Download ECONOMIES OF SCALE When doubling on input

ECONOMIES OF SCALE
When doubling on input, more than doubles output it is called economies of scale .There are
external economies of scale as well as internal economies of scale. External depends upon size of
industry and internal depends upon size of individual firm.
Internal economies of scale breaks down perfect competition therefore we will take the case of
imperfect competition .
MONOPOLY
MR is lower than D because to sell more , the monopolist has to
cost & pric
Pm
lower the price of all units and not just one unit
AC
MC
D
Monopolist’s
Steep DD curev-inelastic
MC
Qty
Monopolist’s total sales
Q=A-B X P
q-no of units P-price A and B – constants
MR=P-Q/B
P-MR=Q/B
Therefore , the diff between P and MR depends on initial sales and slope parameter B large B implies
greater e1 more slope and less distance large Q implies more distances and therefore more change
in P req to change quantity.
AC AND MC AC is downward sloping implies economies of scale.
When AC falls MC also falls
C=F+C X Q
F=fixed cost
AC=F/Q+C c=variable cost
MC=C
MONOPOLISTIC
Each firm can differentiate their product from its competitors. The price charged by rivals is given
and does not affect the firm’s prices . Monopolistic competition is based on these 2 characteristics.
The firm would sell less if the member of firms in the industry are large and the firm is charging a
higher price.
Therefore Q=S X (1/n -b X (P-P’)
b-responsiveness of firm’s sales to price.
s-sales in industry
n-no of firms
p-price of firms
P’-price of others
Total sales(S) of the industry does not get affected by pie the firm can only gain a customer at the
expense of another firm.
Another assumption is that all firms in the industry are symmetric , that is , the demand and cost
functions of all firms are identical For the calculation , we need n and P’ which requires AC curve ,
which is upward sloping rt ton ie higher no of firms implies lower output and higher cost. Secondly ,
larger competition would push the price down and when any firms makes supernormal profit , other
firms have an incentive to enter.
1
AC=F/Q+C
2 We know
Q== A-BP
1
Or
MR=P-Q/B
Q= =(S/n +s x b x p’)
2
Comparing 1 and 2
A= s x b x p’ +s/n
And B= s x b
Therefore
MR= P-Q/SxB = C (Since MR=MC)
Or
P=c+Q/Sx B
And since all firms sell same amount therefore they will each sell Q=S/n
Therefore P=C+S/n X s x b
P=C+1/b xn
More n implies lower p implies downward sloping PP
And More NN implies higher cost implies upward sloping CC
CC
Cost and price
PP
Limitations
It only captures a situation where there are economies of scale(as n decreases AC decreases ) and
imperfect competition . But most industries are oligopolistic which we don’t study.
MONOPOLISTIC AND TRADE
1. In these industries by trading, firms can increase their size and therefore have economies of
scale implies larger sale/firm implies lower cost and higher variety .Because of larger market
lower prices and better variety.