10 Costs

Market Power¶

It is the power of firms to control their selling price. It allows them to determine their own profits. It depends on

• type and intensity of competition
• costs of production
  • this influences the type of competition in market, because it is cheaper for one firm to produce at a larger scale
  • big companies threaten small by lowering their price, to make them run out of business; otherwise acquire their company
  • eg: Facebook-Instagram

Sometimes, consumer may have greater market power. This occurs when there is only a sole consumer, but many sellers eg: Dubai Metro

Competition in markets¶

Monopoly¶

1 seller

Duopoly¶

2 sellers

Oligopoly¶

few sellers have control, but not as much as monopoly

eg: telecom

Monopolistic¶

there are large no of sellers

but no of sellers is small enough that if one seller changes their price, other sellers will tend to change their price also in reaction

eg: aviation industry, snacks

Perfectly-competitive Market¶

best for consumers

when there are large no of sellers and buyers

• no of sellers large enough such that change in price by one seller should not affect other sellers’ decision
• no of buyers large enough such that decision by one buyer should not affect other buyers’ decision

if sellers inc price, then the demand for their product becomes 0, as no one will be willing to buy from them.

eg

• agricultural industry
  • one farmer stops producing rice does not affect other rice farmers
• food consumption
  • one buyer stops eating rice does not affect other buyers of rice

Profit Maximization¶

Every company tries to maximize its profit.

Profits can be maximized by cost minimization through optimization of input mix. The input mix depends on

1. productivity of input factor (high is preffered)
2. price of input factor (low is preffered)

Labor is preferred due to lower price; capital is preferred due to higher productivity

$$ \text{Profit}_\max = \max_p \Bigg{ p q_m - c \Big( q_m(p) \Big) \Bigg} \ \implies c'(q_m) = p_m + \dfrac{q_m}{q'_m(p_m)} $$ where

• \(p\) is unit sale price
• \(q(p)\) is units sold
• \(c \Big( q(p) \Big)\) is cost
• \(c' \Big( q(p) \Big)\) is the marginal cost

Problem with Capitalism¶

humans are getting replaced by machines. This is causing consumers to run out of money. Wealth is heavily-skewed, to the point that consumers cannot buy anymore. Most recessions have been due to low demand, not low supply

Producers produce for themselves, by themselves

Karl Marx said

Capitalism

Efficiency¶

input mix is said to be

• Economically efficient if the costs associated with an input mix is minimal
• Technically efficient if it is impossible to maintain the same output, without keeping the same inputs if any input decreases, the output also decreases
  • in india, we have a technically inefficient agricultural sector. This is proved by the fact that: even though many people moved to tertiary sector, it did not affect agricultural output

Costs¶

Total cost = explicit + implicit

Explicit costs are direct. eg: raw materials, labor costs

Implicit costs are indirect. eg:

1. i work in my own restaurant. I lost my time, which could’ve been used somewhere else like some other restaurant/company
2. investing in your company. I could’ve invested it somewhere else, which could’ve earned me more money

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