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Firm’s Costs and Industry Structure

Firm’s Costs and Industry Structure. Class 3 Ref: 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. Contents. Introduction

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Firm’s Costs and Industry Structure

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  1. Firm’s Costs and Industry Structure Class 3 Ref: Technology and Cost. Chapter 4. Industrial Organization – Contemporary Theory & Practice. Third Edition. Pepall – Richards - Norman. Thomson Ed. pp. 59-81 Industrial Economics Flavio Pinto

  2. Contents Contents • Introduction • Production Costs • Cost Structure and Competition • Costs and Market Structure • Economies of Scale • Costs and Multiproduct Firms

  3. Technology and Cost Introduction • 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?

  4. Neoclassical View of the Firm Technology and Cost • 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:

  5. Concepts of Cost Costs • Total Costs • Average Costs • Marginal Costs

  6. qi qi qj qj Cost and Competition Cost Structure and Competition • No Fixed Costs: • No Fixed Costs:

  7. $ qj Cost and Production Decisions Cost Structure and Production Decisions

  8. Relationships between some concepts of Cost Costs and Market Structure

  9. Economies of Scale Cost Structure Economies of Scale S:

  10. Economies of Scale Cost Structure Economies of Scale Practice Problem 4.1 (p. 67)

  11. Economies of Scale Cost Structure Economies of Scale Practice Problem 4.2 (p. 67) a) Find AC, plot AC(q=4,8,10,12,15) b) Find MC c) Compute S

  12. Economies of Scope Cost Structure Economies of Scope

  13. Economies of Scope Practical Problem • Laura Rafaela produces several products, blouses q1 and eau de roses q2. 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

  14. Economies of Scope Problems Let the cost function . Derive a expression for AC, MC. Economies of Scale? Up to which point?

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