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

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

Introduction Technology and Cost 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?

Technology and Cost Neoclassical View of the Firm 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:

Costs Concepts of Cost Total Costs Average Costs Marginal Costs

Cost Structure and Competition Cost and Competition No Fixed Costs: qiqi qjqj qiqi qjqj

Cost Structure and Production Decisions Cost and Production Decisions $ qjqj

Costs and Market Structure Relationships between some concepts of Cost OutputTotal CostAverage Cost Marginal Cost Scale Economy Index , , , , , ,

Cost Structure Economies of Scale Economies of Scale S:

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

Cost Structure Economies of Scale 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

Cost Structure Economies of Scope Economies of Scope

Practical Problem Economies of Scope 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

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