Economics Notes Chapter 7

Costs of Production – all costs necessary for production to take place Fixed Costs – Costs of production that do not change with the amount produced You pay the same amount each month, regardless of how much you produce Ex Variable Costs – Costs that increase directly with the amount produced As you produce more, you need more resources Ex

Average Fixed Costs – Total fixed Costs divided by the number of products produced What happens to the Average Fixed cost as you produce more? The average should decrease as you produce more Average Variable Costs – Total variable costs divided by the number of products produced

What happens to the average variable costs as you produce more? The average should stay about the same If you are in business, do you have more ability to lower your average fixed cost or your average variable cost? AVERAGE FIXED COSTS

Businesses lower their Average Fixes Costs by.... Producing or Selling more goods over the same period of time. Ex. Putting more students in a class, machines that produce faster, Working longer hours Ex. Grocery stores and gas stations that stay open 24 hours, 3 – 8 hour shifts in factories, Using a school for split sessions or 12 months a year Diversification - Selling or producing a variety of different products Ex. Grocery stores sell more than food, Gas stations are often little mini marts

Perfect Competition – there is no control in the market place except supply and demand, Many producers, selling the same product, with free entry and exit to the market this is the best use of our resources because you produce the most at the lowest cost Ex. Grains, sugar, oil, heads of cattle, poultry, etc. (most is sold on the commodities market) stock market Competition is self regulating Competition creates better products at lower costs

Imperfect Competition – exists when businesses are large enough to have some control over the prices they can charge their customers. Imperfect Competition comes in degrees or 4 categories of Imperfect Competition

Monopolistic Competition – many producers of products that are almost the same, companies use their name and reputation through advertising to influence the market price Ex. Pop, clothing, fast food, health and Beauty aids

Oligopoly – a few producers of similar products with a high degree of interdependence between suppliers Ex. Cars, airlines, steel, gas companies There are oligopolies among the suppliers and all of the competitors need the same goods/services ex. Car manufacturing is relying on a few companies that produce the steel, paint tires and etc.

Natural Monopolies – one producer because it would be inefficient to have more than one company produce this product in the area. Ex. Natural gas, electric, water The government monitors natural monopolies and their prices to make sure that they do not take advantage of the consumer. ube.com/watch ?v=430OAJuh0 nk

Pure or Perfect Monopolies – one producer of a particular product that has no close substitutes. Ex. Monopolies are illegal except in the short run. If you create something new and innovative that no one else has produced, you can have a short term monopoly. However, in a very short time other producers will copy your item and come up with something similar if it is making money.

Regulatory Agencies – Government agency set up to regulate natural monopolies, so they do not become too powerful and take advantage of the Consumer Prices can not be increased without approval from the regulatory agency Public meetings must be held to openly discuss an increase in prices Workable Competition – balance between the advantages of competition and imperfect competition.

Antitrust Policy – Government action taken to eliminate monopoly power and encourage competition. Sherman Antitrust Act of 1890 – Most important antitrust law, still cited today in antitrust legislation

Deregulation – elimination of some government laws and regulations The government has deregulated a number of natural monopolies in an effort to increase competition in the market. Ex. airlines were deregulated in 1978 Long distance phone service in 1983 Local phone service in 1997 Electric power in 1996 Natural gas in 1996

The government also has the responsibility of preventing companies from becoming monopolies. Ex. Staples and Office Depot wanted to merge their companies together in 1999 and the government denied them the ability to do so. At&t was allowed to merge with Cingular but was not allowed to merge with T-Mobile a few months later.

Economies of Scale – advantages of big business Buy it in bulk which is cheaper Ex. Walmart can charge less than most competitors because they buy such a large quantity. NTHS gets a better price on textbooks because we have so many students Specialization – the company is large enough to have specialized individuals or departments. Ex. Design, manufacturing, packaging, sales, etc. Lower Average Fixed Costs – producing at a lower cost More money for research and Development – which allows companies to stay on the “cutting edge” watch?v=x_Dy1uo6PJU Silly video – Conan O’Brian

Diseconomies of Scale – Disadvantages when business become too big Less ability to coordinate or organize Less personal care Less commitment to the firm by the employees Less ability to meet specialized needs of customers

How can businesses diminish the Diseconomies of Scale? 1. Employee Rewards Ex. Scholarship, bonus checks, preferred parking, stock options, etc. Business hierarchy – Ex. Superintendant, Principal, Vice Principal, Teachers CEO, V.P., Division Managers, Plant Managers, Forman, etc