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Session 5 - EGMP-06 - ME-1

IIM EGMP COURSE

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Shlokaa Upadhyaya
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6 views18 pages

Session 5 - EGMP-06 - ME-1

IIM EGMP COURSE

Uploaded by

Shlokaa Upadhyaya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Post Graduate Certificate Program in

Executive General Management (eGMP-06)

SESSION 5

Managerial Economics
• The Shapes of the Cost Curves

COST CURVES FOR A FIRM


In (a) total cost TC is the vertical sum
of fixed cost FC and variable cost
VC.
In (b) average total cost ATC is the
sum of average variable cost AVC
and average fixed cost AFC.
Marginal cost MC crosses the
average variable cost and average
total cost curves at their minimum
points.
In a short-run production process, the marginal cost is rising and the average total
cost is falling as output is increased. Thus, marginal cost is:
A) below average total cost.
B) above average total cost.
C) between the average variable and average total cost curves.
D) below average fixed cost.
Answer: A

Which of the following costs are always increasing as output increases?


A) Marginal Cost only
B) Fixed Cost only
C) Total Cost only
D) Variable Cost only
E) Total Cost and Variable Cost
Answer: E
An isocost line is a graph showing An isoquant curve is a curve that shows
various possible combinations of inputs various combinations of two factors of
(labor and capital) that can be production that a firm can use in order to get
purchased for an estimated total cost. the same total output.

Condition for Equilibrium


At point of tendency slope of isocost line (w/r ) = slope of isoquant.
The isoquants should be convex to origin
4
Case I Case II
Maximization of output subject Minimization of cost for given
to cost constraint level of output

5
● economies of scale Situation in which output can be doubled for
less than a doubling of cost.

● diseconomies of scale Situation in which a doubling of output requires


more than a doubling of cost.

Economies of scale are often measured in terms of a cost-output elasticity, EC. EC is the
percentage change in the cost of production resulting from a 1-percent increase in output:

𝐸𝐸𝐶𝐶 = ∆C⁄C ⁄ ∆𝑞𝑞⁄𝑞𝑞


Economies of Scale

1.Automobile Manufacturing (Toyota, Ford)


1. Example: Large automobile manufacturers like Toyota and Ford benefit from economies of scale. As
they increase production, they can spread the high fixed costs of factories, machinery, and R&D over a
larger number of vehicles. Additionally, they can negotiate better prices for bulk purchases of raw
materials and components, further reducing costs.
2.Technology Companies (Amazon, Google)
1. Example: Amazon benefits from economies of scale by spreading the costs of its massive data centers
and logistics network over millions of transactions. Similarly, Google spreads the cost of developing its
search algorithms and infrastructure over billions of users, reducing the average cost per search.
Diseconomies of Scale
1.Fast Food Chains (McDonald's)
1. Example: McDonald's, when expanding rapidly, sometimes faces diseconomies of scale related to
maintaining consistent quality and service standards across all locations. The complexity of managing
a large number of franchises can lead to inefficiencies.
2.Manufacturing Giants (Boeing)
1. Example: Boeing has faced diseconomies of scale with its large-scale operations. The complexity of
managing a vast supply chain, coordinating numerous suppliers, and ensuring quality control across
multiple production sites can lead to increased per-unit costs.
• Economies and Diseconomies of Scope
● economies of scope Situation in which joint output of a single firm
is greater than output that could be achieved by two different firms when each
produces a single product.
● diseconomies of scope Situation in which joint output of a single firm is less
than could be achieved by separate firms when each produces a single product.
Economies of Scope
1.Tata Group:
1. Automobiles and Steel Production: Tata Group produces both automobiles (Tata
Motors) and steel (Tata Steel). Shared resources like raw material sourcing, R&D,
and brand recognition across different sectors help reduce costs.
2.Apple:
1. Electronics and Software Services: Apple designs and sells hardware products
like iPhones, iPads, and MacBooks while also offering software services like
iCloud and Apple Music. By integrating hardware and software development,
Apple reduces overall production costs and enhances customer loyalty.

Diseconomies of Scope
1.Reliance Communications and Reliance Power:
Telecommunications and Energy: Reliance's expansion into telecommunications and
power sectors faced diseconomies of scope due to the differing regulatory
environments and operational requirements. The complexity of managing these
diverse sectors led to inefficiencies.
A firm produces two products, G and H. The standalone cost of producing 400
units of G is ₹16,000 and 300 units of H is ₹12,000. When produced together,
the cost is ₹25,000. What does this indicate?
•A. Economies of scope of ₹3,000
•B. Diseconomies of scope of ₹3,000
•C. Economies of scope of ₹7,000
•D. Diseconomies of scope of ₹7,000
Answer: A. Economies of scope of ₹3,000
Topic: Market Structure: Perfect Competition,
Monopoly, Monopolistic Competition and Oligopoly
The Four Types of Market Structure

Number of Firms?

Many
firms

Type of Products?

One Few Differentiated Identical


firm firms products products

Monopolistic Perfect
Monopoly Oligopoly Competition Competition

• • • •
• • • •

Copyright © 2004 South-Western


Characteristics of Perfect Competition
 There are large number of buyers and sellers.
The products sold by the firms in the industry are identical.
Both buyers and sellers are price takers.
Entry into and exit from the market are easy, and there are many potential entrants.
Buyers (consumers) and sellers (firms) have perfect information.

The concept of perfect competition however is useful because it functions as


standard to measure the efficiency and effectiveness of real-world markets.

13
Examples of perfect competition
In the real world, it is hard to find
examples of industries which fit all
the criteria of ‘perfect knowledge’
and ‘perfect information’. However,
some industries are close.
1.Foreign exchange markets.
2.Agricultural markets.
3.Internet related industries.
Reasons for Monopoly Forming
Monopolies or near monopolies typically develop because of one of more of the following:
1. Intellectual Property Protection 2. Patents and Licenses

3. Distribution Network
4. Exclusive Rights

6. Proprietary Technology

5. Economies of Scale
7. Barriers to Entry
A classic example of a monopoly based on resource control is De Beers.
Diamond: De Beers controls the majority of the world’s diamond reserves, preventing
other players from entering the industry and setting a high price for diamonds.
Legal Barriers
The government creates legal barriers through patents, copyrights, and granting
exclusive rights to companies.

8. Government monopoly and a government-granted


monopoly
Indian Railways

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