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POE

UNIT 3

Production

Q1) Explain factors of production

A1) The primary purpose of economic activity is to produce utility for individuals. Business firm are the important component of the economic system. The business firm purchase the factors of production such as land , labour, capital, etc from households , other business firm and government to produce different goods and services which it sells to its customers.

Definition

According to Bates and Parkinson:

“Production is the organized activity of transforming resources into finished products in the form of goods and services; the objective of production is to satisfy the demand for such transformed resources”.

Factors of production

Production of a commodity requires the use of certain factors of production. Factors of production transforms those resources into different goods or services which is made available to the end user

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Classification of factors of production

Classification of Factors of Production

Land and natural resources

In economics land refers to natural resources or gift from nature

Definition

“Land in economics is taken to mean not simply that part of the earth’s surface not covered by water, but also all the free gifts of nature’s such as minerals, soil fertility, as also the resources of sea. Land provides both space and specific resources”.

Land does not include only land surface, it also includes rivers, lakes, fish in the sea, heat from sun to dry grapes and change them into resins, rain to grow crops, so on

land can be residential, commercial, recreation, cultivation, extraction, uninhabitable

Characteristics

Fixed supply – the total area of earth is fixed. The supply of land is limited. Thus the price of land and natural resources tends to be sensitive to changes in consumer demand. In today’s context land price is increasing sharply

Alternative uses – since the total supply of land is fixed, land has alternative uses. The land can be used for constructing factories, building, or to grow wheat, vegetables, etc. the same land is used for many purposes

No cost of production – land has no cost of production as it is the gift of nature. No cost is incurred in creating the natural resources. Thus, from the society point of view the reward from land is the rent (surplus income
). But today much of the services of land require expenditure to maintain them.

Differences in fertility – land are not equally productive. It is not homogenous in nature. Some lands are more fertile than others

Immobility – the land and natural resources cannot be moved. It is fixed in nature

Return

The income received by the owner of land is called rent. Rent paid is more than the use of land. It also included payment of other factors which involves in making the resources available to the end user.

2. Labour

Labour is an important factors of production. All human efforts that help in production is labor. The effort of labor can be physical or mental which is used for the production of goods are services

Definition

According to Marshall, “Any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the work is called labor.”

Labour can be unskilled, semi skilled, skilled, professional

Characteristics

Labour cannot be separated from labourer – labour and the labourer go together. When a commodity is sold seller does not go with it. But when the labors supply his services he goes with it. He will gain the satisfaction of his services but cannot be separated from labour.

Labour service is not transferable – when a person takes the task , he cannot transfer his service to someone else to do the task, while he does something else

Labour service cannot be stored – labour cannot store his services for the future use.

Labour is perishable- if the labour is not able to sell his service today, then he will not get the value for that day because labour has weak bargaining power

Labour is affected by surroundings – labour is a living being, any change in atmosphere can affect the labour health, feelings, etc

Training – labour service can be enhanced by giving training. It is lengthy and costly process

Mobility - labour move between geographical regions to earn more wage (eg – worker from Odisha moving to Hyderabad). They also change occupation to earn more wages (ex – Jute mill worker joining tea garden).

Return

The reward paid in return for the services of labour is called as wage or salary. Supply of labour depends on their wages. Increase in wages will lead to increase in supply of labour.

3. Capital

Capital is one of the important factors of production as without the involvement of capital, production cannot take place.

Definition

‘Produced means of production.’

Capital refers to manmade resources used in the production process

Tools and machinery, bullocks and ploughs, seeds and fertilizers, etc. are examples of capital.

Capital are of three types fixed, working and venture

Characteristics

Capital formation – capital goods are the creator of other goods. Capital goods like machinery are used to produce goods with less effort and lower cost. We have to first produce capital goods to use them. This calls for a sacrifice of current consumption.

Mobility – capital is mobile in both geographically and occupationally. For example, electric motor can be moved from one place to another.

Return

The earning of capital is known as interest. It is the sum paid by the borrower to the lender who needs finance to purchase capital equipment

4. Enterprise

The enterprise brings land, labour and capital together at one place and uses them for the production process.

The person who creates enterprise is called entrepreneur

He is the one who decides what, where and how to produce

Definition

An entrepreneur is a person, who undertakes risks, mobilizes resources, and generates employment by establishing and running an enterprise.

Characteristics

Decision maker – an entrepreneur decides what to produces, where to produce, how to produces, how much to produce, so on. He decides the scale of production and in which proportion to use different factors of production. He should assess the risk and estimate the profitability.

Creativity – the ability of an entrepreneur to bring new ways to run a business. He should verify the new idea before implementing it.

Self motivation – an entrepreneur can be successful if he is motivated to accomplish his goals. He should look for new opportunity and take necessary actions to achieve them

Time management – an entrepreneur can be successful if he manages his time efficiently and effectively

Problem solving – the ability to solve the problem rather than avoiding them. He should identify the problem and search new ideas to solve them

Flexibility – he should be flexible with the changing market place, strategies of competitors, preference of consumers.

Return

The return to the entrepreneur is profit. Profit is the reward for successful conduct of business.

Q2) Explain law of variable proportion

A2) Law of variable proportion

The law of variable proportion states that keeping all other factors fixed, when the quantity of one factor increased, the marginal product of that factor will eventually decline. This means that upto the use of a certain amount of variable factor, marginal product of the factor may increase and after a certain stage it starts diminishing. When the variable factor becomes relatively abundant, the marginal product may become negative.

Definition

“As the proportion of the factor in a combination of factors is increased after a point, first the marginal and then the average product of that factor will diminish.” Benham

Assumption

The following assumption of law of variable proportion

The state of technology is assumed to be constant

Fixed amount of other factors

The law is based upon the possibility of varying the proportions in which the various factors can be combined to produce a product.

Illustration of the Law:

The law of variable proportion is explained in the below given table and figure. Assume that a there is a given fixed amount of land, in which more labour (variable factor) is used to produce agricultural product.

Units of labour	Total product	Marginal product	Average product
1	2	2	2
2	6	4	3
3	12	6	4
4	16	4	4
5	18	2	3.6
6	18	0	3
7	14	-4	2
8	8	-6	1

In the above table we can observe that upto the use of 3 units of labour, total product increases at an increasing rate. But after the third unit total product increases at a diminishing rate.

A marginal product is the incremental change in total product as a result of increasing the variable factor i.e labour. We can see from the table, marginal product of labour initially rises and beyond the use of third unit it starts diminishing. The use of 6 units does not add anything in the production. Thus marginal product of labour fallen to zero. After the 6 unit, total product decreases and marginal product becomes negative.

Average product is derived by dividing total product by the quantity of variable unit. Till the 3 unit of labour, average product increases. Whereas after the 3 unit, average product is falling throughout.

Three Stages of the Law of Variable Proportions:

The stages are discussed in the below figure where labour is measured on the X-axis and output on the Y-axis.

law-of-variable-proportion

Stage 1. Stage of Increasing Returns:

In this stage, total product increases at an increasing rate till point F..ie the curve TP concave upwards upto point F which means marginal product of labour rises. Because efficiency of fixed factor increases with the increase in variable facto labour. After point F, the total product starts increasing at a diminishing rate. Looking at the next figure, marginal product of labour is maximum, after which it diminishes. This stage is called the stage of increasing returns because the average product of the variable factor labour increases throughout this stage. This stage ends at the point where the average product curve reaches its highest point.

Stage 2. Stage of Diminishing Returns:

The stage 2 ends, when the total product increases at a diminishing rate until it reaches it maximum point H. In this stage both marginal product and average product are diminishing but remain positive. Because fixed factor land becomes inadequate with the increase in the quantity of variable factor labour. At point M marginal product is zero which corresponds to the maximum point H of the total product curve.

Stage 3. Stage of Negative Returns:

In stage 3, with the increase in variable factor labour, the total product decline. Therefore the TP curve slopes downward. As a result, marginal product of labour is negative and MP cure falls below x axis. In this case fixed factor land becomes too much inadequate to the increase in variable factor labour.

Three Stages of Law of Production Function

Q3) Explain returns of scale

A3) Return of scale

In long run, no factors are fixed. Return of scale refers to proportionate change in productivity from proportionate change in all the inputs.

Definition:

“The term returns to scale refers to the changes in output as all factors change by the same proportion.” Koutsoyiannis

“Returns to scale relates to the behaviour of total output as all inputs are varied and is a long run concept”. Leibhafsky

Types of return of scale

1. Increasing return of scale

2. Constant return of scale

3. Diminishing return of scale

Explanation

Increasing return of scale

When proportionate increase in factors of production leads to higher proportionate increase in production refers to increasing return of scale.
In the below figure, x axis represent increase in labour and capital while Y axis represent increase in output. When labour and capital increases from Q to Q1, output also increases from P to P1 which is higher than the change in factors of production ie labour and capital

2. Diminishing return of scale

Diminishing return refers to percentage increase in factors of proportion leads to smaller proportion increase in the output

For instance, 30% increase in variable input (labour and capital) result in 10% increase in output.

In the below diagram, x axis refers increase in labour and capital while Y axis refers increase in output. Percentage increase in labour and capital from Q to Q1 results in less percentage change in output from P to P1

3. Constant return of scale

Constant return of scale refers to output increases in same proportion in which factors of production (labour and capital) increases.

Internal and external economies is equal to internal and external diseconomies

This is known as homogenous production function

In the below figure, x axis refers increase in labour and capital while Y axis refers increase in output. Increase in labour and capital from Q to Q1 is equal to the increases in output from P To P1

Q4) Explain cost curve

A4) Short run cost

Short run cost is the cost where the quantity of one input is fixed and the quantity of other input varies. In this case, the land and machinery is fixed where as the other factors such as labour and capital vary with time. Thus expansion is done in hiring more labour and increasing capital.

Total fixed cost (TFC)-

Total fixed cost remains fixed in short run period. The cost does not change with the change in the level of output.

These costs are also called indirect costs, overhead costs, historical costs, and unavoidable costs.

Definition

In the words of Ferguson, “Total fixed cost is the sum of the ‘short run explicit fixed costs and implicit costs incurred by the entrepreneur.”

From the above figure , we can see TFC curve is horizontal to X axis.TFC remains constant with proportionate change in the output.

2. Total variable cost

Refers to the cost changes with the change in the level of output.

Ex – cost incurred in purchase of raw material, hiring labour, etc

Definition

According to Ferguson, “total variable cost is the sum of amounts spent for each of the variable inputs used”

If the output is zero, total variable cost is zero.

These costs are also called prime costs, direct costs, and avoidable costs.

In the above figure, TVC changes with the change in the level of production

3. Total cost

TC = TFC+TVC

Total cost is the sum of fixed and variable cost. It changes with the change in the level of production

In the above fig, initially total cost increases at diminishing rate, means the rate of cost increases with respect to less output. Later total cost increases at increasing rate, as cost increases with respect to output is more.

4. Average fixed cost (AFC)–

Refers to fixed cost of production divided by the quantity of output produced.

AFC= TFC/Output

AFC curve is declining in the above figure. The TFC remains constant as production increases, thus AFC falls

5. Average variable cost (AVC)

It refers to total variable cost divided by total production

AFC = TVC/Output

AVC decreases as the output increases. But after a point, AVC increases as the output increases. Thus, it is U shaped curve

6. Average cost of production (AC)

Refer to the total costs of production per unit of output.

AC= TC/Output

AC is also equal to the sum total of AFC and AVC. AC curve is also U-shaped curve as average cost initially decreases when output increases and then increases when output increases.

7. Marginal cost (MC)

Refers to change in total cost of production on addition unit of the product.

MC = proportionate change in TC

Proportionate change in output

In the above figure, we can see marginal cost initially decreases as output increases and later, rises as output increases. Thus, MC curve is also a U-shaped curve

Long run cost

In long run, all the factors of production vary. Long run is period in which all cost change as all the factors of production are variable. To produce at a lower cost in long run, the organization should have the ability to change the factors of production. There is no difference between TC and TVC as there is no fixed cost.

Long run total cost (LTC)–

It refers to the minimum cost at which a given level of output can be produced.
Definition

According to Leibhafasky, “the long run total cost of production is the least possible cost of producing any given level of output when all inputs are variable.”

LTC is always less than or equal to short run total cost (STC), but it is never more than short run cost.

In the above figure, STC 1,2,3 is the cost at different plant size. The LTC curve is made by joining the minimum points of STC curves.

2. Long run average cost (LAC)

It refers to long run total cost divided by the output.

The long run average costs curve is also called planning curve or envelope curve as it helps in making plans for expanding production and achieving minimum cost.

In the above figure, LAC is derived from the short run average cost(SAC) curve. The organization will operate on the SAC2 plant as it entails lower cost than SAC1. If organization wants to produce more output, then it will be beneficial to produce at SAC3 than SAC2.

LAC curve first falls then rises, so it is U shaped curve

3. Long run marginal cost (LMC)-

Long run Marginal Cost (LMC) is defined as added cost of producing an additional unit of a commodity when all inputs are variable.

LMC is derived from SMC

On the graph, Output A,B,C intersects SMC at P,Q,R. LMC is drawn by joining P,Q and R respectively which is the tangency between LAC and SAC.

Q5) Explain concept of revenue

A5) The term revenue refers to income obtained by the firm through sale of goods and services at different prices

Definition

In the words of Dooley, ‘the revenue of a firm is its sales, receipts or income’.

Revenue are of 3 types as given below

Concepts of Revenue

Total Revenue

Income received by the seller after selling the output is called total revenue
“Total revenue is the sum of all sales, receipts or income of a firm.” Dooley
TR = Q x P

Where,

TR – Total Revenue

Q – Quantity of sale (units sold)

P – Price per unit of output

2. Average Revenue

Refers to revenue earned by the seller be selling the per unit of commodity

“The average revenue curve shows that the price of the firm’s product is the same at each level of output.” Stonier and Hague

AR=TR/Q

Where, AR – Average Revenue, TR – Total Revenue – Total units sold

3. Marginal revenue

Marginal revenue is the net revenue the firm receives by selling an additional unit of the commodity.

“Marginal revenue is the change in total revenue which results from the sale of one more or one less unit of output.” Ferguson.

MR=Change in TR/ change in unit sold

Q6) Explain perfect competition

A6) Perfect competition refers to ‘A market structure in which there are large number of buyers and sellers with a single uniforms price for the product which is determined by the forces of demand & supply.’ The price prevailing in perfect competition market is equilibrium price.

Definition:

It is identified by the existence of the many firm; they all sell an identical products an equivalent way. The supplier is the one who accepts the price."- Vilas

Such market gains when the request for product of every producer is totally elastic. Mrs Joan Robinson.

It is a market condition with an outsized number of sellers and buyers, similar products, free entry of enterprises into the industry is ideal knowledge between buyers and sellers of existing market conditions and free mobility of production factors between alternative uses. Lim Chong-ya

Characteristic of perfect competition:-

1) Large number of seller / seller are price takers: There are many potential sellers selling their commodity in the market. Their number is so large that a single seller cannot influence the market price because each seller sells a small fraction of total market supply. The price of the product is determined on the basis of market demand and market supply of the commodity which is accepted by the firms, thus seller is a price taker and not a price maker.

2) Large number of buyers: There are many buyers in the market. A single buyer cannot influence the price of the commodity because individual demand is a small fraction of total market demand.

3) Homogeneous product: The product sold in the market is homogeneous, i.e. identical in quality and size. There is no difference between the products. The products are perfect substitutes for each other.

4) Free entry and exit: There is freedom for new firms or sellers to enter into the market or industry. There is no legal, economic or any type of restrictions. Similarly, the seller is free to leave the market on industry.

5) Perfect knowledge: The seller and buyers have perfect knowledge about the market such as price, demand and supply. This will prevent the buyer from paying higher price than the market price. Similarly, sellers cannot change a different price than the prevailing market price.

6) Perfect mobility of factors of production: Factors of production are freely mobile from one firm to another or from one place to another. This ensures freedom of entry and exit firms. This also ensure that the factors cost are the same for all firms.

7) No transport cost: It is assumed that there are no transport costs. As a result, there is no possibility of changing a higher price on the behalf of transport costs.

8) Non intervention by the government: It is assumed that government does not interfere in the working of the market economy. Price is determined freely according to demand and supply conditions of the market.

9) Single Price: In Perfect Competition all units of a commodity have uniforms or a single price. It is determined by the forces of demand and supply.

Q7) Explain monopoly

A7) The word monopoly has been derived from the combination of two words i.e., ‘Mono’ and ‘Poly’. Mono refers to a single and poly to control.

Thus, monopoly refers to a market situation in which there is only one seller of a commodity.

In monopoly market, single firm or one seller controls the entire market. The firm has all the market power, so he can set the prices to earn more profit as the consumers do not have any alternative.

Definition

“Pure monopoly is represented by a market situation in which there is a single seller of a product for which there are no substitutes; this single seller is unaffected by and does not affect the prices and outputs of other products sold in the economy.” Bilas

“Monopoly is a market situation in which there is a single seller. There are no close substitutes of the commodity it produces, there are barriers to entry”. –Koutsoyiannis

“A pure monopoly exists when there is only one producer in the market. There are no dire competitions.” –Ferguson

Features

One seller and large number of buyers -in a monopoly one seller produces all of the output for a good or service. The entire market is served by a single firm. For practical purposes the firm is the same as the industry. But the number of buyers is assumed to be large.

2. No Close Substitutes - There is no close substitutes for the product sold by the monopolist. The cross elasticity of demand between the product of the monopolist and others must be negligible or zero.

3. Difficulty of Entry of New Firms - There are restrictions on the entry of firms into the industry, even when the firm is making abnormal profits. Other sellers are unable to enter the market of the monopoly

4. Profit maximizer: a monopoly maximizes profits. Due to the lack of competition a firm can charge a set price above what would be charged in a competitive market, thereby maximizing its revenue.

5. Price Maker - Under monopoly, monopolist has full control over the supply of the commodity. The price is set by determining the quantity in order to demand the price desired by the firm. Therefore, buyers have to pay the price fixed by the monopolist.

Q8) Explain perfect competition equilibrium

A8) Equilibrium of the firm and the industry in the short and the long runs

Equilibrium refers to when the firm has no inclination to expand or to contract its output. The producer can attain equilibrium under two situations.

Perfect competition – the price remains constant and fixed by the industry which is accepted by the entire firm within the industry. Any quantity of commodity is sold at this price.

Imperfect competition – under this condition, the firm has the freedom to set prices for their output. Price is not constant here, as the firm adopt independent pricing policy.

The Marginal Revenue-Marginal Cost Approach

Profit depends on revenue and cost. Thus equilibrium revolves around revenue and cost. According to the MR-MC approach, a producer is said to be in equilibrium when:

MR = MC

A Firm can maximise the profit when marginal revenue is equal to marginal cost
MR is the addition to TR from the sale of one more unit
MC is the addition to TC when an additional unit is produced.
Thus when MR = MC, TR-TC result in maximum profit.
If MR exceeds MC, then producer will produce more as it adds to the profit

MC is greater than MR after the MC=MR Output Level

MC= MR is a necessary condition, but its is not enough to ensure equilibrium. This condition happens more than one output level.

To ensure equilibrium, it has to be supplemented by the condition that MR should be less than MC after this level

Producer’s Equilibrium when Price remains Constant

Price remains constant under conditions of perfect competition. Here price is equal to AR. When price is constant, revenue from each additional unit is equal to AR. It means AR curve is same as MR curve. The firm attains equilibrium when two condition are fulfilled , that is firm aims at producing that level of output at which MC is equal to MR and MC is greater than MR after MC = MR output level.

Producer’s Equilibrium when Price is not Constant

When there is no fixed price, price falls with an increase in output. The producer sells more units at a lower price. In this case MR slopes downwards. The firm aims at producing that level of output at which MC is equal to MR and MC is greater than MR.

Short run and long run supply curves

Supply curve shows the relationship between price and quantity supplied. According to Dorfman, “Supply curve is that curve which indicates various quantities supplied by the firm at different prices”.

Supply curve can be divided into two parts as:

Short Run Supply Curve

Long Run Supply Curve

Short run supply curve of a firm

Under Short run , fixed cost remains constant, supply can be changed by changing the only the variable factors. Thus the firm has to bear fixed cost id it is shut down. Thus in short run, goods are supplied at price is either greater or equal to average variable cost. Average revenue is equal to marginal revenue under perfect competition. Hence the firm will produce at the point where marginal revenue and marginal cost are equal.

Prof. Bilas has defined it in simple words, “The Firm’s short period supply curve is that portion of its marginal cost curve that lies-above the minimum point of the average variable cost curve.”

From the above figure we can see that, the firm will not be covering its average variable cost, at price less than OP. At price OP, OM is the supply. MC and MR cut at point A, OM is equilibrium output. If price rise to OP1, the firm will produce OM1 output. This short run supply curve of a firm starts from A upwards i.e., thick line AB.

Long run supply curve

Under long run, the supply curve changes by changing all the factors of production. The firm produces only at minimum average cost in long run. In this case, long run marginal cost, marginal revenue, average revenue and long run average cost are equal. The firm enjoys normal profit.

Optimum production is the point where minimum average cost is equal to marginal cost. Long run supply curve is a portion where marginal cost curve that lies above the minimum point of the average cost curve.

Optimum point is the Point E, as at this point MR=LMCAR minimum LAC. The portion of LMC above point E is called long run supply curve

Q9) Explain monopoly equilibrium

A9) Equilibrium

A. Short run

A monopolist maximizes his short-term profits if the following two conditions are met first, MC equals Mr. Secondly; the slope of MC is larger than that of Mr at the intersection.

Equilibrium of the monopolist

In Figure 6.2, the equilibrium of the monopoly is defined by the point θ at which MC intersects the MR curve from below. Thus, both conditions of equilibrium are met. The price is PM and the quantity is XM. Monopolies realize excess profits equal to shaded areas APM CB. Please note that the price is higher than Mr

In pure competition, the company is the one who receives the price, so it’s only decision is the output decision. The monopolist is faced with two decisions: to set his price and his output. But given the downward trend demand curve, the two decisions are interdependent.

Monopolies set their own prices and sell the amount the market takes on it, or produce an output defined by the intersection of MC and MR and are sold at the corresponding price. An important condition for maximizing the profits of monopolies is the equality of the MC and the MR, provided that the MC cuts the MR from below.

Derivation of equilibrium of the monopolist- Part 1

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We can now revisit the statement that there is no unique supply curve for the monopolist derived from his MC. Given his MC, the same amount could be offered at different prices depending on the price elasticity of demand. This is graphically shown in Figure 6.3. Quantity X is sold at price P1 if demand is D1, and the same quantity X is sold at price P2 if demand is D2.

Supply curve for the monopolist

So there is no inherent relationship between price and quantity. Similarly, given the monopolist MC, we can supply various quantities at any one price, depending on the market demand and the corresponding MR curve. Figure 6.4 illustrates this situation. The cost condition is represented by the MC curve. Given the cost of a monopolist, he would supply 0X1 if the market demand is D1, then p at the same price, and only 0X2 if the market demand is D2 B.Long-term equilibrium:

Relationship between price and quantity

In the long run the monopolist will have time to expand his plants or use his existing plants at every level to maximize his profits. However, if the entry is blocked, the monopolist does not need to reach the optimal scale (that is, the need to build the plant until the minimum point of LAC is reached), neither does the guarantee that he will use his existing plant at the optimum capacity. What is certain is that if he makes a loss in the long run, the monopolist will not stay in business.

He will probably continue to earn paranormal benefits even in the long run, given that entry is banned. But the size of his plant and the degree of utilization of any plant size depends entirely on the market demand. He may reach the optimal scale (the minimum point of Lac), stay on the less optimal scale (the falling part of his LAC), or exceed the optimal scale (expand beyond the minimum LAC), depending on market conditions.

Monopolist with suboptimal plant and excess capacity

Figure 6.5 shows when the market size does not allow the monopolist to expand to the minimum point of Lac. In this case, not only is his plant not optimal (in the sense that the economy of full size is not depleted), but also the existing plant is not fully utilized. This is because on the left of the minimum point of the LAC, the SRAC touches the LAC at its falling part, and the short-term MC must be equal to the LRMC. This happens in e, but the minimum LAC is b,and the optimal use of the existing plant is a. Since it is utilized at Level E', there is excess capacity. Finally, figure 6.7 shows a case where the market size is large enough for a monopolist to build an optimal plant and be able to use it at full capacity.

Monopolist operating in a large market

In Figure 6.6, the scale of the market is so large that monopolists have to build plants larger than the optimal ones to maximize output and over-exploit them. This is because to the right of the minimum point of LAC, SRAC and LAC is tangent at the point of positive slope, and SRMC must be equal to LAC. Thus, plants that maximize the profits of monopolies are, firstly, larger than the optimal size, and secondly, they are over-utilized, which leads to higher costs. This is often the case with utility companies operating at the state level.

It should be clear that which of the above situations will appear in a particular case will depend on the size of the market (given the technology of monopolists). There is no certainty that monopolies will reach their optimal size in the long run, as is the case with purely competitive markets. In Monopoly, there is no market force similar to those of pure competition that will lead companies to operate at optimal plant size in the long run (and utilize it at its full capacity).

Q10) Explain Explicit and implicit cost, actual and opportunity cost, accounting and economic cost, Social and private costs

A10) Explicit and implicit cost –

Explicit cost is the cost made to other owner for the purchase or hiring of various other factors in the course of running a business. It is also called as accounting cost. Examples of explicit costs include wages, lease payments, utilities, raw materials, and other direct costs.

An implicit cost has already occurred but not necessarily shown as separate expense. It is also called as opportunity cost. Implicit costs are a part of opportunity cost. They are the theoretical costs ie., they are not recognised by the accounting system and are not recorded in the books of accounts but are very important in certain decisions. They are also called as the earnings of those employed resources which belong to the owner himself. Implicit costs are also called as "Imputed costs".

Examples: Rent on idle land, depreciation on dully depreciated property still in use, interest on equity capital etc.

Actual and opportunity cost

Opportunity costs are incomes from the next best alternative that is foregone when the entrepreneur makes certain choices.

Ex – a manufacturing company has a factory. He uses the factory for his business purpose instead of giving it for rent. These costs calculate the missed opportunity and calculate income that we can earn.

Actual cost is defined as the cost or expenditure which a firm incurs for producing or acquiring a good or service. The actual costs or expenditures are recorded in the books of accounts of a business unit. Actual costs are also called as "Outlay Costs" or "Absolute Costs" or "Acquisition Costs".

Examples: Cost of raw materials, Wage Bill etc.

Accounting and economic cost,

Accounting costs are the actual or outlay costs that point out the amount of expenditure that has already been incurred on a particular process or on production as such accounting costs facilitate for managing the taxation need and profitability of the firm.

Examples: All Sunk costs are accounting costs

Economic costs are related to future. They play a vital role in business decisions as the costs considered in decision - making are usually future costs. They have the nature similar to that of incremental, imputed explicit and opportunity costs.

Social and private costs,

Private costs for a producer of a good, service, or activity include the costs the firm pays to purchase capital equipment, hire labor, and buy materials or other inputs. Private costs are paid by the firm or consumer and must be included in production and consumption decisions. In a competitive market, considering only the private costs will lead to a socially efficient rate of output only if there are no external costs.

Social costs include both the private costs and any other external costs to society arising from the production or consumption of a good or service. External costs are directly associated with producing or delivering a good or service, but they are costs that are not paid directly by the producer.

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