (AR = )
(5) Reve
∆
$10
$10
$10
$10
sation
ogether to finarlier, the shot: its fixed inof the firms
n the short rurice pattern o
ve the whole on the right. questions intrusiness and iTo answer thost functions.erage total co
ng the short-res, MR is con
MC eventuallother unit of ois unit of outtrarily, if MRt will fall sho. Therefore,
Business
117
olumn ut sold. ue, which antity. nue – $40).
marginal erefore, ut, in this R curve.
Marginal enue MR = ∆TR/∆Q
$10
$10
$10
nd the ort run is nput in the
un, and over the
industry Again roduced if so,
hese . The two ost
run profit nstant ly output tput
R < MC, ort of the if MR =
Module 2
118
Figu
NowretaalsoEco
(1
QuanSoldShi
Tab
Tabfivemar$20 greaP)> by $dim=RMunitmaxis a
Not(MRcom
ure 2.8
w let us extenins three colu
o three new conomic Profit
1) (2)
ntity d (Q) rts
Price (P)per shirt
4 $10
5 $10
6 $10
7 $10
8 $10
9 $10
ble 2.7 Men’
ble 2.7 illustre and to six anrginal cost in
for the ninthater than marMC and pro
$2 since MR minishing retuM10< MC = t number 7. Cximum of $3descending t
e that in the R) > ATC, th
mpany makes
nd Table 2.6umns, Q, TR
columns: Tott (TR-TC) as
(3)
) t
Total Revenue
(TR) (P×Q)
0 $40
0 $50
0 $60
0 $70
0 $80
0 $90
s shirt comp
rates how as nd so on, ma
ncreases fromh unit. For thrginal cost, pofit increases
is greater thurns push MC$13). Theref
Column eigh4 at the sevetrend.
short run, thhe Shirt Coms a negative e
6. In the extenR, and MR —tal Cost (TC)s follows.
(4)
Average Revenue
(AR) (TR/Q)
MaRe
((∆T
$4
$5
$6
$7
$8
$9
pany
the companyarginal reven
m $3 for the fhe earlier uniprofit increass. In fact, for han MC by $2C above MRfore, the prof
ht shows that enth unit, and
here are threempany makes economic pro
nded table, T— there are m), Marginal C
(5) (6)
arginal evenue (MR) TR/∆Q)
TotaCost (T
$10
$10
$10
$10
$10
$2
$2
$2
$3
$4
$6
y increases itnue remains afifth unit to $ts, because m
ses. Up to thethe seventh
2. At the eighR and total pro
fit maximisinprofit increa
d from that p
e possible proeconomic pr
ofit or an eco
Table 2.7, wmore observaCost (MC), a
(7)
al TC)
Marginal Cost (MC) (∆TC/∆Q)
20 $3
$5
$8
$13
$20
23
28
36
49
69
ts output fromat $10 while $5 and all themarginal revee seventh uniunit, profit inhth unit, howofit drops (Mng level of oases from $20oint onwards
ofit outcomerofit. If P < Aonomic loss.
which tions and
and
(8)
Economic Profit
(TR–TC)
$20
$27
$32
$34
$31
$21
m four to
e way to enue is it, (MR = ncreases
wever, MR= P output is 0 to the s, there
s. If P ATC, the If P =
S
Study skills
ATClatteTwo
Figu
In F(b) t
1.
2.
3.
C, then the fier situation wo of these ca
ure 2.9
Figure 2.9, pathe situation
Complete thof the produ
Q TC
0 5
1 9
2 12
3 16
4 21
5 28
Referring tolevel?
A. thre
B. four
C. five
D. two
At the profitmake a total
A. 24
B. 30
C. 2
D. 3
irm makes nowe referred toses are illust
anel (a) the fis one of eco
he following uct is $6 per u
TR MC
— —
— —
— —
— —
— —
— —
the table ab
e units.
r units.
units.
units.
t maximisingl economic p
C5
ormal profit o earlier as thtrated below
firm earns economic loss.
table, using unit.
C MR
— —
— —
— —
— —
— —
— —
ove, what is
g level of outprofit of —
Economic Env
and zero ecohe break-evein Figure 2.
onomic prof
the given inf
the profit-m
tput in this ta
vironment of B
onomic profien level of ou9, panels (a)
fit whereas in
formation. T
maximising ou
able, the firm
Business
119
it. This utput. ) and (b).
n panel
he price
utput
m will
Module 2
120
S
Study skills
Solu
The
A pealterdiffeoptieithremcontProdor vvarithe fcost
Thetotaits Apoingreathannot
Thuthe m
1.
2.
ution:
1. TR: 0,
MC : 0
MR: 0,
2. B. The MC.
3. D. At fand totprofit o
e short-run
erfectly comrnative level
ferent prices: ion exists forer its fixed o
member that wtinuing to incduction beco
variable costsiable costs, thfirm should ts (P < AVC)
e shut down pl revenue is
AVC. The mnt at which thater than the n total variabonly its varia
us, a firm’s suminimum po
A firm make
A. Pric
B. Pricvari
C. Pric
D. Pric
If the firm sh
A. Tota
6, 12, 18, 2
0, 4, 3, 4, 5,
, 6, 6, 6, 6, 6
fourth unit
four units, thtal cost ($21of $3 is the h
n supply c
mpetitive firms of output thto be exact,
r the firm to tor its variablewhen a firm scur its fixed
omes pointless. Therefore, he firm shoushut down if).
point for the exactly equainimum poinhe firm revenminimum A
ble costs and able but also
upply curve oint of AVC.
es an operati
ce is less than
ce is less thanable cost.
ce is less than
ce is less than
huts down in
al revenue w
24, 30.
7.
6.
is the last u
he differenc1) is the larghighest that
urve
m’s MC curvehat the firm wit is the firmtemporarily e costs. To unshuts down, costs, whichss when a firif the firm’s
uld shut downf its price fal
firm is definal to its total vnt of AVC is nue just cove
AVC, of coursthe firm sho
o part of it fix
is the portion.
ng loss if —
n average var
n average tot
n average var
n average fix
n the short ru
will be zero, a
unit for whi
ce between gest. Thereft can be ach
e is indeed thwould be wi
m’s supply cushut down ifnderstand thit avoids var
h are unavoidrm is unable s total revenun. To state thls below its a
ned as a situavariable costthe firm’s sh
ers its variabse, total reve
ould produce,xed costs.
n of its MC c
—
riable total c
tal costs but g
riable cost.
xed cost.
un, then —
and total cost
ich MR exce
total revenufore, economhieved.
he representalling to supp
urve. Howevef it is unable is point bette
riable costs wdable in the sto cover eith
ue falls belowhe point diffeaverage varia
ation where tts, or its prichut down pole costs. At p
enue will be g, since it can
curve that lie
ost.
greater than
t will be zero
eeds
ue ($24) mic
ative of ply at er an to cover
er, while short run. her fixed w its total erently, able
the firm’s e equals int, a prices greater
n cover
es above
average
o.
Solu
Out
In thdecifaceexisfixesimiof p
As ipossbreadespeconcom
An irun induthe prespMeaexis
Therespexisbusi
Figucom
B. Totato b
C. Totahave
D. Tota
utions:
1. C. Varduring
2. B. In thunreco
tput decis
he short run, ision is to proes less constrsting firm caned inputs – orilar token, in
profits.
indicated earsibilities: maaking even. Ipite its short-nomic loss. I
mpetitive firm
industry in wadjusts in tw
ustry increaseprofit. Entry
pond to markanwhile, econsting firms to
e presence of ponses. First,sting firms exiness.
ure 2.10 illumpetitive firm
al revenue we paid.
al revenue we to be paid.
al profit will
iable costs athe firm’s o
he short runoverably
ions: Long
a firm decidoduce, how mraint. Rememn change ther to decide ton the long run
rlier, in the shaking an econIn the long ru-run situationIndeed, the o
m is one in w
which firms awo different wes. Second, t
y by new firmket incentivesnomic profit
o expand thei
f short-run lo, the number xit. Second, t
ustrates the lom.
C5
will be zero, b
will be zero, b
be zero, and
are the onesoperation.
n, fixed cost
g-run optim
des whether tmuch to prod
mber, long rue size of its fio leave the inn, new firms
hort run, a finomic profit,un, however,n, cannot eith
only outcomewhich the firm
are making aways. First, tthe existing f
ms is a rationas (signals) prt also serves ir existing op
osses promptsof firms in t
the existing f
ong run equil
Economic Env
but total fixed
but total varia
d total costs w
s that are ac
ts have to be
misation
to produce orduce. In the l
un is a time frixed input (pndustry to av
can enter th
irm might fac, taking an ec, a perfectly cher run an ece in the long m makes norm
an economic the number ofirms expandal decision brompted by aas the incent
peration.
s a different the industry dfirms contrac
librium for a
vironment of B
d costs will s
able costs wi
will be positi
ctively incur
e incurred,
r not and alslong run, the
frame in whicplant) – there void losses. Be industry in
ce three diffeconomic losscompetitive conomic profrun for a per
mal profit.
profit in the of firms in thd to take advaby investors wan economic tive (signal)
set of rationadecreases as ct the scale o
a perfectly
Business
121
still have
ill still
ive.
rred
o if the e firm ch an are no
By a n pursuit
erent s or firm, fit or an rfectly
short he antage of who profit. to the
al some
of their
Module 2
122
S
Study skills
Figu
1.
2.
Use
3.
ure 2.10
A competitiv
A. Pric
B. Rev
C. Rev
D. Pric
All the folloequilibrium
A. The
B. The
C. All cost
D. Indu
e the followin
If the markeshirts and ca
ve profit max
ce exceeds m
venue exceed
venue exceed
ce exceeds m
owing statemin a competi
e marginal fir
e marginal fir
firms determt.
ustry demand
ng figure to a
et price for shan earn
ximising firm
minimum aver
ds variable co
ds fixed costs
minimum mar
ments, except itive industry
rm is making
rm’s price is
mine output b
d is not perfe
answer the fo
hirts is $10, t .
m will enter a
rage cost.
osts.
s.
rginal cost.
one, are truey. Which is o
g zero profit.
equal to ave
by equating p
ectly elastic.
ollowing que
this firm sho
a market if:
e of long-runodd one out?
erage cost.
price and ma
estions.
ould produce
n ?
arginal
_____
4.
Solu
Figu
Thewithenvi
A. 70,
B. 80,
C. 110
D. 80,
If the markeearn
A. 100
B. 100
C. 50,
D. 100
utions:
1. A, beca
2. D. Induthe kind
3. D. Tracyou fin
4. D. TotaAgain
ure 2.11
e short-and loh three key leironment.
1. The reaseconomsome cofirms esentrepreenters th
2. When fifirms wi
and $1,500.
and $1,500
, and $1,100
and $800.
et price is $15 economic p
, and $1,500
, and $1,100
and zero.
and zero.
ause only in t
ustry demandd of firm (pri
cing the prind the quant
al cost is eqfirst find wh
ong-run dynaessons for m
son the markmic profit is thombination ostablished in eneurial skillhe market.
irms within till enter in or
C5
0.
5, this firm pprofit.
0.
0.
this case is th
d is not perfeice taker) wh
ce $10.00 totity to be 10
qual to total here P cross
amics of perfmanagers in a
ket price is hihat the demaof both. By nsuch marketl of taking a
the industry mrder to inves
Economic Env
produces
he economic
ctly elastic ohose demand
o the interse00 and total
revenue at ses MC.
fect competithighly comp
igh enough fnd is high, thow, smart mts. This, howrisk before t
make economt and reap th
vironment of B
shirts an
c profit positi
or horizontald is perfectly
ection with revenue $8
this price le
tiveness provpetitive mark
for firms to ehe supply is
managers havewever, requirethe competiti
mic profit, othe benefits of
Business
123
nd can
ive.
. This is elastic).
MC., 800.
evel.
vide us ket
earn an low, or e their es the ion
ther f the
Module 2
124
Price m
makers (
imperfec
All sompowmarsystLet monfinis
Mo
At ttheridenand govmonSomFor gouror m= Mrathmargoosupp
Youand presperfindu(horindudowline
opportunsupply agraduall
3. Since pehomogecompetiadvertiscompetilow as p
t compet
firms seek tome degree of wer and accourket. To undetem functionus proceed b
nopolistic coshing the seq
nopoly
the extreme ore is one sellentified as a moutput levelernments. Gnopoly for thmetimes, circ
example, thermet coffee.
markets, the eMC rule to maher than a prirginal revenud or service plier that is p
u can best units marginal
sented earlierfectly compeustry was dowrizontal demaustry itself —
wnward slopi.
nities. This mand drives thly disappear.
erfectly compenous (identicing on the baing is not anition can maipossible.
tition)
o obtain and such power. unt for a largerstand the ms when indivby looking atmpetition, an
quence and a
opposite of aer of a partic
monopoly, it hl. Such monoovernment a
he duration ocumstances aere may be oWhenever a
economic theaximise its shice taker, we ue. In a nutshfor which no
protected from
nderstand thel revenue by r. Recall the
etitive firm anwnward slopand curve). I
— one seller. ng, the firm'
movement, ahe price down. Therefore, n
petitive firmcal) products
asis of producn option. Theintain profit
expand markA minority o
ge portion of market systemvidual firms pt monopoly. nd you will c
analysing olig
a perfectly cocular producthas consider
opolies as puand laws alsof the patent o
allow a firm tonly one stora firm has a meory states thhort-run profcan no long
hell, a monopo close substim competitio
e relationshipusing the angraphs reprend industry. ping, the firmIn this case, hTherefore, ws marginal re
as we have sen. Economicno firm can r
ms within an is, there is noct differentia
e only way a is through ke
ket power, anof firms have
f the market, m, you need tpossess signiNext in the lconclude thisgopoly.
ompetitive mt or service. Wrable power tublic utilities o provide comon a particulato enjoy tempe in a shoppi
monopoly in hat it still mufit. Because ier say that it
poly is an inditute exists. Ton, one way
p between a mnalysis of pricesenting the dWhile the de
m faced a perhowever, the
with a demanevenue line l
een, increase profits will remain comp
industry sell o strategy in ation. Thereffirm under peeping its co
nd many firme significant if not the entto know howificant markelogical seques study sectio
market is one When a firm to determine are sanction
mpanies withar product. porary monoing mall thata particular
ust adhere to it is a price mts price is equdustry that prThere is onlyor another.
monopolist’sce elasticity difference beemand facedrfectly elastice monopolistnd curve that lies below its
es the
placent.
fore, perfect osts as
ms have market tire
w the et power. ence is on by
in which is its price
ned by h a
opoly. t sells market the MR
maker ual to its roduces a y one
s price
etween a d by the c t is the is
s demand
We procof d
Qu(Q)
Tab
Tabunitto th
Notillus
can show hoceed to price
demand and m
(1)
uantity Sold ) Hairstyles per day
1
2
3
4
5
6
7
8
9
10
ble 2.8 Haird
ble 2.8 showsts five and sixhe sixth unit,
e that averagstrates these
ow a monopoe her product marginal rev
(2)
Price (P)
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
dressing bus
s that total rex. Marginal r, and subsequ
ge revenue, crelationships
C5
oly (a hairdreby combinin
enue curve s
(3)
Total Revenue TR
(P×Q)
$10
$18
$24
$28
$30
$30
$28
$24
$18
$10
siness
evenue, columrevenue, coluuently becom
column four, s.
Economic Env
esser, for exang its cost strshown in Tab
(4)
AverageRevenue A
(TR/Q)
0 —
8
4
8
0
0
8
4
8
0
mn three, reaumn five, is
mes negative
is equal to p
vironment of B
ample) wouldructure with ble 2.8.
e AR
(
MarginaMR (∆
—
$9
$8
$7
$6
$5
$4
$3
$2
$1
aches a peakinitially posi.
price. Figure
Business
125
d the type
(5)
al Revenue ∆TR/∆Q)
—
$8
$6
$4
$2
$0
-$2
-$4
-$6
-$8
k between itive, up
e 2.12
Module 2
126
Figu
Tabcomless extrto alHowthe pdiagTab
Figu
As yis $2incr
ure 2.12
ble 2.8 also smpetition and
than its pricra unit of outll units sold –
wever, the adprice charge
gram, Figureble 2.8.
ure 2.13
you can see, 28 and $30 rrease its sale
shows an impd monopoly. Ace. The reasotput, the firm– the additio
ddition to revd. In order toe 2.13. This f
when the prirespectively. by one unit
portant differA monopolis
on is that in om must cut itsonal unit as wvenue from so see this poifigure shows
ices are $7 aMarginal revfrom four to
rence betweest’s marginal
order for the ms price, and thwell as all preelling the exint, consider s the demand
and $6 respecvenue is, howfive, the mo
en perfect l revenue is amonopolist the price cut aevious units.
xtra unit is lesthe followin
d curve repre
ctively, total wever, $2. Inonopolist mu
always to sell an applies
ss than ng sented in
revenue n order to
ust lower
S
Study skills
its pprictwo hatc− 6)is lo
In a
Solu
Sho
Nowcan the monmarrevethe curvmonSuprun maxunitoutpcostCon(mafirm
price from $7ce charged. T
shaded rectached area. Th) = $4. Thereower than the
monopoly,
A. The marrevenue
B. The marcurve.
C. The marrevenue
D. The marrevenue
ution:
D. The margits slope is tw
ort-run pro
w that you hafind out howsame revenunopolist will rginal revenuenue curve assame verticave. Figure 2.nopolist and perimposed o
average costximising mont rises to meeput level Qm.t greater thannversely, evearginally or inm’s profits ca
7 to $6. HowThe gain fromangles. The she loss is equefore, the nete price charg
rket demand e curve.
rket demand
rket demand e curve
rket demand e curve.
ginal revenuewice as muc
ofit maxim
ave considerew a monopoliue conditions
wish to expaues. You notissociated wit
al intercept on.14 presents the correspo
on these are tht (ATC) and nopolist prodet the falling Notice that
n its marginaery unit to thencrementally
an be visualis
C5
wever, the revm selling the seller gains tual to 6 × (5 −t (extra or maged $6.
curve is abo
curve is the
curve is abo
curve is abo
e curve has tch.
isation
ed the revenuist maximise
s as in Figureand output uniced in the lath a negativen the graph athe market d
onding margihe cost curvemarginal co
duces up to thmarginal revevery unit to
al revenue; the left of Qm cy); it thereforsed as the rec
Economic Env
venue generaunit is the di
the checked a− 4) = $6, warginal) gain
ove and steep
same as the
ove and paral
ove and flatte
the same inte
ue side of a mes its profit. Fe 2.13. The pntil marginal
ast section the sloping lineand twice thedemand curveinal revenue es of the monst (MC) curvhe point whevenues. Thiso the right ofherefore it wicosts less thare will be proctangle PmAB
vironment of B
ated is less thifference betarea and losehile the gain
n is 6 − 4 = $2
per than the m
marginal rev
llel to the ma
er than the m
ercept as dem
monopoly firFigure 2.14 profit-maximl costs rise toat the marginear demand ce slope of thee (D) faced b(MR) curve.nopolist – thves. The profere marginal point occurs
f Qm has a maill not be proan it earns oduced and sBC.
Business
127
han the tween the es the n is 4 × (7 2, which
marginal
venue
arginal
marginal
mand but
rm, we shows
mising o equal nal curve has e demand by the .
he short-fit-cost per
s at arginal
oduced.
sold. The
Module 2
128
Figu
Frommonor sethe rwith
Mo
In aproflossits vunlecan
If thin oentrand
In ointoleadby omonmusbarrrun big
Natuwhethansale
ure 2.14
m a managemnopoly modeervice shouldright price ish its margina
nopoly in
a monopolisefits provide ises in the shovariable costsess it can findbe covered.
he monopolyrder to earn m
ry occurs, thethe firm wil
order for posio the industryds us to a discother firms tonopoly profitst prevent theriers typicallyaverage costfirms have s
ural barriers en one firm cn two or mores to a quanti
ment viewpoel is that a fird not charge s the one thatal cost. In doi
the long ru
ed industry, aincentives foort run, it wils. In the longd a scale of o
y is making pmore than the monopoly’l cease to be
itive monopoy, these new cussion of eno the industryts are to perse entry of newy arise as a rt curve is dowignificantly
give rise to ncan supply thre firms can. ty at which e
oint, the imporm in a positithe highest p
t helps equating so, the fi
un
as in a perfecr exit and enl continue to
g run, howevoperations at
profits, othershe opportunits position sh
e a monopoly
oly profits tofirms must bntry barriersy. These maysist in the lonw firms into
result of econwnward sloplower cost p
natural monhe entire marThis situatioeconomies o
ortant implicion of monopprice. Furthete the firm’s irm will earn
ctly competitntry. If the mo operate as lver, it will leat which its fu
s will wish toty cost of the
hown in Figuy.
o lead to the ebe able to ents: impedimeny be either n
ng run, effectthe industry
nomies of scaping over a laer unit than s
opoly. Naturrket at lower on arises whef scale exist.
cation of the poly in sellinermore, we kmarginal rev
n the maximu
tive one, lossonopoly is sulong as it canave the indusull opportunit
o enter the ineir capital. If ure 2.14 will
entry of new ter the industnts that preveatural or creative entry bary. Natural entale. When tharge range ofsmall firms.
ral monopolyaverage tota
en the deman Electrical p
ng a good know that venue um profit.
ses and uffering
n cover stry ty costs
ndustry f such
change,
firms try. This ent entry ated. If rriers try
he long-f output,
y occurs al cost nd limits ower
trangivesituacost
Figu
Anoits csuchhugprofincu
As dgovinstalegaexam
Mo
In teperfhighdiam
Thissimpinco
YoumoncomcomdemFigucurv
nsmission is aen region wilation. Here tt is ATC.
ure 2.15
other type of costs of enterh things as ite – then its efitable. Howeumbent firm
discussed earernment actiance, may pral right to promple is the c
nopoly ve
erms of welffect competith price. Thermetrically op
s section discply a redistriome from con
u are well prenopoly by co
mpetitive marmpetitive marmand and supure 2.16. Reve under perf
a natural monll always be the demand c
f natural barriring the markts brand imagentry into theever, this is uwill be free o
rlier, many eion and are threvent entry oduce a certacase of pharm
rsus perfe
fare and effiction. A monorefore, consupposed standp
cusses the faibution of incnsumers to th
epared now tomparing therket. To do thrket were tranpply curves foemember thatfect competit
C5
nopoly – a sicheaper than
curve for elec
ier is setup cket, developige and its deae market couusually not thof this threat
entry barriersherefore conby conferrin
ain product fomaceutical co
ect compet
ciency, monoopoly makes
umers and mopoints on the
act that there come. In the he firm, ther
to see the imm with pricehis, considernsformed int
for the bottledt the supply ction. In this c
Economic Env
ingle set of pn two. Figurectricity is D
cost. If the firing its producaler networkld prove suche case and nt.
s are created ndoned by it. ng on the patefor a specific ompanies.
tition
opoly does poeconomic pr
onopolists tene desirability
is more to thprocess of th
re will be a n
mpact on pricee and quantitr what wouldto a monopod-water inducurve is the scase, we are
vironment of B
power lines se 2.15 showsand average
rm could ovects and estab
k – which is tcessful and normally the
by consciouPatent laws,
ent holder thperiod. The
oorly relativerofit by charnd to have
y of a monop
his issue thanhis transfer o
net loss.
e and quantitty in a perfecd happen if a ly. The mark
ustry are showsame as the Massuming a
Business
129
serving a s such a total
ercome blishing typically
e
us , for
he sole best
e to rging a
oly.
n just of
ty of a ctly perfectly
ket wn in MC cost
Module 2
130
horiintercomin th
Withmarchanby tInstthe c
Nexshowpricthe mthe mthe prodcomcostcurv
Thenewoutpwithwatevers
Figu
Allo
As yperf
izontal MC crsection of th
mpany, the mhe market str
h the transforket becomesnge, howevethe demand cead, the marcase before.
xt, consider sws the quant
ce and is reprmarket suppmarket. Aftesame as befoducers are no
mbines the cot curve that ive shown in F
e bottled-watew marginal reput level, theh the transforer becomes msus Qpc) are p
ure 2.16
ocative eff
you see, monfect competit
curve. Equilibhese curves,
market demanructure.
ormation to as the busineser. Now that tcurve) and itsrginal revenu
supply. Recaltity of outputresented by aly curve is th
er the changeore: inputs orow in the hanost figures fors merely an eFigure 2.16.
er monopolyevenue and me price is founrmation frommore expensproduced.
ficiency
nopoly statustion, so it mo
brium for a cpoint A. If th
nd curve rema
a monopoly, ts’s demand cthe business s marginal re
ue curve falls
ll that a perfet supplied bya portion of thhe sum of alle to a monopriginally ownnds of one bur these varioextension of .
y’s profit-mamarginal costnd at point C
m perfect comive, (Pm vers
s restricts outoves wealth f
competitive mhe industry bains the sam
the demand ccurve. Thereis a monopo
evenue are nos below the d
fect competitoy the businesshe marginal l supply curvoly, productined by the peusiness. Whe
ous facilities, f the perfectly
aximising outt curves interC on the demmpetition to msus Ppc), and
tput and setsfrom the con
market occurbecomes onee despite the
curve for the is a signific
olist, its priceo longer equ
demand curve
or’s supply cs at each poscost curve. I
ves of busineion facilitieserfectly compen the monopit finds a ma
y competitiv
tput occurs wrsect, point B
mand curve. Tmonopoly, bfewer bottle
s a higher prinsumers to th
rs at the e large e change
e entire ant
e (given ual. e, as was
curve ssible In turn, esses in remain petitive polist arginal e supply
where the B. At this Thus, ottled s, (Qm
ice than he seller.
S
Study skills
ThebettHowpers
Figucomthat showof thsurpthe tdem
WhePm, shapstripif thviewquanat Fgainthe the cgrou
Howmonlowalsoallo
Use quesequa
1.
erefore, from er off with p
wever, whethspective of ef
ure 2.16 canmpetition, con
consumers awn by (the hhe good to thplus. In termtriangular ar
mand curve.
en the monopconsumer supes. The monpes. But is thhe gain by thew the monopntity as mere
Figure 2.16 sn to the monoseller as depconsumers, iup is offset b
wever, the renopoly’s rester monopoly
o referred to acative ineffic
the followinstions. Initialal to zero.
If the ice creprice of
the perspectperfectly comher monopolyfficiency is a
n be employensumers pay are willing to
height of) thehe consumerss of Figure 2ea TAPpc – t
poly replaceurplus is redunopoly gainshe monopolise seller had b
poly practice ely redistribushows that thopolist. Somicted by the it is not a losby the gain of
st of the losstriction of ouy output is thas the deadwciency assoc
ng diagram (mlly this indus
eam becomes per ice
C5
tive of fairnempetitive induy is inferior ta different m
ed again to illPpc for each
o pay for eac demand curs. The value 2.16, consumthe area betw
s perfect comuced to the shs in the form st’s gain equabeen equal toof charging
utive. But thehe loss to the
me of the lossesquare patter
ss to the socief the other. T
s in consumeutput, is lost. he shown by tweight loss tociated with th
market for icstry is perfec
s a monopolycream and p
Economic Env
ess and equityustries than mto perfect co
matter.
lustrate this punit bought.
ch unit is derrve (D), whicminus its pri
mer’s surplusween the price
mpetition chahaded patternof higher pr
al to the conso the loss to ta higher pric
ere is more toconsumers ies to the buyrn. While thiety as whole
The net gain
er’s surplus, cThe total losthe grey trian
o the society,he monopolis
ce cream) to ctly competit
y, the monopproduce
vironment of B
y, the societymonopolies.
ompetition fro
point. Under. The maximived differench measures ice is consum
s is represente line and th
arging a highned with diamofit – shownsumer’s lossthe buyers, yce and restrico this. A closis greater thayers are accruis represents
e since the lo(or loss) equ
caused by thss resulting fngle. This ar which meas
stic practice.
answer the five and fixed
polist will ch cones of ic
Business
131
y is
om the
r perfect mum price ntly. It is the value
mer ted by e
her price, mond
n with ? Again,
you could cting ser look an the ued to a loss to ss to one
uals zero.
he from the rea is sures the
following d cost is
harge a e cream.
Module 2
132
2.
3.
Solu
Pric
As yan aIn soprodof ppricdiscmargoocustany buy have
A. B do
B. B do
C. F do
D. F do
If the ice creto —
A. ABC
B. BFG
C. CGH
D. GHK
If the ice creequal to —
A. ABC
B. BFG
C. CGH
D. GHK
utions:
1. B. A perF dollarthe price
2. B. The and wilaverage
3. C. The gained
ce discrim
you have anaassumption thome circumsduct to differ
producing force discriminacrimination isrket. In a comd at the marktomer becausfirm tried tofrom anothe
e some mark
ollars and L
ollars and K
ollars and K
ollars and L c
eam becomes
C
GC
H
KL minus B
eam becomes
C
GC
H
KL minus B
rfectly comprs. The monoe to B.
monopolistll face an ave cost times
area CGH iby the mon
mination
alysed the behat the monostance, howerent customer the two cusation. Befores not possibl
mpetitive market price. Nose the firm cao charge a higer firm. For aket power.
cones
cones
cones
cones
s a monopoly
FGC
s a monopoly
FGC
petitive indusopolist will re
t will reduceverage cost quantity, o
is the loss innopolist.
ehaviour of mopoly chargeever, a firm mers for differestomers are the looking at se when a goorket, there ar
o firm is willian sell all it wgher price toa firm to disc
y, the monop
y, the loss in
stry would preduce output
e output to Kof F. Its pro
or BFGC.
n consumer
monopolies ss the same p
may be able tent prices evehe same. Thisuch behaviood is sold in re many firming to chargewants at the a customer,
criminate in i
polist’s profi
n social welfa
roduce L andt to K and wi
K, will charofit is price
r’s surplus n
so far, there hprice to all cuto sell the samen though this practice is
our, note that a competitiv
ms selling thee a lower primarket price that customits pricing, it
it is equal
are is
d charge ill raise
rge B minus
not
has been ustomers. me
he costs called price
ve e same ce to any e. And if
mer would t must
S
Study skills
Thecharand weesets typedisccharmax
Thefor adiffepricwillis thgeogwill
1.
2.
Solu
Soc
Monto coeithThescal
ere are numerrge different senior citize
eknights versdifferent pri
e would inclucount. Anothrges a differeximum price
e first and moa profit-max
ferent customce-discriminalingness to pahat price discgraphically olingness to pa
The followin
A monopoliits night-timduring the d
The followinTrue/False?
A monopolicustomers wa quick resa
utions:
1. False. Pprices fo
2. The discmarketsThis is ea seriou
cial benefi
nopoly yieldompetitive fier higher or
ere are two rele, and (2) tec
rous exampleprices for di
ens or to thossus weekendsices for diffeude bulk buyer form of prent price for that he or sh
ost obvious limising mon
mers, a monopating monopoay than is po
crimination ror sometimesay.
ng is an exam
st charges a me customers
ay’.
ng is an exam
ist is selling iwho can easilale in the high
rice discrimior reasons no
crimination m to be able toespecially cri
us problem si
ts of mono
ds neither allofirms. Howevlower unit co
easons why cchnological a
C5
es of price diifferent custose who attends, etc. Anotherent quantitiying: the largrice discrimieach unit sol
he is willing t
esson is that nopolist. In opoly can incrolist charges ossible with aequires the as by age or in
mple of price
higher price because the
mple of succ
its product toly buy the prher-price ma
ination is theot associated
monopolist mo successfullitical for goonce by natur
opoly
ocative nor pver, in certainost than that costs may difadvance in th
Economic Env
iscriminationomers: lowerd in the after
her form of pries (volumesger the order,ination occurld and chargto pay for th
price discrimother words, brease its profeach custom
a single priceability to sepncome – acc
e discriminat
for its daytimcost of prod
essful price d
o two differeroduct in a loarket’.
e practice of d with costs.
must be able ly practice prods. Servicesre they are no
productive efn cases, a moincurred by
ffer, namely he long-un.
vironment of B
n. Movie ther price for sturnoon and onrice discrimi). Examples , the larger thrs when a firmes each cons
hat unit.
mination is aby charging fit. In essenc
mer a price cle. The secondarate customording to the
tion: True/ Fa
me customerduction is gre
discriminatio
ent groups ofower-price m
charging dif
to separate irice discrimins do not usuaot easily tran
fficiency as conopolist macompetitive (1) economi
Business
133
atres udents n certain ination of this
he m sumer the
a strategy prices to
ce, a loser to d lesson
mers – eir
alse?
rs than eater
on:
f market for
fferent
its nation.
ally pose nsferable.
compared ay incur
firms. ies of
Module 2
134
Eco
Whefirmthe mwouup omonFor relatcomlongspeclearnof th
Inve
MonimpmortechMorfirmimp
Gov
ColsamStatcolluand/comregu
1.
onomies of s
en economiems, producing
market demauld have a lowof several comnopoly mightexample, exting to new i
mputer softwag-run averagecialised inpuning by doinhe firms.
ention and in
nopolists canplementation re likely thanhniques over reover, mono
ms enter into portant to the
vernment
lusion is an me price or ottes, for examusion are em/or regulation
mpetition amoulate the beh
Antitrust la
The first lawSherman Acand avoid thregulate firmto collude. Athe term ‘anto eliminate Sherman AcFederal Tradprohibited o“substantiallThe Federal(FTC), whicbusiness pra
scale
es of scale arg at the minimand. In this swer average mpetitive firt be able to a
xtensive econinformation tare and Intere total costs
uts, the spreadng. This has s
nnovation
n lower their of new techn
n competitivetime, then in
opolists maythe market. Imaintenance
policy tow
agreement mtherwise not
mple, governmmbodied in th
ns aimed at eong firms. Aaviour of mo
aws and anti
w regulating ct (1890), whhe formation ms that had cAfter the Shentitrust laws
collusion amct, Congress de Commissi
or defined as ly to lessen cl Trade Act ech was givenactices.
e extensive, mum efficien
situation, an itotal cost tha
rms. At the eattain the lownomies of scatechnologies
rnet services.have decreasding of produsubstantially
costs througnology in thee firms to devnefficiency o seek technoIn this situatie of monopo
ward mono
made by few compete am
ment policieshe antitrust leliminating c
A number of lonopolies.
itrust enforc
monopolies hich was desiof monopoli
combined to ferman Act ws’ continues tmong firms. Tpassed the Cion Act. Undillegal if its
competition, established thn rights to mo
a large numbnt level, mayindustry of oan would thextreme, a sin
west long-runales always ds such as com As these firsed because uct developm
y reduced the
gh the discove long run. Ifvelop more e
of monopoly ological advaion, technolo
oly.
opoly
firms or prodong each oths with respeclaws. Antitrucollusion andlaws have be
cement
in the Unitedigned to encoies. The Sherform trusts. Tas passed, truto be used toTo address lo
Clayton Act (der the Clayteffect tends or to tend to
he Federal Tronitor and re
ber of compey not be able one or two fire same indusngle firm or an average totdisplay in sommputers, noterms have groof greater us
ment costs ane average tota
very and f monopolistefficient prodmight be ov
ance to restricogical advanc
ducers to chaher. In the Unct to monopoust laws are ld promoting een implemen
d States was ourage comprman Act is Trusts enableusts disappea
o refer to lawoopholes in t(1914) and thton Act, a meto cause
o create a morade Commigulate unfair
etitive to meet
rms stry made a natural al cost. me firms
ebooks, own, their se of nd al costs
ts are duction
verstated. ct new ce is
arge the nited
oly and laws
nted to
the petition aimed to ed firms ared, but
ws aimed the he erger is
onopoly.” ssion r
Monoppolistic c
3.
4.
5.
competitio
Monmonfirmmaroffethe anambe dchar
In mknowthe pthe dpurccom
Mergers: T
The U.S. fedmarket powby raising prmost concerbetween firmfirms at diff
The Departmerger guid
The Economof Justice wconsequencewere develoThe guidelinunderstand wguidelines fomeasure of m
Regulating
If a firm is aforcing priceprofit. Policachieve econmonopoly chstrategy has still falling wprice equal tand the firmprice equal tmonopoly w
on
nopolistic conopoly. It ha
m: a large numrkets, and knoered by the seability of sel
mes, packagindifferent fromrge a higher
monopolistic wing that theprice is too hdifferentiatinchase a comp
mpetitor must
The trade-off
deral governmer by merginrices and redrned with homs in the samferent stages
tment of Jusdelines
mics Section was establishe
es of proposeoped by the Dnes made it ewhether the g
focus on threemarket conce
natural mo
a natural mones down to thy makers usunomic efficieharge a pricea weakness
when it crossto marginal c
m will suffer ato the level o
will break eve
ompetition is s most of thember of selleowledge of mellers. A keyllers to differng, advertisinm the competprice than its
competitione consumer hhigh, in viewng features opeting firm’st expect a rel
C5
f between m
ment regulatng they may ducing outpurizontal me
me industry. of productio
stice and Fe
of the Antitred in 1973 toed mergers. S
Department oeasier for firmgovernment e main issueentration, an
nopolies
nopoly, comphe level wheually set pricency, regulate equal to itswhen the fir
ses the demacost, price wa loss. Henceof average toen.
a cross betwe characteristers, fairly easmarket partic
y characteristrentiate their ng, location, tition. This ds competitor
n markets, thehas many clo
w of the consuof the firm’s ps product instlatively elast
Economic Env
market powe
tes mergers bincur ineffic
ut. In particulrgers, whichVertical me
on of a good.
deral Trade
rust Divisiono evaluate theSubsequentlyof Justice andms proposingwould allows, namely ma
nd merger sta
petition will ere the firm eces for naturators may req marginal co
rm’s averageand curve. If
will be less the, the policy
otal cost so th
ween perfect tics of a perfsy entry and cipants abouttic that make
product. Foretc. all help
differentiatios, if it so des
e firm must cose substituteumer’s perceproduct, the tead. Thus thtic demand re
vironment of B
er and efficie
because if firciency of the lar, the goverh are mergersergers are be
e Commissio
n of the Depae economic y, merger gud the FTC ing a merger to
w the merger.arket definiti
andards.
not play its rearns zero ecal monopolie
quire that the ost. Howevere total cost cuthe firm chaan average tomakers will
hat the natura
competition fectly compeexit into andt the prices bs it monopolr example, ba product apn enables a f
sires.
choose a prices to choose eption of the consumer w
he monopolisesponse to ch
Business
135
ency
rms gain market
rnment is s
etween
on
artment
uidelines n 1982. o These ion, the
role of onomic es. To
r, this urve is arges a otal cost set the
al
and titive
d out of being listic is
brand ppear to firm to
ce from. If value of
will stic hanges in
Module 2
136
its pwithcausbecaactiofirm
In owithincrfor tcan profcomentr
MonvendThecharartismonare dry fromget t
Sho
Figucomcurvrespdemfor idemto luinducannincluone
price level. Yhout causing sing a changause the firmons to be spr
m any sufficie
other words, mhout experienreases it will the pure comadjust the pr
fits. Howevempetitor has mry of new firm
nopolisticallydors gather t
e weekly fruitracterised as sans selling snopolistic cosmall retail bcleaners. Fo
m different reto know all h
ort-run pro
ure 2.17 shompetitive firmve are similarpectively. Thmand curve isinstance, a dr
manded by asure away somustry as a whnot be as muudes all sellethat gained m
Yet at the samany other fire in the gene
m is one of mread imperceent reason to
monopolisticncing the extsuffer loss o
mpetitor. Likerice upward o
er, similar to many rivals ims in the lon
y competitivto sell similart and vegetabmonopolisti
souvenirs andmpetitors. Obusinesses sur instance, soegions of Chhis or her cus
ofit maxim
ows the case m within the ir to those in
he industry des obviously frop in the pr
s much as theme of the cushole, the respuch (there is lers (firms), inmostly at the
me time, it exrm to retaliateral price lev
many firms, aneptibly over ao react to the
c competitiontreme responof sales, but te a monopolyor downwardthe pure comin the short rng run.
ve markets arr products toble market inic competitiod other good
Other exampluch as floristome Chinese
hina. The neigstomers by n
isation
of a profit-mindustry. Themonopoly, remand curveflatter than thrice charged be firm, with istomers of otponse of the qlower price encluding all e expense of
xpects to be ate and conse
vel in the marnd it expectsall the other finitial firm’s
n can changense of pure cothis loss is noy, the monopd to the level
mpetitor, the run, compoun
re found wheo a gathering n some common. Similarlyds in tourist res of monopts, pharmaciee restaurants ghbourhood
name.
maximising me demand anrepresented be is given by he industry’sby a firm incits elastic demther firms. Hquantity to thelasticity) sinthose who loothers.
able to changquently, withrket. This is ps the impact ofirms, givings price chang
e price up anompetition. Fot total as it wpolistic compl that maximmonopolisticnded by the f
ere a large nuof potential
munities mayy, the gatherinresorts act likpolistic compes, restauranttry to offer fpharmacist t
monopolisticand marginal rby d and mr D. The firm demand cur
creases the qumand curve,
However, for he same pricence the indusost customers
ge price hout possible of its g no one ge.
nd down For price would be petitor
mises its c free
umber of buyers.
y be ngs of ke petition ts and food tries to
ally revenue
’s rve since, uantity is able the e cut stry s and the
Figu
Thedepimarthe firmreveat Q
Nothcom2.18weamaxan earea
Figu
ure 2.17
e situation of icted in Figurginal revenuslope and the
m maximises enue equals m
Q1; profits are
hing, howevmpetitive indu8 shows whaaker market dximisation byeconomic losa.
ure 2.18
f a representaure 2.17. Sinue curve muse same intercits profits at
marginal cose shown as th
ver, guaranteeustry will ear
at happens whdemand. Evey setting marss. The loss is
C5
ative firm in mnce the demanst lie below thcept point. Tthe price an
sts. Thus, priche area P1AB
es that a firmrn economic hen a firm w
en though therginal revenus shown by t
Economic Env
monopolisticnd curve hashe demand c
The monopolind output levece will be se
BC.
m in a monopprofits in th
with the samee firm followue to marginathe rectangle
vironment of B
c competitions a negative scurve, havingistically comel where mar
et at P1 and qu
polistically he short run. Fe cost curves ws the rule ofal costs, it m
e P2DEF – the
Business
137
n is slope, the g twice
mpetitive rginal uantity
Figure faces a
f profit might face
e striped
Module 2
138
S
Study skills
1.
2.
3.
Solu
Lon
In aand are pThepurean epossquicour
Unlike a mo
A. canthe l
B. has
C. can
D. may
In monopoliprice —
A. equa
B. exce
C. is le
D. equa
The monopoelastic than monopolistisloping,
A. mor
B. mor
C. less
D. less
utions:
1. A. Easyeconom
2. B. To mexceeds
3. C. GivesubstituThe mamarket horizon
ng-run opt
analysing moexit are freeprofits to be
erefore, the de monopoly ieconomic prosible to earn ckly try to mrepresentativ
onopolist, a m
earn positivelong run.
a downward
never cover
y sell to many
istic competi
als marginal
eeds margina
ess than marg
als marginal
olistically cothat of the pecally compet the market
re, like.
re, unlike.
, like.
, unlike.
y entry into thmic profits.
maximise pro MC.
en product dutability wilarket demanstructure, w
ntal in perfe
timisation
nopolistic coe in the long r
made and dedifference betis that the moofit indefinitean economic
move in. Theirve firm to de
monopolistic
e economic p
d sloping mar
its minimum
y buyers.
ition, when p
revenue.
al cost.
ginal revenue
cost.
ompetitive firerfectly comtitive firm’s
t demand cur
he market wi
fits, MR = M
differentiatill be less thand curve is dwhereas the ect competit
ompetition, orun. Firms caepart when thtween this sitonopolistic cely. As soon c profit in a pr entry will c
ecrease (shift
ally competi
profit in the s
rginal revenu
m average co
profits are be
e.
rm's demandmpetitive firm
demand curvrve in perfect
ill compete a
MC. Because
ion, the degran it is in pedownward sfirm's dem
tion.
our key assuman enter the ihey face ecotuation and t
competitor caas other firmparticular macause the demt to the left) b
itive firm —
short run but
ue curve.
st in the long
eing maximis
d curve will bm. The
ve will be dot competition
away any sho
price exceed
ree of erfect compsloping in thand curve is
mption is thaindustry whe
onomic lossesthe one facedannot expect
ms notice thaarket, they wmand curve fbecause the
t not in
g run.
sed, the
be
ownward n.
ort-run
ds MR, P
petition. his s
at entry en there s. d by a t to earn at it is will facing
S
Study skills
newshiftto thdemwhimonP*, profof o
A diwithSupthemfirmmarrighelimaverfirm
Figu
Use a mo
wcomers will ft continues uhe average to
mand curve anch they just tnopolisticallyprice and avfits or losses
output, where
ifferent sequh losses, but ppose that them is able to m
ms will be forrket share (deht. These shifminated. Graprage cost cur
m starts in a p
ure 2.19
the diagramonopolistical
be taking a cuntil profits aotal cost curvnd the averagtouch and hay competitive
verage total c. Note that ta
e marginal re
uence occurs the market w
ere are too mmake a profitrced to leaveemand) increfts will continphically, it mrve and the saprofit-earning
m to answer thlly competiti
C5
certain amouare eliminateve. Graphicalge total cost ave the samee industry in
cost are equalangency occuevenue is equ
if a monopowill arrive at
many video stt. Eventually. Therefore,
eases and thenue until the
means a tangeame long-rung position.
he followingive firm.
Economic Env
unt of its bused, when the lly, this is thare tangent ( slope). Figu
n long-run eql and there arurs at the proual to margin
olistically comthe same lon
tores in a smy, there will bfor the rema
eir demand cue losses for thency betweenn equilibrium
g questions. T
vironment of B
siness away. demand curv
he point at wh(that is, the pure 2.19 showquilibrium. Are no economofit-maximisnal cost.
mpetitive firmng-run equiliall town andbe a shakeouaining firms, urves will shhe surviving n demand anm as develop
This diagram
Business
139
This ve slips hich the point at ws a
At Q* and mic sing level
m starts ibrium.
d none of ut: some
the hift to the firms are
nd ps when a
m depicts
Module 2
140
1.
2.
3.
4.
5.
Solu
In the short
A. OA
B. OB.
C. OC.
D. OD
In the short
A. OE.
B. OF.
C. OG
D. OK
In the short
A. OA
B. OA
C. OA
D. OA
In the long rbecome mor
A. righ
B. righ
C. left,
D. left,
In the long r and b
A. righ
B. righ
C. left,
D. left,
utions:
1. A. This
2. D. Use t
3. C. Tota
4. D. Eachenter thbecause
5. D. The firm’s m
run, the prof
.
.
.
.
run, the prof
.
.
.
run, this firm
×OG.
×OK.
×GK.
×EK.
run, this firmre
ht, inelastic.
ht, elastic.
, inelastic.
, elastic.
run, this firmbecome more
ht, inelastic.
ht, elastic.
, inelastic.
, elastic.
is the output
the demand c
al economic
h firm will lhe industry. e of the larg
reason is thmarket shar
fit-maximisin
fit-maximisin
m will earn a
m’s demand c
m’s marginal e _
t level where
curve to dete
c profit equa
lose some oDemand w
ger number
hat as more re drops (the
ng output lev
ng price is —
total econom
curve will shi
revenue curv
e MR = MC.
ermine price.
als (P -ATC
of its marketwill become
of substitut
firms enter ere is a redu
vel is —
—
mic profit of
ift to the
ve will shift
.
C) x Q.
t share as fimore elastic
tes.
the industruction in the
f —
and
to the
irms c
ry, each e
The firrm in an o
oligopoly
Theoligoligalumon. carsis theconas a
Regmarfirmare nthat and follo
AnoUnlthe e
Olig
Pric
Whepric
demandfirm’s dto the leoperatinfirm is marginelastic.
y
e determinatiogopolistic magopoly mightminium, chemThey might
s. The key chhe relatively nomic theory
an oligopoly.
gardless of horket share is h
ms in an oligonamed by a ceach firm mof the antici
owing the M
other crucial ike monopolentry of new
gopolists are
1. The intewith eaccase), thmonopoof the timcharges
2. Alternatgain a bpoliciescompetewill be. down th
cing under
en firms undces, market sh
d faced by edemand andeft). Also, wng in the indmore elastical revenue c
on of price, oarket as in thet sell a standamicals such aalso sell a di
haracteristic dsmall numbey for the min
ow few firmsheld by the topoly is that condition kn
must set its pripated reactio
MR = MC rule
feature of ollistic compet
w firms, with
typically pu
erdependencech other. Unlhey tend to goly to maximme firms do and partly b
tively, they wigger share o, however, are to gain a biCompetition
he potential p
r oligopoly
der oligopolyhare, adverti
C5
each individd marginal rwith a largerdustry, the dc. Each hascurve will a
output and pe three other ardised produas hydrochloifferentiated distinguishiner of competnimum numb
s there are inop firms, thethe pricing p
nown as muturice on the baon by its come may not be
ligopoly is thtition, oligopvariation fro
ulled in two d
e of firms maless the law pet together a
mise their joinnot collude,
because of the
will be temptof industry pre incompatiigger share on drives dowprofits.
y
y engage in csing expendi
Economic Env
dual firm). Trevenue curr number ofdemand cur less contro
also become
rofit is not atypes of ma
uct: steel, a moric acid; papproduct such
ng this markeing firms. Th
ber of firms th
n a market ane most imporpractices in thual interdepeasis of its cos
mpetitors. In e enough to m
he existence poly involvesom industry t
different dire
ay make themprohibits it (
and act as a snt profits. At partly from e lack of trus
ted to compeprofits for theible. The moof profits, then the price a
ollusion, theiture, etc., to
vironment of B
Therefore, thves will fallf firms nowrve faced byol and hencee flatter or m
s simple in aarket. Firms imicrochip prper products h as soft drinet and the othhere is no rulhat qualify a
nd what percertant implicathis type of mendence. Thists, demand other words,
maximise pro
of barriers tos various barrto industry.
ections:
m wish to coas is usually ingle seller oleast explicifear of crim
st discussed b
ete with theiremselves. Thre fiercely fi
e smaller thesand hence wi
ey are agreeino reduce the
Business
141
he l (shift
w y each e its more
an in an rocessor, and so
nks or her three le in
a market
entage of tion for
market s means elasticity , just ofit.
o entry. riers to
ollude the
or itly, most inal below.
r rivals to he two irms se shares ll drive
ng on
Module 2
142
uncecuttindu
Coo
A fomaxthey
TheMRof itmus
Figu
Havmar
Eachup tif pr
In mgovbein
Wherouncollumaycam
Anoas adomAlte
ertainty theying or retaliaustry profits.
operative o
ormal (explicximise profity were a sing
e total marketR curve. The cts members. st therefore s
ure 2.20
ving agreed orket among th
h member wto Q1. If the rice remained
many countriernment as a
ng against the
ere explicit cnd it. Alternaude by watch
y implicitly ampaigns.
other form ofan establishedminates the inernatively, th
y face and to atory adverti
or collusiv
cit) collusives if it acts lik
gle firm. Figu
t demand curcartel’s MC Profits are m
set a price of
on the cartel hemselves.
would be givequotas exceed fixed at P1
es, cartels ara means of dre public inter
collusion is iatively, firmshing each oth
agree to avoid
f implicit cold leader. Thendustry. Thishe price leade
banish the spsing, both of
ve mechan
e agreement ike a monopoure 2.20 illu
rve is showncurve is the
maximised atf P1 (at which
price, the me
en a quota. Teded Q1, eith or the price
re illegal, as triving up prirest.
llegal, firms s may stay wher’s prices ad price wars
llusion occure leader may s is known aser may simpl
pectre of comf which could
nisms
is called a caly: if the mestrates a cart
n with the corhorizontal su
t Q1 where Mh Q1 will be
embers will t
The sum of alher there woue would fall.
they are depices and prof
may simply within the law
and keeping or aggressiv
rs when firmbe the large
s dominant fily be the firm
mpetitive prid reduce tota
artel. The carmbers behavtel.
rresponding um of the MC
MC = MR. Thdemanded).
then divide t
ll the quotas uld be output
icted by the fits and there
break the law but still imp
theirs similave advertising
s set the samst firm: the f
firm price leam with the lo
ce-al
rtel will ve as if
market C curves he cartel
the
must add t unsold
by as
aw, or get plicitly ar. Firms g
me price firm that adership. owest
costtimeof mIn thwaythe oof bto ex
Non
Collcharoligto thcurvto mchan
Figu
Figuthe gis nomuccomcomraise(thedemantiredu
Theat thnonselli
t, known as le as the mostmarket condithese scenarioy and will be other firms.
being the firstxpect that ot
n-coopera
lusion (implirging the sam
gopolies is thhe same priceve. The kinke
match a pricenge price or
ure 2.21
ure 2.21 illugiven price Pot continuouch more elast
mpetitor anticmpeting firmsed its price s
ere being an emand curve is
cipate that thuctions from
e main intent he expense oe would gaining about the
low-cost prict reliable onetions. This isos, regardlesfollowed wiThe price leat to adjust prther firms wi
tive (Comp
icit or explicme price. In fe model thate being charged demand c cut but not pquantity.
ustrates the esP*, the dema
us. The portiotic than the p
cipates that ifs would follostands to loseelastic demans rather inelahe lowering othe other co
of lowering f the other co
n very much e same amou
C5
ce leadershipe to follow: ts known as bs of the typeithin a relativader is the firrices, but thisll follow suit
petitive) m
cit) is not the fact, one impt explains whged among c
curve model price increas
ssential aspeand curve is kon of the demportion belowf it increasedow. If this is e a considerand curve). Th
astic because of its price w
ompetitors.
prices in anompetitors. Imarket share
unt as before
Economic Env
p or, one thathe one that i
barometric fir of leadershively short timrm that is wis firm has ust.
mechanism
only reason portant modehy mutual intcompetitors: shows that if
ses, then they
cts of this thkinked in themand curve aw the price. Td its price, noindeed the c
able amount ohe lower poreach compe
would bring a
oligopoly isIf every firme. In fact thebut at lower
vironment of B
t has emergeds the best barm price leadip, one firm lme by all or milling to take sually a good
m
for every coel of competiterdependencthe kinked d
f firms expecy are unlikely
heory. Noticee sense that itabove the priThis is becauone of the othase, the firmof market shrtion of the ketitor is assumabout retaliat
to gain markm lowers its pey may all enr price unless
Business
143
d over arometer dership. leads the most of the risk
d reason
ompetitor ition in ce leads
demand ct rivals y to
e that at ts slope ce is
use each her
m that has hare kinked med to tory price
ket share rice,
nd up s their
Module 2
144
pricthe p
Thean okinkarou
TherevecurvportinelcurvfromA. Athe howcurv
This2.20mar
Othinstaexplindu
Olig
Stratheoone inceindupricmodSecochoonumince
ce cuts help toprice elastici
e upshot is tholigopolistic ked demand cund which th
e price stabilienue curves. ve has two dition of the deastic portionve corresponm the same pAt quantities steep (inelas
w this is consve back to th
s and the cor0. Therefore,rginal revenu
er importantances when olicitly. The nustry.
When fito produindustrievery expexample
When thincreasincompeticategory
gopoly and
ategic situatiooretic modellvery simple
entive probleustry (a duopce or a low prdel in two aspond, their chose from. In
mber of possientive structu
o stimulate tity of the ind
hat the kinkedmarket tend curve model
he kinked cur
ity can be shoThe marginaifferent segmemand curven of the demands to the flatpoint where th
greater thanstic) portion otructed, imag
he vertical ax
rresponding M you will not
ue curve, sho
t models of coligopolists c
nature of com
irms produceucing a givenes where fixepensive, there of this situa
hey produce ng capacity iition or Bertry.
d the priso
ons form theling is beyongame theore
em very wellpoly) in whicrice. Note thapects. First, f
hoice is discrethe Cournot
ible quantitieure of this ga
total market ddustry deman
d demand cuto charge thdoes not exp
rve lies is act
own by drawal revenue cu
ments. The upe, while the loand curve. Att (elastic) parhe demand c
n Q*, howeveof the demangine a extendis.
MR are showte that there
own as the ga
competition, cannot coope
mpetition, ho
e homogenoun amount of oed costs are hre is quantityation is the st
differentiateis low, comprand compet
oner's dile
subject mattnd the scope etic structure: the prisone
ch firms mayat this settingfirms are choete in that tht models, firmes. Despite thame is simila
demand. Thind.
urve helps to e same priceplain how thetually determ
wing in the fiurve approprpper segmenower segment quantities brt of the demcurve interceper, the MR cund curve and ding the stee
wn by the dotis a vertical
ap CD.
discussed beerate (colludwever, varie
us products aoutput, as in high and cha
y or Cournotteel industry
ed products apetition takestition. Airline
mma
ter of game tof this cours
e that capturer’s dilemma
y charge eitheg is differentoosing price
hey have onlyms can chooshese differenar to the Cour
is would dep
explain whye. However, te market pric
mined.
irms’ marginriate to this dnt relates to thnt relates to tbelow Q*, th
mand curve, spts the verticurve correspstarts at C. Tp part of the
tted lines in discontinuity
elow, explainde), implicitlyes from indus
and/or are cothe case of
anging capaccompetition
y.
and/or the cos the form ofes belong in
theory. Formse. However,es the basic o. Consider a er a high (colt from the Corather than q
y two prices se any one of
nces, howevernot model.
end on
y firms in the ce
nal demand he elastic the
he MR tarting cal axis: onds to To see demand
Figure y in the
n y or stry to
ommitted
city is . An
st of f price this
mal game there is
oligopoly two-firm llusive) ournot quantity. to f a large r; the
Let highpricpricfirmof thpoorpayopay-
As i(or phigheachintendefeFurtthengetsSimthe ostratdomevenoutcgive
Fir
Tab
Thea criinduthouprisbeliintermaincoopforthwillmainbe ahigh
us assume thh prices, whices (a non-coces, both firmm charges a hhe sales in thrly. If both foff structure -off matrix.
indicated in Tpayoff); the hest under thh will earn a nds to chargect, for by chthermore, evn the best stras 30, while if
milar reasoninother does, ittegy that is b
minant strategn though the come of the men the strateg
rm 1 High
Low
ble 2.9
e original verime rather thuced to confeugh both susponers) had toeve they wouraction betwntaining cooperate if the h cooperatiol induce defentained in a
around next ph, then defec
hat oligopolich we will re
ooperative strms do well, eshigh price andhe market andfirms charge
is illustrated
Table 2.9, thsecond elem
he strategy ofprofit of 50.e the collusiv
harging a lowven if Firm 1 ategy would f it remains trng applies to ts best strate
best no mattegy. It is likelyfirms could
mutual defecgy chosen by
Hig
price
price
rsion of the phan two firmsess (defect) ipects would o make singluld do anyth
ween the firmoperation. In
firms believn from the ri
ection by the repeated gamperiod, or if ttion will resu
C5
sts can engagefer to as a crategy). If bossentially shad the other dd does very wlower prices
d in the follow
he first elemement is Firm 2
f mutual coop However, ifve price, then
wer price, it cbelieved thabe to defect
rue to the agrFirm 2. Thu
egy is to defeer what the riy, that mutuaearn signific
ction strategyy the rival, ea
Firm
gh price L
50,50
0, 100
prisoner’s dils. In the origin the hope odo best if ne
le, once-and-hing other tha
ms is repeateda repeated ge that cooperival in the nerival next pe
me, althoughthe one-perioult.
Economic Env
ge in two difcooperative soth firms cooaring in mon
does not, the well but the s, both make wing box or
ent in each c2’s profit. Coperation (colf, Firm 1 beln Firm 1 has
can raise its pat Firm 2 was
also, becausreement, it w
us, for each fiect – charge lival does is ral defection wcantly more by is called Naach firm is do
2
Low price
100, 0
30,30
lemma dealt ginal version,of getting a lieither confess-for-all choican defect. If, d, the chance ame, there isration in thisext period, weriod. Thus, c
h if one firm bod gains from
vironment of B
fferent stratetrategy, and
operate or chanopoly profitdefector takeother firm domodest profmatrix, know
ell is Firm l’ombined profllusion). In thieves that Fir
s an incentiveprofit from 5s likely to dese by doing swill get nothiirm, no mattelow prices. Areferred to aswill be the oby colludingash equilibrioing the best
with two sus, each prisonighter sentensed. If firms
ces, it is hardhowever, this much bett
s an incentives period will
while defectiocooperation believes it mm defection a
Business
145
gies: low arge high ts. If one es most oes very fits. This wn as a
s profit fits are his case, rm 2 e to
50 to 100. efect, so Firm 1 ing. er what
A s a utcome
g. The ium; t it can.
spects in ner was nce even
(or d to he ter of e to bring
on today may be
may not are very
Module 2
146
It isof pcomgeneinduman
Pric
Lim
Marwhemaxmoncomforecommonretarstratdete
Netw
Affiairlicusteffefirstprodstanrailrconsdiffe
Mar
Marto crmarmasmarMicsoftwenthincrsoftwwid
Adv
A fiensu
fortunate foprisoner’s dilmpetition eveeral how muustries with ony alternative
cing strate
mit pricing
rket theory reere MR = MCximise their pnopolists mu
mpetitors. In sego higher shmpetitors’ entnopolists mayrd the entry otegy to set a er market ent
work extern
inity programines reflect thtomer lock-inects are closet-mover advaduction tied tndard. In the road rights osistent physi
ferent railroad
rket penetrat
rket penetratireate a new m
rket. The maiss of customerket or businecrosoft is welware program
husiastic custreases prices ware becomeespread thro
vertising
irm in a monure that its cu
or consumersemma as thisn when only
uch competitionly a few fire theories of
egies in im
eveals that mC. At this opprofit level. I
ust remain sensome circumhort-run profitry and boosty implementof new compless-than-op
try by new co
nalities
mmes for reshe fact that mn effect that p
e-linked withantages. Netwto widesprearailroad induf way with acal network d companies
tion pricing
ion pricing imarket or enin purpose ofers, create goess. For examll-known to hms at promotomers. Onceto gain highes more diffiughout a firm
nopolistic maustomers kno
s that oligopos maintains r
y a few firms ion is enoughrms can be h
f how oligopo
mperfectly c
monopolists stimal price lIn practice, mnsitive to the
mstances, it mfits if pricing t long-run prt a pricing strpetitors. Limptimal price (ompetitors.
taurant dininmany firms aproduce long
h network extwork externaad adoption oustry, for exaa consistent gare so impor
s required dif
s a strategy onlarge marketf this pricingood network mple, in the chave sold initional pricese a large cust
her profit marficult or costlm or organisa
arket with a dow how its g
oly situationsreasonably vare involved
h, but, as indhighly compeolies behave.
competitiv
set profit-maevel, the mon
markets are de possibility o
make sense fomoderation
rofitability. Inrategy called
mit pricing is (where MC =
ng and flyer pare always abg-run benefitternalities thaalities refer toof a physical ample, customgauge of tracrtant that traifferent gauge
of setting vert share in a wg strategy is teffects and e
computer sofitial versions in order to atomer base irgins as swity once use hation.
differentiatedgood is differ
s include the vigorous leved. We cannotdicated aboveetitive. There.
ve markets
ximising pricnopolists wil
dynamic and of entry by nor monopoliswill forestaln this situatio
d limit pricina competitiv
= MR) in an
programmesble to create ats. Customerat yield to sigo the advantaor economic
mers are linkk. The benefins could notes of track.
ry low initialwell-developeto benefit a cestablish a viftware markes of PC-basedattract a larges created, Mching compu
has become
d good is reqrent from its
aspect els of t say in e, even e are
s
ces ll
new sts to ll on, g to
ve effort to
for the a r lock-in gnificant ages of c ked using fits of a t run if
l prices ed critical iable et, d e base of icrosoft uter
quired to
Activ
vity 2.2
Activity
comis tospenand comthe I
Oneconsprodthe qhighthe cbett
Thinmannatiothe c
mpetitors, eveo use advertisnd huge amovalue the dif
mpetitors. AdInternet are t
e of the mainsumers of a hduct. In genequality of a ph and consistcustomers iner product ch
nk of three dny firms are tonal or interncases you ha
en when the dsing and pac
ounts in advefferences bet
dvertising in mthe main cha
n objectives ohigh-quality eral, a brand product, and tent quality sn terms of prohoice to be m
ifferent prodthere in the mnational. In w
ave identified
C5
difference iskaging. Firm
ertising to enstween their omagazines, n
annels for pro
of advertisingproduct or cname gives iis an incenti
standard. Advoduct differe
made.
ducts or servimarket. Identwhat ways dod?
Economic Env
s marginal. Oms in monoposure that cusown goods annewspapers,omoting thei
g is to providcreate a brandinformation tive to the provertising andences and qu
ices and estimtify whether o the firms c
vironment of B
One of the strolistic compestomers apprend those of ttelevision, ra
ir goods or pr
de a signal tod name for thto customersoducer to achd brand nameality and ena
mate roughly‘the market’
compete in ea
Business
147
rategies etition eciate their adio and roducts.
o heir s about hieve a e benefit able a
y how ’ is local, ach of
Module 2
148
Modu
ule sum
Summary
mmary
Youof dmarcurvmarThe has varicrosshapcurvprodbusiThe incr
Youcontshouperflongnatuentirexiscomfromdeadmonstrucmonis imand
In thof ndem
u have reviewdiminishing mginal produc
ves are also hginal producmarginal coa negative slable cost has
sses the margped and reachve. Economicduction and ainess could hlong-run av
easing, then
u have also setrol over its puld produce ifect competitg-run equilibural monopolre relevant rat. A monopo
mpeted away m the point odweight loss nopolist for rcture of monnopoly and pmportant to reCournot com
he following ational incom
mand, aggrega
wed the produmarginal retuct curve that hill-shaped bct. Marginal cost curve is shlope and is fls a saucer-shginal cost curhes a minimuc cost includa normal ratehave increasierage cost cuconstant and
een that a peprice. In theif its producttion, free entrrium situatiolist is a monoange of markolist can makin the long rf view of theto the societ
reasons not anopolistic comerfect compeelate to concmpetition.
study units, me, inflationate supply an
uction functiurns in the shis hill-shapedecause of thecost is invershaped like thlatter at high
haped curve trve. The curvum where it
des the oppore of return fong, constanturve is sauced finally decr
rfectly comp short run, a t price exceery and exit e
on makes neiopolist whosket demand fke an economrun. Producte society becty. Price dis
associated wimpetitive indetition. To ucepts of carte
you will be n, unemploymnd their equi
ion which is hort run that rd. The total aeir connectiosely related the letter ‘J’. Aher output levthat reaches ive for averagintersects th
rtunity cost oor the owners, and decreas
er-shaped refreasing retur
petitive indivperfectly cods its averag
ensure that anither econome ATC is dec
for which ecomic profit thaion of a monause the moncrimination iith the cost cdustry is a crunderstand olel, collusion,
looking at ecment, busineslibrium.
governed byresults in theand average ons with chanto marginal pAverage fixevels. Averageits minimumge cost is saue marginal c
of all the facts of the firm.sing returns tflecting rangerns to scale.
vidual firm hmpetitive fir
ge variable con individual f
mic profit norclining over onomies of sat will not benopoly is undnopolist causis the practiconditions. M
ross betweenligopoly induPrisoner’s D
conomy in agss cycle, agg
y the law e product nges in product. ed cost e
m where it ucer-ost ors of A to scale. es first of
as no rm osts. In firm in a r loss. A the
scale e desirable ses a ce by a Market n a ustry, it
Dilemma
ggregate gregate
Assig
A
gnment
Assignment
t
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
What is the rcost? How a
Give an examcount as a co
How and whrun and in th
Define econmight arise.
Production pachieve prodchoosing theoutput?
Which costsexplicit costcosts (oppor
How do eco
What is the nentire marke
What does thlook like?
What does thlook like?
How is the mimperfect co
What is the rthe industry
Is it true thatmore output
How can firm
What is the rdemand and
relationship are they relat
mple of an oost. Why w
hy does a firmhe long run?
nomies and di
processes maductive efficie production
s—economicts (payments rtunity costs
nomists mea
name of the et?
he demand c
he demand c
marginal curvompetition?
relationship demand with
t compared tt and charge
ms continue
relationship d how much i
C5
among a firmed?
opportunity cwould the acc
m's average-
iseconomies
ay be labour-iency, what cprocess to p
c costs or accto those outowners susta
asure profitab
market struc
curve facing t
curve facing t
ve drawn in
between the hin which th
to perfect comhigher prices
to earn pure
between the its price exce
Economic Env
m's total reve
cost that an acountant igno
total-cost cu
of scale and
-intensive or criterion mus
produce a cer
counting costside the busiain by runnin
bility?
cture when on
the firm in p
the firm in im
relation to th
demand facihe monopolis
mpetition, ms?
e profits in th
elasticity ofeeds margina
vironment of B
enue, profit,
ccountant more this cost?
urve differ in
d explain why
capital-intenst a firm apprtain quantity
ts—include biness) and imng the busine
ne firm supp
perfect compe
mperfect com
he demand cu
ing a monopst operates?
monopolies pr
he long run?
f the monopoal cost?
Business
149
and total
ight not
the short
y they
nsive. To ply in y of
both mplicit ess)?
plies the
etition
mpetition
urve in
polist and
roduce
olist's
Module 2
150
Asse
A
essmen
Assessment
t
Usemakfournum
1.
2.
3.
4.
5.
e the followinking plans tor distinct me
mber of clean
TechniqueA B C D
If the hourly$6, which pminimise co
Which is thD?
Use the foll
Number Worker
1
2
3
4
5
A. Com
B. Wit
C. Gra
‘When margIs this statem
Your friendof $480,000in business could put threstaurant bhis funds. Hannual wagestore.
A. Calrunn
ng informatio establish a cethods of pron cars.
Units o
y price of a uproduction tecosts; A, B, C
e most labou
lowing table
of s
MarginProdu
12
16
14
13
10
mplete the to
th which wor
aph the marg
ginal producment true or
d operates a v0. Each year taxes, and $3
he $80,000 hebusiness insteHe also estime of $90,000
lculate the toning the vari
on for the necar wash busduction, each
f Capital 2 4 6 8
unit of capitachnique shou, or D?
ur-intensive m
for this ques
nal uct
TotaProdu
otal product a
rker do dimin
ginal and aver
t is decreasinfalse? Why?
variety store he pays $25,350,000 on pe has investeead and earn
mates that he a0 if they work
tal explicit ciety store.
ext two questsiness. Your h of which w
Units of La
al is $60 and uld you choo
method of pr
stion.
al uct
AveraProdu
and average p
nishing retur
rage product
ng, average p?
that provides,000 in rent fproducts to sed in the storan annual 20
and his famiked somewh
costs and tota
tions. You arresearch has
will produce t
abour 20 15 11 8
the hourly wose in order t
roduction: A
age uct
product colu
rns occur?
t curves.
product is co
s an annual rfor the store,ell. He estim
re into his fri0 per cent prly could earnere other tha
al implicit co
re s isolated the same
wage is to
, B, C, or
umns.
onstant.’
revenue , $15,000
mates he end’s
rofit on n a total an the
osts of
6.
7.
8.
9.
10.
B. Wh
C. Wh
D. In was aGivindiofte
E. ShoWh
Identify eacfixed:
A. Dep
B. Lum
C. Pro
How does thscale) differ
Distinguish
Daily produnumber of w
(1) Labour
0 0
1
2 2
3 5
4 5
5 5
A. On grapcurv
B. On risemar
Suppose Hoits total costtotal cost offifth car?
hat is the acco
hat is the econ
what way is ean indicator oven the advanicator, explaien used in ac
ould your friehy?
ch of the follo
preciation ch
mber costs fo
perty insuran
he law of varr from the law
between eco
uction for Poworkers emp
Short-
(2)
Total Produc(pots/day)
0
100
280
510
560
540
one graph, dph, draw the ves. Explain
your graphses, where marrginal produc
onda’s total ct of producinf producing f
C5
ounting profi
nomic profit
economic proof the overalntages of ecoin why the c
ccounting.
end consider
owing short-
harges for a c
or a pulp-and
nce for a rest
riable proporw of diminis
onomies of s
t-Works, a flployed, as sho
-run Production
ct
Margi(po
draw the totamarginal prthe relations
, identify therginal product is negative
cost of produng five cars ifive cars? Wh
Economic Env
fit of the vari
t?
ofit superior l performanc
onomic profioncept of ec
r closing dow
-run costs as
construction
d-paper produ
taurant.
rtions (decreshing returns
cale and sco
flowerpot maown in the ta
for Pot-Works
(3)
nal Product ots/day)
al product curoduct and avships betwee
e ranges wheuct falls and ie.
ucing four cas $250,000. hat is the ma
vironment of B
ety store?
to accountince of this bust as a performonomic prof
wn this busin
either variab
firm.
ucer.
easing returnsto labour?
pe.
aker, varies wable below.
(4)
Average Prod(pots/day
rve. On anotverage produen these curv
ere marginal pis positive, an
ars is $225,00What is the a
arginal cost o
Business
151
ng profit siness? mance fit is not
ess?
ble or
s to
with the
duct y)
her uct ves.
product nd where
00 and average of the
Module 2
152
11.
12.
13.
14.
15.
16.
17.
How do retuindustries?
All of the foWhich is th
A. Mar
B. Thecust
C. The
D. The
E. The
When the dmarginal rev
A. the
B. the
C. a vesam
D. if th
E. the
A pure mon
A. sell
B. mak
C. with
D. with
E. all o
Which of th
A. pate
B. own
C. the
D. sub
A monopoli
A. incr
B. redu
C. redu
D. prod
The profit-m
urns to scale
ollowing, exce odd one ou
rginal revenu
e firm cannottomers.
e firm can se
e firm is a pri
e firm faces a
emand curvevenue is less
firm can sell
firm can onl
ery large numme product.
he firm raises
firm is beha
nopoly is bes
ling a produc
king short-ru
h a degree of
h a downwar
of the above
he following
ent rights.
nership of pr
possession o
stantial econ
ist who is pro
rease produc
uce price.
uce producti
duce where p
maximising m
influence th
cept one, areut?
ue equals ma
t raise the ma
ll as much as
ice taker.
a downward-
e facing the fs than price b
l more units
ly sell more u
mber of firms
s its price, it
ving as a pri
t defined as
ct for which t
un economic
f market pow
rd-sloping de
.
is not a barri
rivate proper
of a governm
nomies of sca
oducing whe
ction.
on.
price is equa
monopolist m
he size of bus
e true of the c
arket price.
arket price w
s it wants at
-sloping dem
firm is downbecause:
without low
units by low
s are produci
loses all its
ce taker.
a firm—
there are no c
profits.
wer.
emand curve
ier to entry?
ty.
ment franchis
ale.
ere MR is les
al to margina
must decide a
sinesses in ce
competitive m
without losing
the market p
mand curve.
nward sloping
ering its pric
ering its pric
ing essential
customers.
close substitu
e.
e.
ss than MC s
al cost.
all of the foll
ertain
model.
g all its
price.
g,
ce.
ce.
lly the
utes.
should—
lowing
18.
19.
Use
20.
21.
except—
A. outp
B. pric
C. the
D. the
A monopoly
A. it is
B. it hamar
C. it is
D. D. ireve
A natural msuch that—
A. P=M
B. MR
C. P=A
D. MR
e the diagram
When perfe__________
A. fall
B. fall
C. rise
D. rise
With a profishown by ar
put level.
ce level.
wage level.
combination
y is currently
s maximising
as reduced thrginal cost to
s maximising
it is producinenue equals
monopoly is u
MC.
R=MC.
ATC.
R = ATC.
m below to an
ectly competi____ and qua
to E, fall to
to E, rise to
e to F, rise to
e to F, fall to
fit-maximisinrea—
C5
n of inputs.
y maximizing
g total revenu
he differenceo zero.
g total revenu
ng at a point average cost
usually regul
nswer the nex
itive industryantity will __
G.
H.
H.
G.
ng monopolis
Economic Env
g profits. We
ue and minim
e between ma
ue and margi
in output wht.
ated to produ
xt six questio
y becomes a ___________
st, the net los
vironment of B
e can conclud
mising total c
arginal reven
inal revenue.
here margina
uce an outpu
ons.
monopoly, p____
ss of social w
Business
153
de that—
cost.
nue and
.
al
ut level
price will
welfare is
Module 2
154
22.
23.
24.
A. BD
B. BA
C. EAB
D. DC
To preserveto—
A. FBC
B. BA
C. FBA
D. AB
If this indusmonopoly, tmonopoly i
A. DB
B. AB
C. FBC
D. BA
If this indusbe shown by
A. AB
B. DC
C. FBA
D. FBC
F.
AC.
BF
E.
e the monopo
CE.
AC.
AE
DC.
stry was initithe amount os shown by t
C.
C.
CE.
AE.
stry were pery the area—
C.
E.
AE.
CE.
oly, this firm
ially perfectlyof consumer the area—
rfectly compe
m would be w
y competitivsurplus trans
etitive, consu
willing to spen
ve and then bsferred to the
umer surplus
nd up
became a e
s would
Asseessmen
t answe1.
2.
3.
4.
5.
ers Technique
A
B
C
D
Therefore, chosen. A icapital.
Clearly A iprevious qu
A.
NumbWork
1
2
3
4
5
B. With t
C. Diagra
False. Whe
A. Explic
Implic
B. Accou= $90,000
C. Econo $480,0
Tota
2 x
4 x
6 x
8 x
A is the leasis the least co
s the answeruestion.
ber of kers
MarPro
1
1
1
1
1
the third wor
am
en MP is decr
cit costs = $2
cit costs = ($
unting Profit
omic Profit =000 − ($390,
C5
al Cost
$60 + 20 x $
$60 + 15 x $
$60 + 11 x $
$60 + 8 x $
t expensive tostly because
r. This is com
rginal oduct
TPro
12
16
14
13
10
rker MPL beg
reasing, AP c
25,000 + $15
80,000 x 0.2
= TR – Expl
= TR – Total ,000 + $106,
Economic Env
$6 = $240
$6 = $330
$6 = $426
$6 = $528
technique ane labour is m
mpatible with
Total oduct
AvePro
12
28
42
55 13
65
gins to dimin
could be risi
,000 + $350
2) + $90,000
licit costs = $
costs (explic000) = −$16
vironment of B
nd hence it ismuch cheaper
h the answer
erage oduct
12
14
14
3.75
13
nish.
ng or falling
,000 = $390,
= $106,000
$480,000 - $
cits + implici6,000
Business
155
to be r than
to the
g.
,000
$390,000
its) =
Module 2
156
6.
7.
8.
9.
D. Econoincludfor. AnEconoalternapinpoifluctuaopport
E. Yes. Mdeposiinstead
A. fixed
B. fixed
C. variable
D. fixed
The law of diminishingall inputs arlatter is cau
Economiesas the levelthe cost of pproducing t
A.
(1) Labour
0
1
2
3
4
5
omic profit isding opportunny business d
omic profit isatives (opporint with accuate. It is true tunity costs c
My friend wiliting the capid.
decreasing rg returns to lre flexible an
used by keep
of scale arisl of productioproducing twthem separat
Sho
(2)
Total Prod(pots/da
0
100
280
510
560
540
s superior in nity costs of decision shos hard to meartunity costs)uracy, as they
that sometimcould be subj
ll be better oital investme
returns is a lolabour is shornd changed aing capital fi
se when averon increases.wo products jtely.
ort-run Producti
duct ay)
Ma
0
100
180
230
50
-20
that it is obtatime and capuld be based
asure because) are normally are market-mes an effortjective.
off working fent in a finan
ong-term phert-term. The at the same tiixed while ch
rage cost of p. Economies jointly is les
on for Pot-Work
(3)
rginal Product (pots/day)
ained after alpital, are accod on this notie the forgonely difficult to-driven and tt to determin
for someone ncial institutio
enomenon; thformer occu
ime, whereashanging labo
production dof scope aris than the co
ks
(4)
Average P(pots/d
0
100
140
170
140
108
ll costs, ounted on. e o tend to ne
else and on
he law of urs when s the our.
ecreases se when
ost of
Product day)
Diag
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
grams:
B. MP risunit 4
Average tot
Marginal co
When firmsexpand whiformer, deccompetitorsmarket. Thinumber of rauto, chemi
E is the anscurve.
B
E
B
C
C
D
C
D
ses between and become
tal cost = To
ost of 5th uni
s face increaile taking advcreasing avers out of the mis way the firremaining firical, and pha
swer. A perf
C5
0 and the this negative w
$
5
cos
total
it = 250,000
asing or constvantage of farage costs enmarket and crm grows in rms(if not th
armaceutical
fectly compe
Economic Env
ird unit of labwith unit 5.
5
000,250$
−225,000 =
tant returns talling or con
nable the firmapture a biggsize to beco
he only one). fall into this
etitive firm fa
vironment of B
bour. It falls
000,50$
$25,000.
to scale they nstant costs. Im to drive ger share of tme one of thIndustries su
s category.
aces a flat de
Business
157
with
can In the
the he small uch as
emand
Module 2
158
21.
22.
23.
24.
B
C
D
B