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