firm’s costs and industry structure class 3 technology and cost. ref: technology and cost. chapter...
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Firm’s Costs and Industry Structure
Class 3
Ref: Technology and Cost.Technology and Cost. Chapter 4. Industrial Organization – Contemporary Theory & Practice. Third Edition. Pepall – Richards - Norman. Thomson Ed. pp. 59-81
Industrial Economics
Flavio Pinto
Contents
Introduction Production Costs Cost Structure and Competition Costs and Market Structure Economies of Scale Costs and Multiproduct Firms
Contents
Introduction
Technology and Cost
Cost Structure and Competition are important for determining industry structure
Examples:
• Kellogs, General Mills, General Foods and Quaker Oats: 80% share of cereal market
• The larger 4 firms of games and toys account for 35% - 45% of the share
What explains the differences in market structures?
Technology and Cost
kxxxfq ,..., 21
kk xwxwxwC ...2211
Neoclassical View of the Firm
Technology: Production relations that establish the proportions of inputs that have to be allocated for producing a given amount of outputs
Cost:
Objective: minimize Cost:
FqCqTC
Costs
q
FqAVCqAC
q
FqCqAC
FqCqTC
Concepts of Cost
Total Costs
Average Costs
Marginal Costs
dq
qdC
q
qTCqMC
Cost Structure and Competition
Cost and Competition
No Fixed Costs:
qi
qj
No Fixed Costs:
qi
qj
Cost Structure and Production Decisions
Cost and Production Decisions
$
qj
Costs and Market Structure
Relationships between some concepts of Cost
Output Total Cost Average Cost
Marginal Cost
Scale Economy
Index
5 725 145
6 816 136 96 1,42
7 917 131 104 1,26
8 1024 128 113 1,13
9 1143 127 123 1,03
10 1270 127 132 0,96
11 1408 128 151 0,85
12 1572 131
Cost Structure Economies of Scale
Economies of Scale
S:
Cost Structure Economies of Scale
Economies of Scale
Practice Problem 4.1 (p. 67)
Cost Structure Economies of Scale
Economies of Scale
Practice Problem 4.2 (p. 67)
€
C = 50 + 2q+ 0,5q2
a) Find AC, plot AC(q=4,8,10,12,15)b) Find MC
c) Compute S
Cost Structure Economies of Scope
Economies of Scope
Practical Problem
Economies of Scope
Laura Rafaela produces several products, blouses q1 and eau de roses q2.
€
C q1,0( ) = 2 + q1
C 0,q2( ) = 2 + q22
C q1,q2( ) = 3+ q1 + q22
a) Show that production of blouses holds scale economies but eau de roses desn‘t. Is there a like monopoly for the production of eau de roses?
b) Show that there are scope economies
Problems
Economies of Scope
1. Let the cost function . Derive a expression for AC, MC. Economies of Scale? Up to which point?
€
C q( ) =100 + 4q+ 4q2