Firm

1
Firms 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

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

3
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
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
Costs

• Total Costs
• Average Costs
• Marginal Costs

6
Cost Structure and Competition

• No Fixed Costs

• No Fixed Costs

7
Cost Structure and Production Decisions
8
Costs and Market Structure
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
9
Cost Structure Economies of Scale
S
10
Cost Structure Economies of Scale
Practice Problem 4.1 (p. 67)
11
Cost Structure Economies of Scale
Practice Problem 4.2 (p. 67)
a) Find AC, plot AC(q4,8,10,12,15)
b) Find MC
c) Compute S
12
Cost Structure Economies of Scope
13
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 desnt. Is there a
like monopoly for the production of eau de roses?
b) Show that there are scope economies
14
Problems

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