Economies of Scale and Market Structure

Market structure
Production in the Short Run versus Production in the Long Run

In the short run at least one of the factors of production remains unchanged (fixed). In the long run all factors of production are variable. In a two-input production process, in the short run, only one input is variable. In a two-input production model, in the short run, the changes in the output (physical product) are the result of changes in the variable input.
Short Run ATC, AVC & SMC Cost Curves
LATC
K= 10 L= 6
.82
K= 20 L= 7
.53 .51
K= 30 L=8
LATC
61
141
195
Long-Run Average Total Cost

Rs. (SATC)1
(SATC)2
(SATC)3
LATC 0
Economies and diseconomies of scale

Economies of scale refers to the phenomena of decreased per unit cost as the number of units of production increase.
The initial investment in capital is diffused through an increase in production, and the marginal cost of producing a good or service decreases when each additional unit of production is added.
Economies of scale means a reduction in the per unit costs of a product as a firm's production increases.
Where do Economies of Scale Occur Most?

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

These are economies made within a firm as a result of mass production. As the firm produces more and more goods, the average cost begin to fall because of:
Technical economies made in the actual production of the good. For example, large firms can use expensive machinery, intensively. Managerial economies made in the administration of a large firm by splitting up management jobs and employing specialist accountants, salesmen, etc.
Financial economies made by borrowing money at lower rates of interest than smaller firms.
Marketing economies made by spreading the high cost of advertising on television and in national newspapers, across a large level of output.
Commercial economies made when buying supplies in bulk and therefore gaining a larger discount.
Research and development economies made when developing new and better products.
Internal Economies of Scale

Technical Economies of Scale
The Law of Increased Dimensions Cubic law can be applied where cubic volume increases more than proportionate to surface area Economies of linked processes Production processes can be linked together with one integrated plant important in mass production which requires complex manufacturing processes Large-scale indivisible units of capital machinery Capable of high productivity
Huge units of capital require a vast output in order to reduce the average cost per unit
Specialisation and Division of Labour
Diseconomies of scale
Diseconomies of scale are the forces that cause larger firms to produce goods and services at increased per-unit costs.
Internal Diseconomies of Scale

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

These occur when too many firms have located in one area Local labour becomes scarce and firms now have to bid wages higher to attract and retain new workers Land and factories become scarce and rents begin to rise The local traffic infrastructure become congested and so transport costs begin to rise
Market structure
the number of firms producing identical products
Market structure and price determination

Market structure in the basis of competition
Perfect competition Imperfect competition Monopoly
Perfect competition
Large number of producers offer a homogeneous product to a very large number of buyers of the product Example: stock exchange
Perfect competition
Features:
Large no. of buyers and sellers Homogeneous product Perfect mobility of factors of production Free entry and free exit Perfect knowledge about the market conditions No government interference Absence of collusion and independent decision making
Perfect vs. pure competition

Perfect competition minus perfect mobility and knowledge = pure competition
Imperfect competition
A number of firms sell identical or differentiated products with some control over the price of their products Example : jobless recovery. Price of candidates post recession. Types
Monopolistic competition Oligopoly Duopoly
Monopolistic competition
many competing producers sell products that are differentiated from one another (that is, the products are substitutes, but, with differences such as branding, are not exactly alike) Example: restaurant , clothing etc.,
Oligopoly
A few are sellers Differentiated or homogeneous products. Characteristics:
Intensive competition Interdependence of business decisions Barriers to entry Examples: Aviation, Communication, etc
Duopoly
A situation in which two companies own all or nearly all of the market for a given type of product or service. Example: visa and master card, politics
Monopoly
Indian opium that the drug is chiefly supplied to the world Government monopoly OG&E , Oklahoma Gas & Electric Company Indian railway organization Some medicine companies
Pure Monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes Characteristics
Single Seller - a one producer of a specific product No Close Substitutes - no reasonable alternative products "Price Maker" - the firm exercises considerable control over price because it is responsible for the quantity supplied. Totally Blocked Entry - no competitors because of economic, technological, legal obstacles Advertising - monopolies may or may not advertise
monopolist selling luxury good can advertise to increase demand monopolist selling utilities/necessities will not advertise
Sources and types of monopoly

Legal restrictions Control over key raw materials Efficiency Patent rights
Price determination
Price discrimination
First degree: to take away the entire consumers surplus Second degree: different prices to different economic class of consumers Third degree: total output is divided into the markets and pricing done accordingly to maximize profit Normal autos running as share auto. From 1 he can charge Rs.100 and from next he can take just Rs.10
Monopsony, in which there is only one buyer of a good. Oligopsony, in which there is a small number of buyers.

Economies of Scale and Market Structure

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Economies of Scale and Market Structure

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Market structure

Production in the Short Run versus Production in the Long Run

Short Run ATC, AVC & SMC Cost Curves

Long-Run Average Total Cost

Economies and diseconomies of scale

Where do Economies of Scale Occur Most?

Types of Economies of Scale

Internal Economies of scale

External Economies of scale

Internal Economies of Scale

Internal Economies of Scale

Internal Diseconomies of Scale

External Diseconomies of Scale

Market structure and price determination

Perfect vs. pure competition

Sources and types of monopoly

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