Economic Chapter 3: Production theory and market structure

Economic Chapter 3: Production theory and market structure

Economic Chapter 3: Production theory and market structure

 Production

This  refers  to the process  of creating  utility  in goods  and  services  in order  to satisfy  human  wants.  It seeks to analyze the input-output   relationships   and to answer the following   questions.

1)   How will output   respond   if all inputs   are simultaneously    increased   or decreased    in the same proportion?

2)   Supposing   that  there  is more  than  one  process   of producing   a commodity,   how  will  the output’ change  in response  to changes  in the factor proportions?

3)   What is the most efficient production   technique that minimizes   costs?

4)  How can the least cost combination of inputs   be achieved to maximize   profits by minimizing   costs?

Types of Production

  • Direct (subsistence) production; the production of commodities    for one’s   own consumption    (home use) e.g.  Planting   maize   for food at home without   surplus   left for sale, a doctor treating his own child.
  • Indirect (market) production; the production  of goods and services   for exchange e.g. a farmer growing cotton for sale, producing   pancakes   for sale.

Stages (Levels) of production

  • Primary Production.  This refers to the extraction   of raw materials   from their natural   existence.

It involves application   of factors of production   on the raw materials   in order to produce   primary products.   Primary production   includes items like fishing, mining,   lumbering,   farming etc.

  • Secondary Production. This involves the transformation  of raw materials   into final commodities which are ready for use.  It includes activities  like manufacturing,    processing   etc.
  • Tertiary Production.  This is the production   of services.   These services may be direct or indirect. The provision   of these services is necessary   because   they help   to bridge   the gap between   the producer and the consumer.

Specialization and division of labour

Specialization is a method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency and leaves out other activities to be done by other people or country or region.

Forms of specialization

  1. Specialization by craft. This   was   the   earliest   from   of specialization     where   certain    families specialized   in different activities basing on their location like fishing, hunting,   farming, etc.
  2. Specialization by process. This is where different  people   specialize    in different   stages   in the production   process.
  3. Regional specialization. This is where a certain  region   specializes    in carrying   out an activity which it can do best.
  4. International specialization. This is where a country  specializes    in production    of a commodity which  it can  do best  and  exchanges   it with  other  countries   which  cannot  produce   the  commodity e.g.   Developing    countries    like   Uganda    specializing    in   Agricultural    products    and   developed countries in industrial products.

Division of labour

This  is the  allocation   of tasks  (activities)   among  workers   in the  production   process   such  that  each worker   is  given  a  task  which  he/she   can  perform   best.

 

Advantages (merits) of specialization and division of labour

  1. It increases the efficiency of labour. This is as a result of performing  the same task over time.
  2. It is time saving. This is because there is no need of moving from one job to another.
  3. It helps to improve on the quality of the product. Workers   become   perfect   in carrying   out particular   tasks.
  4. It helps to speed up the training process.    This is because   a worker   is trained   to carry out a particular   task in the production   process.
  5. It enables workers to exploit their natural talents by concentrating on particular   tasks which they can do better:
  6. International specialization promotes international trade.  This is because   different   countries utilize their resources   to produce   a commodity   in which they can do best and exchange   it with other countries.
  7. It increases the level of output. This is because   specialization   increases   the  scale  of production and reduces  the production   costs  as a result  of economies  of scale.
  8. Specialization increases economic interdependence between countries. This  is because  different countries   can  be  able  to get what  they  do  not  have  from  other  countries   through   the  process   of exchange.
  9. Specialization promotes technological development through innovations    and inventions    as a result of continuous   use of machines.    This leads to efficiency in production.

Demerits (Disadvantages)   of Specialization   and Division of labour

  1. It leads to boredom. This is because performing  the same task all the time becomes   monotonous which results into loss of efficiency and work dissatisfaction.
  2. It is difficult to assess the individual contribution of the worker to the final product under division  of labour.    This is because   many workers   contribute   in the making   of the total final product.
  3. It leads to loss of craftsmanship. This is because   when the job is divided   into a series of tasks, one’s skill in making a complete product is lost.
  4. Specialization leads to unemployment. This  is because  when  a worker  is laid off from  a certain firm,  it becomes   very  difficult  for the  worker  to get  another  job  in another   firm which  requires different  skills.
  5. 5. It leads to unnecessary delays in case of breakdown  in one department    of the firm during   the production
  6. It leads to over production especially when   markets   are limited.     This   leads   to wastage   of resources due to excess output which is not sold.
  7. International specialization promotes over dependence of one country on other countries.  This leads   to shortage   of certain   commodities    in case   there   are some   misunderstandings      among countries.
  8. It increases occupational labour immobility. This is because workers concentrate  on performing one task and with time may not be able to carry out other tasks.
  9. 9. It leads to loss of responsibility among workers which undermines team work.   This is because each worker is concerned about his/her own tasks.

 Factors (agents) of production

Factors of production are resources   (inputs) required   in the production   of goods and services.

They include, Land, Labour, Capital and Entrepreneurship

Factor price refers to the monetary   reward (payment)   given to the factor of production    for its contribution   to the production    process.   Examples   of factor prices   include;   Rent,     Wages, Interest and Profits

 Classification of Factors of production

Physical factors of production; are tangible factors   of production; e.g.    land, capital, buildings, machines,   furniture, tools and equipment   etc.

Non-physical factors   of production; are intangible   factors   of production    for example

Skilled labour (services), entrepreneurship    etc.

Specific factors of production; are factors of production   which are only used for a specific purpose and cannot be put ‘to any other use.

These  are factors  of production   which  cannot  be used  for  any  other  purpose   other  than  for  which   they  were  designed   for  example   harvesters, railway  lines, highly  skilled  labour,  type writer  etc.

Non-specific factors of production; are factors  of production   which  can be used  to serve various  purposes  for example  a buildings,   liquid  capital,  land,  computers   etc.

 

Note. Specificity of a factor of production is the extent (degree)   to which a factor of production    is designed to serve a particular purpose.

Mobility of factors of production

Factor  mobility  is  the  ease  with   which   a  factor   of  production    can  be  moved   from   one geographical   area to another  or from one occupation   to another.

Types of mobility of factors of production

  • Geographical mobility of a factor of production; is the ease with which a factor of production  can be moved   from one geographical    area to another.   For example   a doctor   moving   from Nairobi to Kampala, an Entrepreneur   moving from Mable to Gulu.
  • Occupational mobility of a factor of production. This refers to the ease with which a factor of production   can be transferred      from one   occupation    to another.   For example   office   practice    teacher    becoming    a secretary, an accounts teacher becoming   an accountant   etc.

 

LAND

Land refers to all natural resources used in the production   process.    It includes soil, minerals,   forests, water bodies, air etc. The reward  for land is rent.

Characteristics of land

  1. Its supply is fixed.
  2. Land is a gift of nature.
  3. It is geographically  immobile that is, it cannot be transferred   from one place to another.
  4. It is occupationally  mobile that is, it can be used for various purposes.
  5. Land is not homogenous  for example some land is fertile and another is infertile.

 Importance of land

  1. It is used for agricultural activities for example hunting, farming and fishing.
  2. Land acts as a ground for waste disposal for example sewage disposal
  3. Land is used for construction of industries, roads, building, etc.
  4. It is a source of raw materials for example fish, water, minerals, timber etc.
  5. It is a source of fuel for example coal and oil from the ground, charcoal form forests etc.
  6. It is a source of government revenue since it can be taxed.
  7. Land also provides beautiful scenery for tourism which is a source of foreign exchange.

Capital

Capital   refers    to   any man made   resource   which   is used   in the production    process   for  example machinery,    buildings,   money,   clothes   etc.  Capital   is used to produce   other   goods.   In the factor market, capital is rewarded by interest.

Types of capital

  1. Real capital is the physical assets  used  in the  production   of goods  and  services   for example  machines,  buildings,  roads  etc. It is also called fixed capital.
  2. Liquid (money/financial} capital is capital which is in cash form. It is used as a means of payment for capital goods.
  3. Floating (circulating/operating/working) capital is capital used in the day to day running of the business activities for example buying raw materials.
  4. Human capital is the productive qualities found in human beings for example   skills and knowledge.   Such qualities are attained through training and education.
  5. Overhead capital is the social and economic infrastructure or assets which facilitate  in the production   process for example  roads,  banks, insurance   etc.
  6. Public (social) capital is capital owned  by  the  government   on  behalf   of  its  citizens   for example  government  hospitals,   schools,  roads  etc.
  7. Private capital is the type of capital owned by private individuals. It includes private cars, schools, businesses etc.

Productivity of capital and marginal efficiency of capital

Capital productivity is the measure of how well physical capital is used in providing goods and services in a given time

Marginal productivity of capital is the additional output that results from adding one unit of capital—typically cash

Marginal efficiency of capital (MEC) refers to the expected (anticipated)   monetary   returns on an extra (additional)   unit of capital employed   in the production   process.

Determinants   of Marginal efficiency of capital (MEC)

  1. Anticipated level of output is an expected increase  in the  level  of output  by  the  firm leads  to an increase  in MEC  but an expected  decline  in the level  of output  by the firm  leads  to a reduction   in MEC.
  2. Level of taxation; the higher the amount of taxes imposed on capital, the lower the MEC and the lower the tax rate, the higher the MEC.
  3. Quantity and quality of other co-operate factors; the availability  and  high  quality  of corporate factors  increases  the MEC  but lack and poor  quality  of such factors  decreases   the MEC.
  4. 4. Available excess capacity; availability of excess capacity increases the MEG but existence of full capacity reduces the MEC
  5. Rate of interest on capital; the higher the rate of interest, the lower the MEC and the lower the interest rate, the higher the MEC.
  6. The rate of depreciation of capital; the higher the rate of depreciation, the lower the MEC and the lower the rate of depreciation the higher the MEC.                                                ,
  7. Market size; the bigger the market size, the higher the MEC and the lower the market size, the lower the MEC.
  8. The general price levels (inflation); the high level of inflation in the economy reduces the MEC but low level of inflation in the economy increases the MEC

Capital Accumulation   (Capital Formation)

This is the process through which the stock of capital increases overtime for purposes of future investments.  Capital accumulation can be in form of   increased savings, resource   utilization, construction etc.  In the process  of  capital  formation,  society has  to  forego  some  of  its  present consumption  and  direct it  to increasing  the  stock  of  capital  goods  in  order  to  improve  on  the production of consumer goods in future.

Determinants of (factors influencing) capital accumulation

  1. The level of savings; the higher  the  level  of  savings,  the  higher  the  level   of  capital accumulation on the other hand, the low rate of savings reduces the rate of capital accumulation.
  2. Level of technology; use of better methods of production like modem machinery increases the productivity of factors of production hence, capital accumulation. On the other hand, use of poor production techniques reduces the productivity of factors of production hence low capital accumulation.
  3. Government policy; favorable government policies like subsidization, tax holidays encourage investments and this increases the production of commodities hence capital accumulation. On the other hand unfavorable government policy like high taxes discourage investment hence law rate of capital accumulation.
  4. Level of development of social and economic infrastructure; for example banks, hospitals, micro finance institutions, roads schools, etc. Availability of such infrastructure which is well developed facilitates the production and investments hence capital accumulation. On the other hand, the presence of under developed and poor infrastructure discourages production and investment hence low rate of capital accumulation.
  5. Political stability;  a  politically  stable  country  encourages both  local  and  foreign   investors hence  capital accumulation but a politically unstable  country  discourages  investors hence-low rate of capital accumulation.
  6. Level of education; high level of education in form of skills and knowledge increases the productivity of labour hence capital accumulation. On the other hand, low level of education limits labour productivity hence low capital accumulation.
  7. Level of liquidity preference; this refers to the desire by individuals to hold their wealth in cash or near cash form other than investing it in alternative assets. The higher the level of liquidity preference, the lower  the rate  of  capital  accumulation  and  the  lower  the  level  of  liquidity preference the higher the rate of capital accumulation.
  8. Degree of availability of market; availability of both foreign and domestic markets encourages production and investments hence capital accumulation, But presence of inadequate markets limits the scale of production hence low capital accumulation.  “
  9. Level of economic stability; if the economy is stable, inform of stable commodity prices and interest rates, this encourages investment hence increased capital accumulation. On the other hand instability in form of inflation discourages investments hence low capital accumulation.
  10. Level of interest rate; high interest  rate  charged   on  loans  discourage    potential   borrowers    or investors   hence  low  capital   accumulation    and  low  interest   rate  charged   on  loans   encourage investors  hence  increased  capital  accumulation.
  11. Level of population growth rate; high population growth rates increase the dependence   burden which   reduces   the level   of savings.   This limits   the level   of investment    hence   low   capital accumulation.   But a low population   growth rate reduces the dependence   burden hence high level of capital accumulation.
  12. Degree of availability of entrepreneurs; the presence  of individuals   who  have  the  capacity   to generate  new  investments   and  who  are innovative   leads  to capital  accumulation    and  absence  of entrepreneurs   leads to low capital  accumulation.

Importance (role) of capital accumulation in economic environment

  1. It leads to technological development in form of inventions and innovations.   This  leads  to  the production   of goods  and  services  in large  quantities   and of high  quality  hence  economic   growth and development.
  2. It increases the standards of living.  This   is  due  to  increased    incomes   of  individuals    and production   of a variety  and better  quality  goods  and services  which  are consumed   at lower  prices.
  3. It facilitates resource exploitation. This increases production   and investments   in the industrial, agricultural   and service sectors hence economic growth and development.
  4. It helps to create employment   opportunities   in the   economy.    This is due   to   increased investments   and production   activities   in the economy.
  5. It facilitates the construction social overheads in form of roads,  railways   etc.  This increases mobility of factors of production
  6. It helps to reduce on the level of inflation in the economy.  The increased   production   of goods and services helps to meet the high aggregate demand for goods and services.  In addition,   capital accumulation   reduces the supply rigidities   associated   with the production   of goods especially   in the agricultural   sector.  This increases   supply in the long run hence economic   stability.
  7. It helps to solve the balance of payment problems. This  is as a result  of increased  production   of high  quality   goods  and  services   for  export  which  helps  the  government    to  earn  more   foreign exchange.    In addition,    capital    accumulation     leads   to   establishment     of   import    substituting industries and this reduces on the importation   of high valued manufactured    goods.  Therefore,   the gap between   export earnings   and import   expenditure   is reduced   hence   favourable   balance   of payments.
  8. It brings about market expansion through establishment of social and economic   infrastructure. This facilitates trade and economic   development.
  9. It increases the national income of the country. This is as a result of increased  production   and economic activities resulting from capital accumulation.
  10. It helps to relieve the country from the burden of the foreign debt. This is because   capital accumulation    increases   resource   exploitation    and mobilization    which   increases   the   country’s capacity to be self-sufficient   and reliant.

Labour

Labour refers to all human   effort   both mental   and physical   which   is used   in the production process.

 The types of labor

The types of labor in economics are skilled, unskilled, semi-skilled, and professional. Together, these four types of labor make up the active labor force.

Marginal product of labour refers to the additional   output resulting   from employing   an extra unit of labour.

 Average product of labour refers to output per unit of labour employed

 

Mobility   of Labour

Mobility of Labour refers  to the ease with  which  labour  can be moved  from  one  place  of work  to another or  from one occupation to another.

Types of labour mobility

Geographical mobility of labour is the ease with which labour can be moved from one place of work to another.  For example a worker transferring   from Kampala   to work in Mukono.

Occupational mobility of labour is the ease with which labour can be moved from one occupation to another.  For example, a medical doctor becoming a biology teacher.

Immobility of Labour

Labour immobility is the inability (or difficulty) of labour to move from one place to another or from one occupation   to another.

 Types of labour mobility

Geographical immobility of labour refers to the inability of labour to move from one place of work to another.

 Occupational immobility of labour refers to the inability   (difficulty)   of labour to move from one occupation to another.

Types of occupational mobility of labour

Horizontal mobility of labour refers to the change of occupation   where no change occurs in the status of the worker.  For  example   a biology  teacher  becoming   a chemistry   teacher,  a minister   of finance  becoming  a minister  for internal  affairs.

Vertical mobility of labour refers to the change of occupation   which results into a change in the status of the worker.  For example when a classroom teacher becomes   a headmaster,   a nurse becoming a doctor.

Factors affecting/Determinants   of labour mobility

  1. The length of the training period. The longer  the  length  of the  training  period,   the  lower  the mobility  of labour and the shorter  the training  period,  the higher  the mobility  of labour.
  2. The level of skills required for a particular job. Jobs which   require  highly   specialized   skills reduce  the mobility  of labour  but  in cases  where  no  special  skills  are  required,   the  mobility   of labour  increases
  3. The degree of job security. The more the security on the job in terms of permanent employment the lower the mobility   of labour.   But temporary   employment    in form of contracts   increases labour mobility.
  4. The level of advertisement of the job. In cases   where   the degree   of knowledge    about   the existence   of jobs by workers   is high, mobility   of labour   increases.   But  in cases  where  labour lacks  information  about  the prevailing  jobs,  mobility  of labour  reduces.
  5. The influence of trade unions and other professional associations. In occupations   where  there are restrictions  on entry  into  certain  professions   for example  lawyers,  mobility  of labour  reduces and in occupations  where  there  are no restrictions,   mobility  of labor   increases.
  6. Level of education. The higher the level of education,  the higher the mobility   of labour and  the lower  the level of education,   the lower  the mobility  of labour.
  7. Nature of the job. Risky jobs  with high occupational    hazards.   For example   mining,   body guards, sugar cane cutting etc.  discourage   workers  hence  labour  immobility,   but jobs  which  are less  risky   with  fewer   occupational    hazards   tend   to  attract   workers   hence   increasing    labour mobility.
  8. The degree of specialization. The  higher  the  level  of  specialization,    the  lower  the  mobility   of labour  and the lower  the degree  of specialization,   the higher  the mobility  of labour.
  9. Age of the worker.  Old   people    tend   to   be   immobile    because    they   have   more    family responsibilities   and cultural attachments   but young individuals   tend to be mobile because   of less family and cultural attachments.
  10. Degree of political instability. In areas which  are politically   stable,  labour  tends  to be mobile  as compared   to areas  which  are politically   unstable.   This is because labour tends to fear to go and work in insecure places for fear of loss   of life.
  11. Racial, tribal and religious prejudices. In occupations  where there is discrimination    based on such   prejudices,     labour    tends   to   be   immobile.    But   in   cases   where    there    are   no   such discriminations,    labour tends to be mobile.

The Entrepreneurship

An  entrepreneur  is a person  or  group  of persons   who  under  take  the  task  of  organizing    the  other factors  of production   in order  to make  production   process  possible.   He or she is a co-coordinator, risk-taker,    innovator    and   decision    maker   of   the   business    enterprise.    In   the   factor   market,    an entrepreneur   rewarded with profits.

Functions   of the entrepreneur

  1. The entrepreneur   is responsible   for starting the business
  2. The entrepreneur   employs other factors of production   such as land, capital and labour
  3. The entrepreneur   makes arrangements   for rewarding   the other factors of production
  4. The entrepreneur makes decisions concerning   the business activities and allocation   of resources
  5. The entrepreneur undertakes   the necessary   innovation   for the proper running of the business
  6. The entrepreneur   takes responsibility   of the profits and losses made by the business

Factors that influence the supply of Entrepreneurs

  1. The level of education and training. There higher the level  of education   and  training,   the greater the supply  of entrepreneurs   and the lower  the level  of education  and training,  the  lower  the supply of entrepreneurs
  2. Personal abilities of the individuals. In societies with a large number of individuals who are more innovative   and  hardworking,   there  is high  supply  of entrepreneurs   while  in societies   with  many people  who  are less innovative  leads  to low supply  of entrepreneurs.
  3. The level of economic activities. The higher the level of economic activities, the higher the supply, of entrepreneurs  and   the   lower   the   level   of   economic    activities,    the   lower   the   supply    of entrepreneurs.
  4. The market size of commodities. The   bigger    the   market    size,   the   higher    the   supply    of entrepreneurs   and the smaller the market size, the lower the supply of entrepreneurs.
  5. The government policy in relation to investment. Conducive    government    policies    towards investment encourage the supply of entrepreneurs   while poor investment    policies   discourage   the supply of   entrepreneurs.
  6. The degree of political stability. The higher the degree of political stability   in the country,   the higher  the  supply  of  entrepreneurs   and  the  lower  the  degree  of political   stability,   the  lower  the supply  of entrepreneurs.                                                                                 .

Forms of business organizations

A business organization is the control of economic   resources   aimed at producing   and distributing commodities   to the final consumers.   Business organizations    are categorized   according   to ownership into two broad categories.   The privately   owned business   organizations    include   sole proprietorship, partnerships    and joint   stock Companies   which   can be private   or public   Limited   Companies.    The Public or state owned business organizations   include public co-operations and     parastatals

Sole proprietorship

This is where the business is owned and managed   by one person.  The owner may be assisted by family members.  The major source of capital is personal savings and borrowing.

Merits (advantages) of a sole proprietor

  1. It is easy to set up the business. This is because it does not require many bureaucratic   procedures of   registration    and   documentation     as   for   the   case   of   other   business    organizations like partnerships.
  2. It does not require a lot of capital to set up the business. This promotes  entrepreneurial    abilities in the economy.
  1. There is quick decision making.  This is because   the business   is owned and controlled   by one person
  2. The benefits  (profits) are enjoyed by the  owner  of the  business  alone  unlike   other   business organizations   where profits  are shared  among  the business  shareholders.
  3. It is easy to develop personal contact with the customer. This ensures that the customers’ needs are satisfied.
  4. The business owner has self-interest and motivation in business as opposed   to the other forms of business organizations   like the public enterprises.
  5. It is easy to supervise and manage the activities of   the   business    unlike   other   business organizations.
  6. A  sole  business  owner  enjoys  the  secrecy  of  his  business   unlike   other   forms   of  business organizations   like joint  stock companies.

Demerits (disadvantages) of a sole proprietor

  1. The business owner has unlimited liability. That is, in case of the  collapse   of the  business, the debt  arising  out  of business   operations   can  of large   be  recovered   by  selling  the  personal   property   of  the business  owner  in addition  to the property  of the business.
  2. It is difficult to expand business and enjoy economies scale in the long run.  This is due to limited capital contributed by the business owner.
  3. It is difficult to undertake speculation and division of labour due to small size of the business.
  4. There is uncertainty in the continuity of the business in case of the death of the business owner. This is because the business activities are undertaken   by one individual.                                       .
  5. The sole proprietor is overworked and this leads to inefficiency. The sole proprietor manages   the business alone and does not get enough time to rest.                                                                          .
  6. It is difficult to undertake research by the sole proprietor. This  is due to limited capital contributed   by the sole proprietor.                                                                                                       .
  7. It is difficult to access credit facilities like loans from financial institutions. This is due to lack of collateral security and lack of trust in one man’s  business by financial institutions.

Partnerships

Partnerships is a business type  where  members  come  together  pool  (contribute)   financial  resources   in order  to carry out business jointly with  the aim of making  profits.

The minimum number of members   in partnership   is two (2) and the maximum   number is twenty (20).  Each member   in partnership   is called   a partner:

The  sharing   of  capital  and  profits   and  general  running   of  the  business   is  spelt  out  in  a  document called  a partnership  deed. It is presented to the registrar of companies   before business commences.

 Types of partners

  1. Active partner. This  is one  who  contributes   capital  and  takes  part  in the  active  management    of the business.  He also shares profits and losses jointly with other members of the partnership.
  2. Dormant partner. This  is one  who  does  not  take part  in the  active  management of the  business but contributes   the capital  and shares  losses  and profits  of the business.
  3. Quasi partner. This is a partner who offers his name to be used as the name of the partnership. He does not contribute capital to the business and does not take part in the active management   of the business.  He is not responsible   for any debts and losses incurred by the business.

Merits (advantages) of partnerships

  1. Losses and other risks are shared among the members. Partnerships involve  a number   of members   and therefore the risks per unit member are greatly reduced.
  2. Partnership creates room for specialization   within its members.   This   is because    different members     have   different   skins   regarding    production,    management,     marketing    etc. within   the organization.
  3. There is continuity in business  in  case  of  death  or  sickness   of  one  partner   unlike   under   sole proprietorship.
  4. It is to expand the scope of discovery and innovation under the partnership,   This  is  because members   can  easily  share  the  skills  and  knowledge   concerning   business   operations.   This leads to improvement   in the performance   of the business.
  5. It is easy to form a partnership as compared   to the joint   stock company.   This   is because   it requires less documents or formalities   as in the case of joint-stock   Companies.
  6. It is possible to enjoy economies  of  large scale, this  is  because   it  is  easy  to  rise  capital   and expand  on the operations  of the business.
  7. It is easy to raise enough capital to start and expand the business under partnership. This widens the capital base as compared to the sole proprietor.

Demerits (disadvantages)   of partnerships

  1. Partnerships have unlimited liability. That   is,  in case   of  debts   arising   out   of  the   business operations,   personal   property   of  the  partners   in  addition   to partnership    property   can  be  sold  in order to recover  the debt.
  2. The mistake made by an individual affects all the members within the partnership. This is due to collective   responsibility   in the business operations.
  3. There are delays in business decision making and implementations. This is because all members have to be consulted before any action is undertaken.
  4. A partnership can be dissolved in case of death of one partner. This affects the continuity  of the business.
  5. Partnerships suffer from dis economies of scale due to large-scale operations of the business. This is in form of mismanagement    of funds.
  6. The membership of partnership is limited up to 20 members. This limits the capacity   of the partnership   to mobilize and raise more funds in order to expand the business.

Joint-Stock   Companies (Limited Liability   Companies)

These   are business   organizations    with   several   members   (shareholders)     who   come   together    and contribute   capital to start business with the aim of making profits.

Types of joint – stock companies

Public limited companies

These   consist   of not less than   seven   (7) members   and there is no maximum number.  The shares are freely transferable   to the public.  That is, members who wish to sell their shares the public are free to do so.

Private limited companies

These consist of a minimum of twenty (20) members and a maximum of fifty (50) members.  The shares are not freely transferable   to the public.  That is, a member   who wishes to sell his shares has to first consult all   the other members   within the company   before he floats them to the public.

Formation of joint stock companies

The formation of joint-stock   companies   involves legal documents   and these include:

  1. Memorandum of association (MOA). This clearly  lays  down  the  name  of the company   with  the word  limited  at the end, the location  of the business,  amount  of capital  to be contributed   by each shareholder,  purpose  of the business  and the signatures  of all the  shareholders.
  2. Articles of association (AOA). This is the document which lays down the rules and regulations governing  company.   It spells  out  the  rights  and  powers  of  each  shareholder,   the  procedures    of calling  and conducting   general  meetings,  powers  of the executive   and rules regarding   the election of the executive  members.
  3. Certificate of incorporation (COl). This is issued by the registrar  of companies   after paying   the registration    fee by the promoters    of the company.   It gives   the company   a legal   entity   and authorizes it to begin floating the shares to the public so as to raise capital.
  4. Prospectus. This document   invites  the general  public  to come  and  buy  shares  from  the  company. This is done after registration   of the company to raise the required   capital start business.
  5. Certificate of trading (C0T). This   is the document   which   empowers    the company    to start business operations.   It is issued  by  the  registrar  of companies   after  the  company   has  raised  the minimum  share  capital  required.

A share and a stock

A shareholder is an individual   who owns and contributes   capital to the company   with the aim of making profits.

A share is a unit of capital contributed   by each shareholder   when starting the company   with the aim of making profits.

A stock is a combination   of shares contributed by shareholders   to the company.

Types of shares

  • Ordinary shares; are shares  which  do not carry  a  fixed  rate  of  return  (dividend).  These shares  receive  only dividends  after  all preference shares  have  paid
  • Cumulative preference shares; are  shares  which  are  entitled   to dividends   irrespective    of whether  the company  has made  profits  of incurred  losses  in a given  period
  • Preference shares; are shares that carry a fixed rate of return (dividend).   However,   if no  profits  are made in the given period,  no dividends   are paid

Dividends, Retained profits   and Debentures

  • A dividend is a profit earned on the shares by the shareholders  of the company.
  • Retained profits are profits  made  by the company  which  are not  shared  among  the  shareholders but they are left to expand  on the business.
  • A debenture   is  a document   that  gives  evidence   that  an  individual   or  company   has  borrowed   a certain  sum of   money  from  the person  or institution  named  on it.

Types of debentures

  • Naked debentures;   this is a debenture   where no collateral   security is required   in order to access the loan by the borrower   from the lender. In case of failure to pay the loan, the lender (debentures holder) has no powers to take over or sell the borrowers property   to recover his/her Money.
  • Mortgage debenture.   This is a debenture   where the collateral   security is required by    the lender before   the borrower   is given   a loan.  In case of failure   to pay the loan by the borrower,   the debenture   holder  has  the  powers  and  rights  to  sell  the  borrower’s    property   and  recover   his/her money.

 

Collateral security refers  to the physical/tangible    asset  presented   by the borrower   before accessing   the  loan  from  the  lender,   For  example   land  title,  tangible   house  hold  properties,   motor vehicle  registration   card  etc.

Advantages   of joint – stock companies

  1. It is easy to raise enough capital from    the sale of shares.    This increases the scale of operation of the business hence economic of scale.
  2. Shareholders have a limited liability. That is, in case the business  collapses the shareholders only lose their share capital to recover the business debts.
  3. There is continued existence   of the company   even if a shareholder   dies or becomes insane.
  4. It is easy to access loans from financial institutions. This is because such companies   are highly trusted by the financial institutions   and they have enough collateral   security
  5. In case of losses and other business risks, they are shared among   the many shareholders.    This minimizes   the burden of the loss per share holder.
  6. Shareholders are free to sell their shares to the public for the case of public limited companies,
  7. The joint stock companies   help individuals   with limited entrepreneurial abilities to participate   in business as shareholders.   This promotes   economic activities in the economy.
  8. Joint stock companies   are capable   of employing    necessary    expatriates    in various   fields.  This increases efficiency in business operations.
  9. Joint stock companies   are capable   of offering   employment    opportunities    to many   individuals. This is due to their large scale operation.   This improves on the standards of living of individuals.
  10. Joint stock companies generate a lot of tax revenue to the government in form of corporate  and profit taxes.  Such tax revenue can be used to construct both social and economic infrastructure.

Disadvantages   of joint -stock   companies

  1. Shareholders do not exercise full   control over their business.   This is because; under joint stock companies management   differs from shareholders.
  2. Shares are not equally owned.  Those with more shares tend to dominate decision making in line with their personal interests or benefits.
  3. It is difficult to start a joint   stock company.   This is because   there is a need to present   several documents   to the registrar of companies   before the company is incorporated.
  4. There is bureaucracy in decision   making.   This is because   there is need to consult   the various shareholders   before the action is taken.
  5. There no secrecy in the running of the business.   For example   books of accounts   are published in the newspapers   especially for public limited companies.
  6. High taxes are paid by shareholders. This is because taxes are paid on both company profits and dividends.
  7. Rivals of the  public   company   can  easily buy  off  the  majority  shares  there   by  crippling   the activities  of the company.
  8. There is little personal contact between the shareholders of the company and the customers.  This undermines   customer care services.                                                                                                                 ,.
  9. There is lack of flexibility in business operations. This is because the company can only engage in activities which are stipulated in the constitution.
  10. There is a risk of suffering from diseconomies of scale. This  is  as    a  result   of  large  scale operation  joint  stock companies   for example  lack of sufficient  markets,  raw materials   etc.              .

Sources of business finance

  1. From personal savings of individuals
  2. Borrowing from relatives and friends
  3. Borrowing from financial institutions like banks and micro finance institutions
  4. Borrowing from non-bank   financial intermediaries   like the housing finance companies,   insurance companies   etc.
  5. Retained profits that is, profits which are not shared by the shareholders of the company.   They are left in the company to expand the business.                                                                                           .
  6. Through the sale of shares to the public as the case of joint stock companies.
  7. Using debentures by companies in order to raise capital from the public.
  8. Loans from international financial lending institutions for example I.M.F and World Bank.
  9. Through gambling and national lotteries.
  10. Through donations and grants.
  11. Through the sale of government securities to the public for example treasury bills and bonds in case of public enterprises.

Some definitions

Money market is a market where short term financial assets are traded for example   treasury bills.

Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).

 

Capital markets.  This  is a market  where  medium   and  long  term  financial   assets  are  traded  for example bonds,  shares  etc.

Stock exchange market is an organized market for the sale and purchase of securities such as shares, stocks, and bonds.

Features of money markets in developing countries

  1. They are mainly urban based
  2. They mainly charge high interest rates
  3. They mainly operate on a small scale
  4. There are still few participants   in the market
  5. They deal in a limited variety of financial assets
  6. They mainly deal in short term financial assets

Subsistence production versus market production

Subsistence   (direct) production

Subsistence /direct) production is the production of goods and services by and individual for use

Features (characteristics) of subsistence production

  1. There is high degree of dependency on family labour in the production  activities;
  2. There is use of simple   (rudimentary) tools for example pangas, hand hoes etc.  in the production process
  3. There is low labour productivity because of using poor production   techniques.
  4. There is lack of specialization in production.
  5. Barter trade is the predominant system of exchange.  That   is exchange   of commodities for commodities
  6. There is limited use of scientific production methods. For example,   there is no application of fertilizers,   mulching, etc.
  7. There is absence of profit motive. Individuals  simply produce for basic survival.
  8. There is a high degree of conservatism. Production   is greatly influenced   by social attitudes and cultural beliefs.
  9. Land is the basic factor of production characterized  by diminishing   returns.

Problems (disadvantages/demerits) of subsistence production

  1. Poor standards of living due to production of poor quality output.
  2. Narrow tax base because of limited   production   activities.   This   leads   to low government  tax revenue.
  3. Poor infrastructure in form of poor roads, hospitals, communication services etc.
  4. Technological backwardness due to lack of inventiveness as a result of conservatism.
  5. Limited and poor quality output hence low levels of economic growth and development.
  6. It discourages hard work and expansion of production due to absence of profit motive.
  7. It limits the level of employment opportunities due to limited production activities.
  8. It leads to low levels of foreign exchange earnings due to lack of trade activities.
  9. It discourages the monetization of the economy due to use of barter system of exchange.
  10. It promotes conservatism and cultural backwardness which leads to cultural dualism.
  11. There is a high degree risks resulting from natural disasters due to over dependency on nature which adversely affects output.

Market (money/indirect/commercial) production

This refers to the production   of goods and services for exchange in the market.

Features (characteristics) of market production

  1. There is use of money as a medium of exchange.
  2. There is existence of profit motive.
  3. There is use of modem techniques of production.
  4. There is production  of high quality output.
  5. There is use of hired labour in the production process.
  6. There is use of capital intensive technology  of production.

Advantages (merits) of market production

  1. It encourages the production of high quality output hence better standards of living.
  2. It widens the tax base thereby increasing government revenue through taxation.
  3. It promotes the development of social and economic infrastructure in form of roads, marketing facilities, banks, telecommunication    services etc. This leads to rural transformation.
  4. It stimulates capital accumulation as a result of increased savings and production activities.
  5. It increases foreign exchange earnings of the country  as a result   of increased   production for export.
  6. It promotes the optimal exploitation and utilization of resources. This is as a result of increased production of goods and services for the export market.
  7. The presence of profit motive encourages hard work and large scale production. This promotes economic   growth and development.
  8. It promotes technological progress as a result of increased innovations and inventions.
  9. It reduces on the dependency of the economy on other foreign economies for trade, manpower, technology etc.
  10. It increases the supply of industrial raw materials for agro based industries. This promotes the creation of forward and backward   linkages between the agricultural   and industrial   sectors.

Input-output   relationships (planning   periods)

The input-out relationship   explains how output is related to factors inputs.  This relationship    depends on the planning periods which include:

  • Very short run period. This is the planning period  where  all factors  of productions   are  fixed  that is,  it  is  impossible   to  increase   on  the  factor  of  production    with  the  aim  of  increasing    output. Supply on market can only be increased by drawing stock from stores.
  • Short run period. This is the planning   period  in which  other  factors  of production   are  fixed  and others  are variable  (change)  for example  land  tends  to be fixed  in the short  run while  capital  and labour  on variable.   In the  short  run  the  supply  of  land  is  fixed  (perfectly)   in  elastic)   while  the supply  of capital  and  labour  is elastic  therefore  output  is increased   by increasing   on the  variable factors  only and the law of diminishing   returns  applies.
  • Long run (secular) period. This is a planning  period  where  all factors  of production   are  viable  a part  from Technology   that is, it is possible  to increase  on output  by varying  both  the variable and what has been the fixed  factors  in the short run.
  • Very long term period. This is where all factors of production  are variable including   technology. In this  planning  period  technological   progress   takes  place  and  produces   can  increases   output  in the shortest  time possible.

 

Note:

  • Variable factors (Inputs)of production, are  factor  inputs  whose  supply  is elastic  in the  short  run.  That is, if their demand increases their supply also increases for example labour.
  • Fixed factors of production  are factor inputs whose supply remains   constant   in the short run for example land.

Short run production   Period

The production function is a mathematical   relationship   between factor inputs and output. The production   function in the short run assumes the following;

  1. At least one variable   factor of production.
  2. It assumes constant technology.                                                                                  .
  3. It assumes that all factors of production   are perfectly divisible that is, they can be combined   in all proportions.

Determinants of the production function

  1. The amount of factor input used like capital, labour, land, etc.
  2. The size of the production   unit (the   firm)
  3. The level of prices for factor input
  4. The proportion   in which the factors of production   are combined.

The production   function can be expressed in the following ways:

(a)   As a mathematical statement/Equation.  In this case, output is expressed   as a function   of factor inputs.  For example:

(i)   Q= f(K,L)   where  capital  is fixed

(ii)  Q = aK + bL

(iii) Q = AKαLβ (Cobb Douglas production function)

Where Q = level of production, K = capital and L = labour

 

(b) In mathematical (tabular form)

Input (labour) Output (units)
10 100
20 200
30 300
50 250

 

(c) Graphical form

 

By  keeping   other  factors  constant   (fixed)  and  one  factor  variable   (labour)   the  relationship   between output   and  labour  can  be  explained   graphically   as  shown above.  Output   increases   with  increase   in labour  up to a certain  point  beyond  which  output  decreases  as labour  increases.

 

Variation of output in the Short run

By  using  the  input-output   relationship   in the  short  run  where  we  have  one  variable   input  (labour)  and the fixed  factor  (land),  a change  in output  can be analyzed  in the following  ways;

  • Total product.  This  refers  to the  total  amount  of output  produced   using  both  variable   and  fixed factors  of production   in a given time.
  • Average product.   This refers to output per unit of the variable input.

  • Marginal  product.   It refers to the additional   output resulting   from the use or employment   of an extra unit of variable factor input

 

A hypothetical example to show the mathematical relationship between T.P, A.P and M.P

Fixed factor

(Land) in acres

Variable factor

(labour)

T.P(Q) A.P M.P
5 1 5
5 2 15 7.5 10
5 3 45 15 .30
5 4 73 18.5 28
                  5 5 86 17.2 13-
5 6 91 15.2 5
5 7 91 13
5 8 88 11 -3

Graphical illustration of the relationship between Average product, Marginal product and Total product

 

From the graph the following is observed;

  • T.P begins by increasing, reaches maximum point B and then falls
  • Marginal  product   begins   by increasing    reaches    a maximum    and   then   decreases    up   to the negatives.
  • Average product begins by increasing, reaches a maximum   and then falls.
  • When total product  (TP)   is increasing   at an increasing   rate (up to point   L), Marginal   product (M.P)   is also increasing.   When   TP is at maximum    M.P is zero, when   T.P is falling   M.P is negative.  Therefore M.P is the measure of the rate of change of total product.
  • When average product (A.P) is increasing; M.P is higher than AP and when average product (A.P)  is falling M.P is lower than A.P and when A.P is at maximum when MP = A.P.
  • L is called a point of inflexion. It refers to the point below which MP is increasing and beyond which M.P is declining.   OR. It is a point below which total product is increasing   at an increasing rate and beyond which total product is increasing   at a declining rate.

From   the   graph   the   short   run   input-output    relationship can be explained in three   stages   of

Production:-

Stage I: The stage of increasing returns.

This  stage  starts  from  zero  output  up to the point  where  AP is  at  maximum.    In this stage   TP, MP and AP are generally   increasing.    TP is increasing    at an increasing   rate.  The ratio of the fixed factor to the variable   factor is high.  That is, the fixed factor is still underutilized   by the variable factor.  MP is greater than AP. Any rational  producer   (farm)  cannot operate   in  this  stage  because   an  increase   in  the  labour   inputs   (variable   factor)   can   still  lead  to increase  in output.

Stage II: The stage of diminishing returns.  

This is also referred   to as the optimal or economic region of production.   In this  region,  MP  and  AP  are  declining   but  MP  is  still  positive.   There   is efficient  utilization   of  the  fixed  factor  by  the  variable   factor  and  therefore   production    should   take place  in  this  region.   In other words, a rational   producer   whose aim is to maximize   profits   should operate in this region.  MP is less than AP

Stage III: The Stage of negative returns.

It is also called the intensive stage. In this stage,   TP, AP and MP are declining   and MP is negative.   This  implies,  employment   of an  extra  unit  of  a variable factor  would  instead   lead  to a decline  in the total  output.  This is due to over utilization   of the fixed factor by the variable factor.  It is irrational to operate in this stage since the employment    of an extra unit of variable factor leads to less output generated.

 

The law of diminishing   returns (The law of variable factor proportions)

The law  states that as more  and  more  units  of  a variable   factor  (labour)   are  added  to  fixed  factor (land),  marginal  product  first increases  reaches  the maximum  beyond  which  it diminishes.

 

Illustration

From the graph   marginal    product increases up to the maximum   point beyond which it begins to diminish

Assumptions of the law of diminishing returns

  1. It assumes a short run period
  2. It assumes existence of a variable factor
  3. It assumes existence of a fixed factor
  4. It assumes constant technology
  5. All units of a variable factor are homogeneous
  6. Assumes that all factors of production   are divisible and they are easy to change in proportions   in which they are combined:
  7. It assumes that factors of production are equally efficient in the production   process.  That is, they have the same skills, level of education etc.
  8. It assumes constant factor prices.

Applications (importance) of the law of Diminishing  returns

  1. It makes it possible   for the producers to determine the optimum level of a variable factor which can be combined   with fixed factor to yield maximum output.
  2. It’s  used  as  a basis for  the formulation   of the law of diminishing  marginal  utility  under   the theory  of demand.                                                                                          .
  3. The law forms   the basis of Malthusian   population   theory which   explains   the relationship between population   growth and food supply.
  4. It forms the basis of the marginal productivity theory of wages. That is a wage given to workers should be equal to the value of his/her marginal product.
  5. The law helps the producer to determine the profit maximizing level of output that is profits are maximized were marginal product is at maximum.

Variation of output in the long run

In the long run, all factors of production are variable apart from technology. Therefore, it is possible for the firm to vary (change) all the factor inputs in a given scale/proportion in order to produce a given level of output. The production relationships in the long run can be analyzed using the law of returns to scale in terms of increasing, constant and decreasing returns to scale.

Returns to scale refer to the change in output when all factor inputs are changed in a given proportion.  It shows the relationship between the proportionate change in the factor inputs and corresponding changes in the quantity of output produced in the long runs

 

The law of returns to scale can be analyzed in three stages:

Stage I: Increasing returns to scale. This is where, when factor inputs double, output (returns) more than doubles. Taking capital and labour as variable factor inputs, increasing returns to scale can be illustrated as shown below.

Capital Labour Output (kg)
2 10 100
4 20 300
8 40 700

Stage II:  Constant returns to scale: This is where when factor inputs are doubled, output also doubles. That is inputs and output increase in the same proportion. This stage indicates the optimum size of the firm. It is illustrated as shown below:

Capital Labour Output (kg)
2 10 100
4 20 200
8 40 400

 

Stage Ill:  Decreasing (diminishing) returns to scale.  This is where an increase in factor inputs exceeds the increase in output in terms of scale. That is, when factor inputs are doubled output less than doubles.

Capital Labour Output (kg)
2 10 100
4 20 250
8 40 250

 

Economies and diseconomies of scale

Economies of scale (E.O.S) are cost advantages gained by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs

Note:

  • Real economies of scale; are advantages(benefits/gains) enjoyed by the firm  as a result of using reduced physical quantities of inputs used in the production of a given level of output. For example   the  number  of units  of inputs  may  change  from  100kgsto   70 kg  to produce   the  same level of output.
  • Pecuniary (Financial) economies of scale; are advantages   (benefits   or gains)  enjoyed  by the  firm inform   of paying   lower  prices   for  factor  inputs   used  in  the  production    process.   This normally occurs when the firm buys factor inputs in large quantities.

Note: Economies   of scale can be internal or external.

  • Internal economies of scale; are  advantages  (benefits)   enjoyed by  the  firm inform   of reduced  average  costs  resulting  from the firm’s  own  expansion.
  • External economies of scale; are advantages   (benefits)   enjoyed by  the  firm  in  form  of reduced  average  costs  due to the expansion  of the industry  as a whole.

 

Examples of internal Economies of scale

  1. Technical internal E.O.S. These arise  from  the use  of better  methods   (techniques)   of production which  results   into  lower  average  costs  of production    For  example,   a large  firm  can  manage   to purchase  specialized machines  like tractors  which  increase  output  at reduced  average  costs.
  2. Managerial (Administrative) internal E.O.S. Large firms can acquire highly qualified personal in various fields for example,  accountants,  marketing   managers,  production   managers,   etc. These can help to do the work efficiently which lead to increased output at reduced average cost.
  3. Marketing internal E.O.S. These  are advantages   enjoyed  by the  firm through  buying  and  selling in large quantities   e.g. when  raw materials  are purchased   in bulk,  the cost per unit  are reduced  also when  goods  are sold in bulk  more revenue  is realized  by the firm hence  reduced  average  cost.
  4. Financial internal E.O.S. A large firm is able to secure a loan from financial   institutions   like commercial   banks.  This is because it has enough   collateral   securities   and it is highly trusted by financial institutes.
  5. Transport internal   E.O.S.  These    result    from   a   large   firm   transporting     raw materials     or commodities    in bulk (large   quantities)   which   reduces   the cost per unit   of transportation.    For example   the   unit   cost   of transporting    600tones    per   trip   is different    from   the   unit   cost   of transporting   100 tones per the same trip.
  6. Storage internal E.O.S. A large  firm enjoys  by  storing  raw  materials   or commodities in bulk  as compared   to  small  firms, That  is, large  firms  incur  lower: costs  per  unit  as a result  of storing  in large quantities.
  7. Research internal E.O.S. Large firms are able to carry out research as a way of improving   on the quality and quantity of their output unlike small firms.
  1. Risks bearing internal E.O.S. Large firms  are able  to diversify  their  output  by producing   a wider range  of products   and  selling  in different  markets.   In addition   they  are  also  able  to  insure  their business  activities  against  certain  risks  so to avoid  losses.
  2. Social (welfare) internal E.O.S. Large   firms can afford to provide    their   workers   with facilities like medical,   transport,   accommodation, higher wages,   etc.  all of  which   motivate   their  workers and make  them  feel contented.  This increases efficiency hence reduced average costs.

Examples of external economies of scale

  1. Transport external E.O.S. Firms in one  industry   can  share  transport   facilities   and  other  social infrastructure   which  results  into reduced  average  costs  of transportation to each  firm.
  2. Information external E.O.S.  Firms in one area can share   information collected from various sources e.g., information   concerning   market prices, new commodities on market, exchange   rates and information   concerning   other business opportunities.    Such collective   information   can help to reduce the average costs to each firm in the industry.
  3. Technical external E.O.S. Firms  in  one  area  can  share   specialized machinery and  technical personnel,   for  example   they  can  share  maintenance    facilities  like  workshops,    garages   etc.  This implies sharing costs hence reduced average costs for each firm.
  4. Financial external economies of scale. Firms  in one area can attract   financial   institutions    like banks, building   societies   advertising   agencies,   insurance   companies,    etc.  This  makes  it possible for  individual   firms  to  acquire   loans  at  lower  interest  rates  and  to  carry   out  other  activities  at reduced  charges  hence  reduced  average  costs to each  firm.
  5. Marketing external economies of scale. Firms under  one  industry   can  sell  commodities   and  buy raw  materials   collectively   in order  to  reduce   on  the  costs  and  even  enjoy   huge discounts     when buying.  In addition firms may form marketing   co-operatives   which can assist in the selling of their products as an industry.
  6. Specialization external E.O.S. Firms under one industry can enjoy reduced   average   costs when they specialize   in different   in the production   process e.g.  within  the  same  industry,   some  firms may  provide   raw  materials   used  by  other   firms   through   the  backward    and  forward   linkages making  each firm to operate  at lower  average  costs
  7. Welfare external economies of scale. Firms under one industry  can be able to establish   certain social infrastructures    like hospitals,   schools,   recreational   centers,   etc.  which   can  improve   on  the welfare  of their  workers.

 

Diseconomies of scale

These  are  disadvantages    accruing   to  the  firm  of  in  form  of  increased   average   costs  resulting   from over expansion  of the scale of production   of the firm or industry.

Note. Diseconomies   of scale can be internal or external.

  • Internal diseconomies of scale. These   are   disadvantages accruing to the   firm   in form   of increased average costs resulting from over expansion of the scale of production   of the firm.
  • External diseconomies of scale.  These   are disadvantages    accruing to the   firmin form   of increased average costs resulting from over expansion of the industry.

Examples of Internal Diseconomies of scale

  1. 1. Managerial internal D.O.S. As the firm over expands beyond its optimum  level, supervision   of workers,   decision   making   and coordination    becomes   difficult   and   this   results   into   increased average costs of management.
  2. Financial internal D.O.S.  Due to over expansion   of the firm, it becomes   very difficult   to get enough money to finance all the production   activities.   This may force the firm to borrow   at very high interest rates hence increasing the average costs of production.
  3. Marketing internal D.O.S. As the firm over expands   it may get problems    in form of limited markets  for its products.   In addition,  prices  if inputs  may  rise  due  to their  increased   demand   and this results  into increased  average  costs  of production.
  4. Technical internal D.O.S. As the  firm  over  expands   the  rate  of  depreciation    of  the  machines increases.   This  forces   the  firm   to  incur  high  costs  of  repair   and  maintenance    hence   increased average  costs  of production
  5. Transport internal D. O.S. As the firm expands the transport facilities may be over utilized due to transporting  heavy and bulky products.   This results into break down of infrastructure   and vehicles, forcing the firm to incur higher costs of repair.
  6. Storage internal D.O.S. This occurs when the firm has limited storage  facilities   yet the output is increasing.  This forces the firm to incur high storage costs hence diseconomies   of scale.
  7. Social internal D.O.S.  These  can  be  in  form  of  congestion   which   results   into  easy  spread   of diseases,  increased  theft  etc.

Examples of external Diseconomies of scale

  1. Congestion. This occurs when a number of firms compete for the available space for expansion.
  2. Pollution. When  many  firms  concentrate   in one  area,  there  is too  much  wastes  and  fumes   from these  firms  or factories  which  pollute  the environment.   This increases the average costs of fighting pollution or removing the wastes of each firm,
  3. High competition. The firms begin to compete   for the facilities   like ware houses,   markets,   raw materials etc. This increases the prices hence higher average costs of production   for each firm,

Revision Questions

Section A questions

1     (a) Define the term “production”

(b) Mention any three agents of production   in your country.

2   (a) What is meant by factor price

(b) Mention any three factor prices in an economy

3   Give any four determinants of demand for factors of production.

4   (a) What is meant by factor specificity?

(b)  Explain the relationship   between specificity   and mobility of a factor of production

5   (a) Distinguish   between horizontal and vertical factor mobility

(b) Give two examples of vertical mobility of labour.

6  (a) Distinguish   between  specialization   and division  of labour

(b) Give two advantages   of specialization   in an economy.

7  (a)  What  is meant  by factor  mobility?

(b) State three causes of factor immobility   in your country

8   Mention four factors which limit occupational   mobility of labour in your country

9   (a) Define Marginal efficiency of capital

(b) Give any three determinants   of Marginal efficiency   of capital.

10   Make a difference between private Limited companies   and public Limited companies.

11 Distinguish   between the following terms

(a)  Unlimited   liability and limited liability

(b) A share and a stock

(c)  A money market and a capital market

12   Mention four features stock exchange markets in developing   countries

13  (a)   State the law of diminishing   returns

(b)  Mention any three usefulness   of the law of diminishing   returns

14  (a) State the law of variable factor proportions.

(b) Mention any three assumptions   underlying   the law above.

15 (a)   Define marginal efficiency of a factor of production

(b)   Mention three determinants   of marginal efficiency of a factor

16 Outline four sources of business finance in your country.

17 (a) Differentiate   between interest and profit

(b) Calculate   the compound   interest  earned  on the principle  sum  of  100.000/=  lent  for a period  of three                  years  at an interest  rate of 10% per  annum.

18 (a) What is meant by subsistence production

(b) Mention three features of subsistence   (direct) production.

19 (a) What is meant by market (indirect) production

(b) Give three merits of market production.

20 (a) Distinguish   between Pecuniary and real economies   of scale

(b) Give two examples of pecuniary economies   of scale

 

Section B questions

  1. (a) With examples, distinguish between Horizontal   and Vertical  mobility  of labour.

(b) Explain the determinants   of labour mobility in your country.

  1. (a) Explain the role of capital  accumulation   in economic  development

(b)  Discuss the factors that influence capital accumulation   in your country

3 (a) What is meant by the term capital accumulation   and capital depreciation

(b)  Suggest   measures   that  should  be  taken  to  increase   the  rate  of  capital  accumulation in  your country.

4  (a) Explain  the barriers  to occupational   labour  mobility.

(b) Suggest policies that can be adopted to improve labour mobility in your country.

5  (a)  Distinguish   between  economies  of scale and diseconomies   of scale.

(b)  Discuss the various economies of scale enjoyed by firms in your country

6   (a) Distinguish   between external economies of scale and internal economies of scale

(b)  Account   for  the  survival  of  small   firms  despite   the  presence   of  economies   of  large  scale production.

 

Concept of the firm

  • A firm is a production  unit under one management which organizes resources   to produce   goods and services.
  • An industry is a collection   of firms dealing in related products   for example   foot wear industry plastic industry, textile industry etc.

Types of industries

  1. Rooted Industries. These are industries located   near   the source   of raw materials    e.g.  Cement industries located near lime stone rocks, sugar industries located near, sugar cane plantations
  2. Footloose Industries. There are industries which can be located anywhere without  considering   the source of raw materials or market.
  3. Tied Industries. These  are industries   located   near   the market   for their finished   products    e.g. furniture industries,   bakeries, carpentry workshops   soda industry, etc.

Objectives of the firm

  1. Profit maximization. This is a major objective of the firm. The firm tries to minimize the costs and maximize the revenue the revenue in order to maximize   Profits are maximized   at a point where marginal cost equals to marginal revenue.
  2. Sales revenue maximization. The   firm  may   aim   at  increasing    sales  through   reduced   prices, advertisement    and  other  incentives   given   to  customers    with   the  aim  of  maximizing    the  sales revenue.
  3. Good image. Some firms do not aim at profit making but to serve the    community   and maintain their   reputation    especially    parastatals.    This   can   be achieved    by   fixing   low   average prices, providing quality products and services that are appropriate   to community needs.
  4. Market expansion. Firms aim at getting a bigger market   share as compared   to their competitors through  market  research,  supplying  good  quality  products,   advertisement   etc.
  5. Long run survival. The  firm  may  operate   in  such  way  to  exist  for  a  long  time.  This   can be achieved through proper management   and making proper decisions.
  6. Entry limitation. Some firms are interested   in preventing   other firms from entering   the industry. This  is achieved  by setting  lower  prices  that make  entry  of new  firms in the-industry  un attractive. This is referred to as limiting pricing policy.
  7. Employee welfare maximization. Some firms aim at maximizing    the welfare   of their workers increasing   the wage and non-wage benefits,

Survival of small scale firms alongside large firms

As firms increase their scale of operation,   they enjoy economies of large scale.  Therefore   every firm must strive hard in order to reap such benefits.   However   some firms continue   to operate   on a small scale because of the following factors.

  1. Limited capital. Small firms may be limited by capital for their expansion  and this makes them to remain small for a long time.
  2. Limited Market   Size.  Some   firms   may   remain    small   due   to   a small   market    size   which necessitates the production   of low output.   Therefore   the firm remains   small to avoid loss resulting from over production.
  3. Using bi-products from large firms. Small  scale  firms  may  survive   When  they  are  using  raw materials   supplied  by large  firms. This makes them to remain in a small state despite the benefits of large production.
  4. Providing personalized services. Small   scale   firms  which  provide   personal   services   and  pay individual   attention   to their  customers   like  doctors,   tailors  may  not  need  to  operate   on  a large scale if they  are to provide  standardized   services  to their customers.
  5. Need for personal contact. The owners of small scale firms can easily develop personal  contacts with their customers.   This  may help  the  firms  to keep  on operating  unlike  large  firms  where  the owners  may not develop  personal  contacts  with  their customers  e.g. salons.
  6. Simplicity in management.   Small   scale   firms   are   easy   to   manage    that   is   there   is   easy communication    and co-ordination   within the small firm unlike large firms.
  7. Beginner firm. When  the  firm  has  just   started,   it  operates   on  a  small   scale  because   time  is required  for it to expand  and enjoy the economies   of large scale.
  8. Fear of diseconomies of scale. Unlike   large   scale   firms,   small   firms   do not   face   internal diseconomies   of scale and therefore, this forces them to small for a long time.
  9. Production of very expensive products. Firms  engaged  in the  production   goods  of  ostentation may  remain   small  because  of the nature  of their  expensive  products   and  the need  to show  class among  their  customers.  Examples are firms dealing in sports cars, expensive jewelry   etc.
  10. Flexibility in production. Small scale firms can easily change  the line of  production    without wasting   much  resources   for  example   when  the  market  demand   changes,   a small  firm  does  not lose so much  as compared  to  a large  firm,
  11. Production of bulky and fragile products. Small   scale   firms   dealing   in  bulky   and   fragile products   may  feel  secure  to remain  small  to avoid  risks  of over  expansion   e.g.  Firms dealing in glass making, brick making, eggs etc.
  12. Fear of paying taxes to the government. Small firms can easily avoid and evade paying  taxes and this makes them to operate on a small scale.

 

Merging (Integration) of firms

This  is where  two  or more  firms join  together   to  form  one  business   unit  with  the  aim  of  enjoying economies  of large  scale.

Reasons (Aims/Objectives) for merging/integration

  1. To expand the market in form of increased sales resulting from large production.
  2.     To ensure efficient management, that is,   different firms can combine   different   management skills which enable them to operate more effectively   and efficiently.
  3. To reduce on the risks involved in business operations. This is because   under   mergers   risk bearing economies   of scale can be enjoyed through diversification   in production.
  4. To monopolize business activities. When  a number  of firms combine  to form  one large firm, they can outcompete   other  small  firms  hence  enjoying  the monopoly  power.
  5. To increase employment opportunities. A number of business activities   are created due to large scale of production   hence more employment   opportunities.
  6. To increase resource utilization. A combined   big  firm  can be able to raise  more  capital  in order to increase  on  the  utilization   of resources   and  produce   more  goods  and  services,   in  case  small firms have been operating  at excess  capacity.
  7. To ensure reliable supply of raw materials. For example when one firm is using bi-products  of another firm as its source of raw materials.
  8. To increase on the profits of each firm within the merger due to the large scale of operation  of the merger.
  9. To ensure increased quality and quantity of output. For example, through joint research,  firms can be able to improve on the quality of their products.
  10. To promote specialization in production. Each   firm under   the   merger    can   specialize    in producing  a given product.  This increases the efficiency and output of each firm.

Types of Mergers

(a)  Horizontal Mergers. This  is where  two or more  firms  in the same  industry   and  at the same  stage of  production   join   together   so  as  to  enjoy   economies    of  large   scale.   For example Toyota Company merging with Nissan Company.

(b)  Vertical mergers. This is where two or more firms in the same industry and at different   stages of Production,   join    together    (amalgamate). For example   sugar    firm   merging    with    sugar   cane producing firm, textile firm merging with cotton producing firm etc.

 

There are two types vertical mergers;

(i) Forward Vertical Mergers. This  is the form of  vertical    integration   where  a firm  at a lower  stage of production  merges  with  the firm at higher  stage of production   like a secondary   school  merging with a university,   sugarcane  firm initiating  the process  of merging  with  a sugar  firm  etc.

(ii) Backward Vertical Mergers. This is the form of vertical integration   where a firm at higher stage of production    absorbs   a firm at a lower   stage   of production.    For   example    the   sugar   firm absorbs   a sugar cane plantation,   a steel manufacturing    industry absorbing    an iron supplying company etc.

Note

  • Backward linkages.  This   is a situation    where   the   existing   large   firm   or   industry    leads   to establishment of another   industry   by providing    inputs   (raw materials).    For   example   a sugar industry having a backward linkage to a firm that grows sugar cane, a secondary school has backward linkage to a primary school
  • Forward linkages. This   is   a   situation    where    an   existing    firm or   industry    leads   to   the establishment   of another firm to create market   for its products.   A sugar factory has a forward linkage to supermarket or restaurant, a secondary school has a forward linkage to a university.

(c) Lateral integration/merger is the expansion of a corporation to include other previously competitive enterprises within the same sector of goods or service production.   For example one candy maker takes over another candy maker.

(d)  Conglomerate (Diversifying) mergers.  This  is a merger between firms that are involved in totally unrelated business activities.,  For  example   a brewery   industry merging  with a textile  industry,  a sugar  industry  merging  with a furniture  industry. A conglomerate merger provides the merging companies with the advantage of diversification of business operations and target markets.

 

Factors which make it difficult for firms to Merge

  1. Fear of complexity in management in form of bureaucracy
  2. Fear of losing independence enjoyed by individual firms
  3. Differences in aims and objectives of individual firms
  4. Government policy which may be aimed at discouraging merging of firms
  5. Fear of losing employment due to merging for example the managers
  6. Fear of paying high taxes by one single big firm
  7. Fear of losing personal contact with the clients of the firm.
  8. Fear of under taking high risks associated with large scale operation
  9. Fear of not achieving the optimum level of production due to a large scale of production
  10. Fear of diseconomies of large scale. For example marketing and technical diseconomies of scale
  11. Market potential may favor competition which forces firms to remain independent.

Advantages of merging of firms

  1. It helps to expand the market in form of increased sales resulting from large firms.
  2. It increases employment opportunities as a result of large scale production.
  3. It increases utilization of resources hence increased output.
  4. It helps to minimize unnecessary competition among firms producing related products in form of duplication of commodities.
  5. It ensures reliable supply of raw materials.
  6. It improves efficiency in management. This is because people of different expertise and experience are combined together under the merger.
  7. It reduces the cost of advertising for individual firms.
  8. It enables firms to carry out research jointly at a reduced cost.
  9. It enables firms to access capital (loans) from financial institutions as a result of merging.
  10. It enables the firms to share risks involved in production.
  11. It enables firms to access the use of better techniques of production.
  12. It increases profits of each firm due to large scale production.
  13. It promotes specialization among firms which increases the level of output.

Disadvantages of merging of firms

  1. It leads to over exploitation of resources.
  2. It increases pollution due to the existence of the industry.
  3. It leads to congestion of firms within the industry.
  4. It leads to over production due to large scale production hence wastage of resources.
  5. It leads to price fluctuations due to over production.
  6. It leads to loss of independence of individual firms
  7. It increases complexity iii management due to large scale operation.
  8. It leads to emergency of collusive monopoly and its associated negative implications
  9. It leads to unemployment in firms when the firms use capital intensive techniques of production.

 

Location of firms (Industries)

This refers to the setting up of a firm in a particular area.

Factors affecting the location of firms

  1. Availability of raw materials. In situations where the raw materials are bulky the firm finds it cheaper to be near the source of raw materials. For example the location of cement factory in Tororo was due to the presence of limestone rocks.
  2. Availability of power supply. Industries  which require a lot of power are located near source   of power,   for   example,   industries    manufacturing     metal   products    like   steel   rolling   mills.    This explains   why Jinja became   the industrial   town of Uganda   due to the presence   of hydroelectric power source.
  3. Availability of market. Industries  or firms producing   perishable   commodities   like  flowers,   bread etc. are  located  near  the market  to avoid  their  products   from  getting  spoilt  or damaged   while  in transit.  In addition, industries producing   fragile and bulky commodities   like glass and bricks need to be located near market areas.
  4. Availability of transport facilities. There is need   to locate   a firm where   transport    is  readily available  and  cheap  .For example  along  railway  lines,  good  road  networks,   water  ways  etc.  This helps to minimize on the transport costs.
  5. Availability of water supply. Some   firms  require   water   as  a  raw  material   in  the  production process,   for  example,   water  is used  as  an input  in  the  brewery   industry   and  it can  be  used   for waste  disproval   by many  industries.   Therefore,   it is economical   for some industries   to be located near a water source.
  6. Availability of land. Land provides a site where a production unit can be established.  Therefore   it is economical   for firms to be located in areas where land as available   and cheap so as to provide room for industrial expansion.
  7. Availability of cheap labour. Firms are located in areas where labour is cheap and is in enough supply. This is true with firms which are labour intensive.
  8. Government policy. The   government     may   be   aiming    at   balanced    regional    development, employment creation,   controlling    rural urban   migration   which   may   force the government     to locate a firm in a certain area.
  9. Political climate. The location of a firm is determined  by political   stability (security)   of the area. This is because   a politically   stable area provides   a conducive   investment   climate which   attracts firms to be located in a certain area.
  10. Availability of economic infrastructure. For example  banks,   insurance companies, advertising companies   etc. may force firms to concentrate   in an area.
  11. Availability of suitable climate. Firms   are located   in areas   where   the climate   is generally favorable   for their activities.   For example   it is not advisable   to locate   a paper   industry   in a swampy area.

 

Localization of firms

This refers to the concentration   of firms in a particular area.

Factors which influence the localization   of firms

  1. Industrial inertia. This is the tendency of the existing firms to remain established in a given area even when the location factors are exhausted.
  2. Availability of ready market. The already established   firms  may  provide  market  for the incoming firms  and the new  firms may provide  raw materials   for the already  established   firms  and  therefore such firms may  decide  to localize  in one area.
  3. Power supply. Availability  of cheap and constant   power   supply may   lead to the concentration many firms in one area.
  4. Availability of enough land. When land is available and cheap, many firms concentrate in that area because of the existence of room for expansion.
  5. Availability of supply of skilled and unskilled labour. When labour is readily available,  and  in large  quantities,   many  firms  may  be established   in that area  hence  localization   .For concentration of many  firms  in Kampala.
  6. Security and political stability. Localization of firms  may be due  to constant  security  and political stability  which  attract  many  firms  in a particular   area.
  7. Availability of water supply. Water   is  needed   for  industrial    purposes    in  various    ways,   for example,   it is used  an input,  for  waste  disposal,  a cheap  means  of transport   etc.  This can attract firms to concentrate   in such an area so as to minimize on production   costs.

 

The revenue concept of the firm

Revenue is the receipts (returns) derived from the sale of a given level of output at a given price in a given time.

Terms used under revenue

Total Revenue (T.R);  this  is  the  total  amount  of money  the  firm receives   from  the  sale  of  its output.   TR = P x Q    Where P = Price of each unit of output and   Q = total out put

 

Average Revenue (A.R);  refers to total revenue per unit of output sold

Note:  Average revenue is the same as price under perfect competition

Marginal Revenue (MR.) refers   to the additional   revenue   resulting   from  the  sale  of  an extra unit  of output

 

Example

Output TR AR MR
1 500 500
2 800 400 300
3 1000 333 200
4 1300 325 300
5 1600 320 350

 

The theory of costs

A cost in economics   refers  to amount  of money  paid  (incurred)  by the  firm  to produce  a given  level of  output  in  a  given  time.  Therefore costs are expenses   of the firm in the production   process.   A firm’s cost of production also includes all the opportunity   costs of producing   its output of goods and services.

 

Types of costs of a firm

Implicit (transfer) costs. There  are costs  which  are not considered  when  calculating   profits  of the firm by the accountants   e.g. costs  in form of noise,  pollution,  family  labour,  self-owned   inputs, etc. They are normally assumed to be zero when computing profits.

Explicit (nominal/money) costs. These  are costs  which  are considered when  calculating   profits of the firm by the accountants   e.g. costs  of raw materials,  hired  labour,  transport  costs   etc.

 

Note. Explicit cost can either be fixed costs or variable costs.

Fixed   (Supplementary/Overhead) costs.  These    are   the   costs    incurred    by   the   producer irrespective   of the level of output.   OR These are costs which remain constant irrespective   of the level of output. For example the cost of land, building, vehicles, salaries for top management, rent.

 Variable   (Prime)   Costs.  These   are  costs  which  change  with  the  changes   in the  level  of  output, that  is; when  the level  of output  increases,  variable  costs  also  increase   for example   the  cost  of raw materials,  wage payments,   transport  costs,  electricity  etc.

Total costs (TC) = Explicit costs + Implicit costs

Total costs (TC)  = Total  Fixed  costs  (TFC)  + Total  Variable  costs  (TVC)  + Implicit  costs

Assuming that implicit costs = 0

TC =TFC + TVC.

Assuming   zero implicit cost, TC = TFC + TVC.

When  output  is zero  as shown  from  the  graph,  there are no  variable  costs  (TVC = 0).  This implies that the producer   has not yet started producing    and therefore    he   cannot   incur   any   variable    cost.   Therefore    Total    Cost   = 0 + Total    Fixed    cost (TC = TFC).

 

When output increases,   TVC and TC increase   by the same amount.  This is because TFC are constant at all levels of output and an increase in TC results from the increase in TVC.

 

Variation of costs in the short run

In the short run, there are both variable   costs and fixed costs of production.    This is because   some factors of production are variable and others are fixed.

 Average Fixed   Costs  (AFC).   These are total fixed costs incurred   in producing   an extra unit of output in a given time.  Or these are fixed costs per unit output produced   by the firm in a given time

Average variable costs (AVC) are total variable costs per unit of output produced in a given time. Or average variable costs are total variable costs incurred in producing in producing one unit of output in a given time.

Marginal cost refers to additional costs resulting from the production of an extra unit of output in agiven time

Example 3

Given that output increased from 50kg to 75kg and total costs increased from 20,000/= to 25,000/=. Calculate MC.

Average total cost (ATC/AC) is the total costs of production per unit of output produced by the firm in a given time. Or average total costs are total costs incurred in producing one unit of output in a given time.

Example 4

Given that TC = 400/= and output is 20 units, calculate ATC (AC)

Numerical example to illustrate the short run variation of costs of a firm

Output Q TFC TVC TC MC ATC AFC AVC
0 100 0 100
1 100 400 500 400 500 100 400
2 100 700 800 300 400 50 350
3 100 900 1000 200 333 33 300
4 100 1200 1300 300 325 25 300
5 100 1550 1650 350 330 20 310
6 100 2000 2100 450 350 17 333

From the graph, MC, ATC and AVC curves are U – shaped because of law of diminishing returns

  • AVC curve lies below ATC curve because AVC is part of ATC.
  • As output increases the AVC curve comes closer to the ATC curve because of the continuous fall of AFC.
  • The MC curve lies below the ATC and A VC curves when they are declining and it lies above them when they are rising.
  • The MC curve cuts the AVC and ATC curves at their lowest (minimum) points (points A and B respectively).
  • The minimum point of the A VC curve (point A) is on the left hand side of the minimum point of the ATC curve (point B).
  • The ATC curve first decreases as output increases because of the fall in A VC and AFC. After point A, the AVC curve begins to rise but the ATC curve continues to fall because of the continuous fall in AFC which outweighs the rate at which AVC is increasing.
  • After point B the A TC Curve begins to rise because of the increase in A VC outweighs the rate at which AFC is falling.

 

Variation of costs in the Long run

In the long run, there are no fixed costs and therefore, all costs of production are variable.  The firm is able to adjust its plant size by varying all the costs of production and at the same time producing  at the minimum point of the long run average cost curve.

  • The relationship between   LAC  and  SAC  curves  is that  the LAC  curve  is a locus  of the  series  of the tangents  of the minimum  points  of the SAC curves  as shown  from the graph.
  • The LAC curve  is U-shaped but  flatter  as compared   to SAC  curve because  of the gradual decline in the  Average   costs  and  the  gradual   increase   in  the  average   costs  after  the  optimum   point  X which  is due to economies   and diseconomies   of large scale
  • The LAC curve is called the envelope curve or planning    curve because it encloses   all the short run average cost curves. The   envelope curve is locus of the tangents of the minimum points of the short run average cost curves.  Therefore   a firm  to produce  more  output  in the  long  run,  it must adjust its plant  size which  allows  it to produce  at the minimum level of the average  cost
  • From the  graph,  to  produce   output   OQ2, the  firm  can  either  use  plant  size  of  SAC1     or  SAC2. However   the  firm  chooses   the  scale  of  operation   of  plant  size  SAC2  to produce   OQ2 because costs CC2 is lower than OC1 indicated  at point  N on SAC1.
  • Therefore it is rational for the  firm  to use  the plant  size  which  produces   output  at the  minimum possible average cost . For  example   output  OQ1 is  produced   at  costs  OC1,  on  using   plant   size SAC1,  OQ2 is produced   at costs  OC2  using  plant  size  SAC2, OQ3 is produced   at costs  OC3   using plant  size SAC3 and so on.
  • The process of changing   the plant  size of the firm according   to the short run  average  cost  curves continues   as output  increases   until  the  optimum   size  of the  firm  is reached   at point    Beyond point X the average costs begin to increase as output increases.

Note:  The average  cost curve  is U-shaped in the short  run  because  of the law of diminishing   returns which   states  that  as more  units  of  variable   factor  are  added  to  fixed  factor  marginal   product   first increases  up to a certain  point  beyond  which  it declines

  • From the  graph  the  curve   begins   by  sloping   down  wards   as  output   increases   because   of  the increasing    This  is mainly  due  to increased   utilization   of the fixed  factor  by  the  variable factor  leading   to  a decline  in  costs  per  unit  output.   At point X, the firm incurs   the minimum possible   costs   (Co) and producing    the maximum   possible   output   (Qo).  Beyond   point   X   the average   costs begin   to rise because   of the diminishing    returns.   This   is  mainly   due   to  over utilization  of the fixed factor  by the variable  factor  hence  the U-shape  of the Average  cost  curve.
  • The average cost curve is U-shaped in the long run because of the economies and diseconomies of scale.  Economies  of scale refer  to the advantages  or benefits   enjoyed  by  the  firm  in form  of reduced   average  costs  due  to the  expansion   of the  industry   or  the  firm    Diseconomies  of scale refer  to disadvantages    accruing   to the  firm  in  form  increasing   average   costs  due  to over expansion  of the industry  or the firm  itself.

Note

Before point X the firm operates   at excess capacity.  Excess capacity is a situation   where the firm produces   output which is less than optimum   output.  OR. It refers  to the  state  of underutilization   of the  available   resources   by  the  firm   or  economy   such  that  the  output   produced    is  less  than the optimum  output.

Causes of excess capacity

  1. Limited or inadequate capital
  2. Presence of monopoly tendencies   in the economy
  3. Use of poor technology.
  4. Limited skilled labour
  5. Limited market
  6. Political instabilities
  7. Poor social and economic infrastructure
  8. Inadequate   entrepreneurs
  9. Unfavorable   government polices like high taxation.

Note:  An optimum firm.   This   is a firm  which   produces    the  maximum    possible    output   at  the minimum   possible   costs.  OR. It is a firm which operates   at the minimum   point of the average   cost curve.

  • Equilibrium of a Firm. A firm is in equilibrium (maximizes profits)when its marginal revenue (MR)  is equal  to marginal  cost  (MC)  at higher  levels  of output.
  • Equilibrium of an industry. An industry  is said to be in equilibrium   when there is no tendency for firms   to leave   or enter   the      This   means   that   each   firm in the industry    is in equilibrium.   When the firm is in equilibrium,   there is no tendency   for its output to increase   or reduce.

 

Market structures

A market is a place, area or medium, through which buyers and sellers exchange commodities,

A market structure refers to the characteristics   governing a particular   market which influence   the performance   of firms or buyers and sellers in that particular market.

Basically, there are four major types of market structures and these include;

  1. Perfect competition
  2. Monopoly
  3. Monopolistic   (imperfect) competition
  4. Oligopoly

These market structures can be classified  basing  on the following  features  (characteristics):

  1. Number of firms. Many   firms:   Perfect   competition    and monopolistic    competition    (imperfect competition);   few firms:  Oligopoly;   One firm: Monopoly
  2. Degree of entry and exit. Free entry and exit: Perfect competition  and monopolistic    competition; Restricted   entry:  Oligopoly;   Blocked  entry: Monopoly
  3. Degree of product differentiation. Homogenous  products:   Perfect   competition;    Differentiated products:  Monopolistic   competition,   Differentiated   oligopoly
  4. Degree of advertisement. No advertisement: Perfect  competition;    Informative    advertisement: Monopoly;   Persuasive   advertisement   for example  monopolistic   competition,   oligopoly.
  5. Degree of knowledge or information about market conditions. Perfect   knowledge:    Perfect competition;   Limited information   or knowledge:   Monopolistic   competition,   monopoly,   oligopoly
  6. Degree of   government    intervention.   No   government     intervention:     Perfect    competition; Government   intervention:   Monopoly, oligopoly, monopolistic   competition.

Perfect Competition Market structure

This is a market structure characterized   by the following features.

  1. Many firms (buyers and sellers). There  are  many   sellers   and  buyers   involved   in  this  market structure   and  therefore,   there  is no  single  firm  which  can  influence   the  market  price.  Prices are determined   by the forces of demand and supply.
  2. Freedom of entry and exit. Firms are free to enter or leave the industry. When the firms in the industry are making  profits,  new firms  are free to enter  and when  firms  in the industry  are making losses,  some  firms  are free to leave the industry.
  3. Homogenous products. All firms under this market structure   sell identical   products.  These force them to charge a uniform price.
  4. There is no advertisement. This is because  under  perfect  competition   all  firms  sell  homogenous products  and they charge  a uniform  price.  Therefore,   there is no need to advertise.
  5. Perfect knowledge about market conditions. There is no ignorance on the side of the buyers about the prevailing market prices, quality of the products etc.
  6. No government intervention. Under this  market  structure,   the  government   does  not  interfere   in economic  activities  in form of taxation  and fixing prices  for commodities.
  7. Sellers are price takers. That is,  there  is  no  single   seller  who  can  influence   the  price  of  the commodity.   This is because   the prices of the commodities    are determined   by market   forces of demand and supply.                               .
  8. There is perfect divisibility and mobility of factors of production. That is, there is a possibility of dividing   factors   of production    into smaller   units during   the production    process   and factors   of production   are geographically   and occupationally   mobile.
  9. Perfectly elastic demand curve. The demand curve of the firm under  perfect   competition    is perfectly elastic.  This is because all firms charge a uniform price and therefore no single firm has the ability to fix its own price.

Note: Pure competition. This is a market structure which satisfies all the features of perfect competition apart from perfect knowledge, mobility and divisibility of factors of production.

 Short run equilibrium position of a firm under Perfect competition

  • Equilibrium is attained when MC= MR=AR and MC curve cuts the MR curve from below.
  • Three possibilities: Normal profit (MC = MR = AR =AC= DD = P); Loss ( AC > AR) and super-normal profit (AC < AR) as shown in diagram below

From the graphs, equilibrium is attained at point A where MC = MR

Normal profit (zero profit) are obtained when AC = AR

Loss is obtained when AC > AR, and loss is represented by the area PP*AB

Super normal profits are obtained when AC < AR and profit is represented by the shaded area P*PAB

Long run equilibrium position of a firm under perfect competition

The firm under perfect competition   in the long run earns normal (zero) profits.  This is because  of free entry  and exit where  the abnormal  profits  in the short  run  attract  new firms in the industry while losses expel some firms from the industry

From the graph the long run equilibrium position is attained at point A, where LMC = MR

At point A, output OQ produced at cost price OP, is also the sold at the same price. Since the selling price is equal to cost price, total revenue is equal to total cost, the firm earns normal or zero profit.

 

Break even and shutdown points of a firm under perfect competition

Break-  even point   This  is refers  to the point  in the production   process  at which  the firm under perfect  competition   neither  earns profits  nor makes  losses.  That  is the firm  earns normal profits From  the graph,  it is indicated  at point  B where  marginal   revenue  curve  meets  the average  cost curve.

Shut down point.  This  refers  to a point  in the  production   process  below  which  the  firm  under perfect  competition   cannot  cover the   variable  costs  of production.   From the graph, it is indicated at point S where average variable cost curve meets the marginal revenue   curve.

 

Why may a firm continue to operate even if it is making losses In the Short run?

Or Why may a firm continue to operate between the break even and shut down points?

OR Why may a firm keep an operating even if it is not covering the total costs of production?

Under perfect competition,    a firm may keep on operating   even if it is making losses because   of the following reasons.

  1. The firm   may  keep  on  operating if it  has the hope of getting  a loan (financial   assistance)   from financial  institutions   so as to improve  on its production   activities  and earn profits  in the long  run.
  2. If the firm is government owned and it is providing essential commodities to the society.   For example the firm supplying   water or electricity, it keeps on operating at a loss due to the nature of the services it provides to the society.
  3. When the entrepreneur   has invested a lot of assets in business, he may be reluctant   sell them off and as a result, he may continue to operate at a loss.
  4. The firm may continue to operate due to the fear losing its cheap source of raw materials.
  5. It  may   continue   to  operate  so  long  as  it  covers  its  variable  costs  which   are  inevitable    in production.   For example the costs of raw materials.
  6. The firm may continue   to operate due to the fear of losing the already established market for   its commodities.
  7. It may keep on operating   with the hope of getting another strategic location where it can attract more customers and minimize   on the costs of production.
  8. The  entrepreneur   may  want to maintain  his reputation  and good image to the  public  and  this forces him to continue  operating  even if he is making  losses.
  9. A firm may keep on operating if it expects to enjoy economies of large scale in the long run and earn more profits e.g. marketing   and technical internal economies   of scale.
  10. If the goal of the firm is to provide employment to the society, a firm a may keep on operating even if it is incurring losses.
  11. If the firm is surviving on the super normal profits made in the past,  it may  keep  on operation even if it is making  losses.
  12. When the firm is newly  established, it may  keep  on  operating   with  the  hope  of  getting   more profits  in future  as it expands.
  13. If the firm is a subsidiary of another profit making firm, it may keep on operating when   it is covered by the main firm.
  14. The losses made may be seasonal when the firm expects to make super normal profits in other seasons.
  15. The firm may have hopes of emerging with another prosperous firm so as to enjoy economies of large scale
  16. When the entrepreneur    has  the  hope  of  changing  the management   and administration   which has caused  losses  in the short run, the firm may  keep  on operating  even  if it is making  losses.
  17. If the entrepreneur expects   to  use better techniques  of production   which   may  allow   him   to minimize  the costs  and  earn more  profits  in the  long  run, the  firm  may  keep  on operating   in the short run.
  18. The owner of  the  firm  may  want to prevent  his vital skilled manpower  from  shifting   to  other firms.  This is   because   if it shifts,   it becomes   extremely   difficult   and expensive   to mobilize    it back.
  19. For fear to loss an established name

Advantages (Benefits/Arguments) for Perfect competition   Market structure

  1. It increases the level of output. This is because   of a large   number    of firms   involved    in production   due to freedom of entry of firms in the industry.  This leads to a reduction   in prices in the long run.
  2. Efficiency in resource allocation. Since  there  is  a  number   of  firms  producing    for  a  limited market,   competition    forces  them  to  be  very  efficient   in  order  to out  compete   other   firms  and remain  in the production   process,  hence  the provision  of better  quality  goods  and services.
  3. No wastage of resources,   Since   the  market   structure   assumes   perfect   knowledge    about   the market  conditions   e.g. knowledge   about  market  prices,  the type and quality  of commodities    sold etc. there  is no wastage  of resources  through  advertisement   by the sellers.
  4. High standards of living for the consumers. In the long run high standards of living  are  enjoyed by  consumers   because   of  increased   production    of  high  quality   goods  and  services   which   are bought  at low prices.
  5. It provides an efficient standard measure for comparison of prices in other markets.
  6. It promotes equitable distribution of income. This is due to freedom of entry of firms in the production   process
  7. Optimal utilization of resources in the long run. Resources are fully utilized   and efficiently allocated.  This  is because  the inefficient   firms  are pushed  out of production   whereas   the  efficient firms keep  on operating  using  the available  scarce  resources  in the most  optimal  way.
  8. It ensures fair and stable prices. Prices under perfect competition tend to be stable because all firms   charge   uniform   price.   This promotes    economic    stability   hence   economic    growth   and development.
  9. Creation of employment opportunities.   Because    of   competition     among   so   many    firms, investments   are promoted   in the economy which increases employment   opportunities.
  10. Absence of consumer exploitation. This is  because   all  firms  charge  the  same  price   and  no single  firm has  the ability  to restrict  output  and charge  a high  price  so as to exploit  consumers   as the case is for monopoly.

Demerits (Disadvantages/Negative    implications)   of perfect competition

  1. Limited choice of consumers. Consumers can not enjoy a variety of differentiated products.   This is because under perfect competition,   all firms produce and sell a homogenous   product
  2. Difficult to expand in the long run. In the long run, expansion of the firm is very   difficult because firms earn normal profits.
  3. It is an ideal market situation. It is based on unrealistic assumptions which do not apply in the real life situation.
  4. Research is limited in the long run. It is difficult to carry out research in the long run because of the normal profits earned.
  5. It encourages duplication of goods and services. This leads   to resource   wastage    and   misallocation
  6. Long run unemployment. Because   of  competition,    the  inefficient   firms   are  pushed    out  of production   and therefore,  people  who have been  working  in such firms remain  unemployed    when these  firms  close  down  their operations.   In addition,   some firms may resort to the use of capital intensive   techniques   of production   hence technological    unemployment   is created.
  7. Failure to provide Public goods and social facilities. This is because  such ventures   are not  profit making   and  they   are  very   expensive    to  set  up  yet  firms   under   perfect   competition aim  at maximizing   profits.
  8. Exhaustion of resources (raw materials). Because   of  free  entry,  many   firms  compete   for  the available   scarce  resources   which  lead  to an increase  in  the prices  of raw  materials   and  costs  of production   in general.
  9. Price discrimination is not possible. Prices tend to be constant and demand is perfectly elastic. This limits  sellers  to carryout  price  discrimination   which  is important  in the economy  with  people having  different  income  levels.

Monopoly Market structure

This  is a market   structure  where  there  is a single  producer   or  seller  of  a commodity   which   has  no close  substitutes   or no substitutes  at all, and entry  of new firms  in this market  structure  is blocked.

Monopolist.  A  monopolist   is  a  single  producer   or  seller  of  a  commodity   which   has  no  close substitutes   or no substitutes  at all.

Monopsony.  This  is where  there  is  a single  buyer  of  a commodity or  raw  material   in  a given locality  e.g. it may be a big firm being  the sole buyer  of raw materials in a given  locality.

Features (characteristics) of monopoly market structure

  1. Entry to the market by other firms is blocked both in the short and long run.
  2. Firms aim at profit maximization and therefore produce at a point where MC = MR.
  3. There is only one seller of a commodity which has no dose substitutes or no substitutes at all.
  4. The firm under monopoly is the price maker, that is, it has the ability to determine the price of its own commodity.
  5. The monopolist produces of excess capacity both in the short and long run. This is because   he has the ability to restrict output and charge a high price.
  6. The demand curve under monopoly is inelastic and downward sloping from left to right.

 

7.The monopolist earns abnormal profits both ill the short and long run. This is because   he has the ability to restrict output and charge high price for his commodity.

8. The monopolist carries out informative advertisement just to inform his customers about the availability   of his product on the market.  This is because the monopolist   has no competitors.

Types of monopoly

  1. Imperfect (simple) monopoly. This is the type  of monopoly   where  there  is a single  producer   or seller of a commodity   which  has no close  substitutes   that is, the commodity   can be substituted   to a certain  degree
  2. Pure (Absolute/Perfecta) monopoly. This is the type of monopoly    where   a firm produces    a commodity   that has no substitutes at all.
  3. Statutory Monopoly. This is the form  of monopoly   set up  the  act of the parliament   to provide   a certain  service  to the public  for example  NSSF,  URA  etc.
  4. Collective (Collusive). This is the form of monopoly where   firms producing   similar   products merge so as to monopolize   certain economic   activities.
  5. Bilateral Monopoly. This is the form of monopoly where there is one buyer facing a single seller of a commodity.
  6. Spatial monopoly. This is the  form  of monopoly  arising  from  long  distance  between  rival producers of a given commodity.
  7. Natural monopoly. This is the form of monopoly which exists because of nature where the firm controls the sole ownership of a certain raw material for example River Nile being the only source of hydroelectric power in Uganda.
  8. Discriminating monopoly. This is the form of monopoly where the seller has the ability to charge different prices  to  different  customers  for  similar  units  of  the  commodity  sold  for  example theaters, air transport, stadiums etc.

 

Basis (Origin/Sources) of monopoly power

Monopoly power refers to the ability of the producer to   determine the price of the commodity and restrict entry of other producers from entering the market.

The factors which give rise to monopoly power include the following:-

  1. Patent rights.  These are legal barriers where the products of some people like authors; musicians etc. are protected from other producers by law. The law forbids other producers or firms from producing a similar commodity. The producer is given the sole right to produce a commodity or provide a service for a certain period of time without interference from other producers.
  2. Ownership of a strategic raw material. Some firms or countries may be having the capacity to control the ownership of the only raw material.  Therefore  they  become  monopolists  in the production of a certain commodity using such a raw material under their ownership e.g. middle east has the monopoly power in oil production.
  3. Exclusive knowledge    of production     techniques; in this case a person or firm may possess specific and unique knowledge which may not be possessed by others in the production process e.g.  some  specialists  in  the  medical  field  whose  services  cannot  easily  be  substituted  like surgeons.
  4. Long distance   between   potential    rivals.   Long distance can be the source of monopoly power among the producers of the same commodity in different localities. Each producer monopolizes the region in which his production unit is located as other producers from other regions cannot interfere due to long distance.
  5. Large scale of production. The large efficient and well established firm may adopt the limiting pricing policy which aims at preventing the entry of new firms and elimination of the already existing inefficient firms by charging lower prices for the commodity in consideration. The large scale firm remains a monopolist because other firms are pushed out of the production process.
  6. Protectionism (trade restrictions). This is where the government imposes tariffs and non-tariff barriers on the imported products so as to reduce foreign competition on the locally produced goods. The home producers therefore become monopolists as they are protected from foreign competition.
  7. Merging of firms. This is where two or more firms producing related commodities come together to form one firm   (collective monopoly).  This can be aimed at controlling the materials, market, price of the commodity etc.
  8. Product differentiation.    This  is another  form  where  the  firm  may  become  a  monopolist  by supplying a commodity that is differentiated from others by certain trade market or brands.
  9. Nationalization by the government. In this case, the government can take over private individual firms and therefore it becomes the monopolist.
  10. Market limitation. The entry of new firms may be limited due to existence of a small market this is because they may find it uneconomical to and therefore already existing firm remains the monopolist.
  1. Large capital requirements. Some firms may remain monopolist due to failure of other firms to raise enough capital to start similar businesses e.g. iron and steel industry.
  2. Long period of training, Monopoly power can be created by restricting entry of new individuals by extending the training period required to join a given profession (industry).

Costs and Revenue curves under Monopoly

  • The shape and nature of the cost curves (A C and MC) of a monopolist are the same as those of a firm under perfect competition.
  • The average revenue (demand) curve is downward sloping from left to right implying that at a higher price a monopolist sells less output and more output is sold at a lower price. The demand curve is also downward sloping because the product sold by a monopolist has no close substitutes and the monopolist is a price maker.
  • The marginal revenue (MR) curve is also downward sloping but below the average revenue curve. This is due to the principle that the margin is always below the average

Equilibrium position   (Profit maximization) of a firm under    Monopoly

Short-run refers to that period in which a monopolist cannot change the fixed factors. However, the monopolist is free in determining price due to lack of competition

In short run equilibrium whether the firm makes an abnormal profit, normal profit or loss, it depends on the level of AC and AR which can be shown as follows:-

  • If AR=AC, the firm receives a normal profit.
  • If AR> AC, the firm receives abnormal profit.
  • If AR< AC, the firm bears the loss.

The following conditions must be fulfilled in order to attain equilibrium under monopoly:-

  • MR must be equal to MC
  • MC must intersect MR from below.

The equilibrium position of a monopoly firm can be graphically presented as follows:-

Abnormal profit

In the first fig. (a), the equilibrium point is ‘E’ when MC cuts MR from below. The equilibrium level of output is determined at OQ. The level of revenue earned is OP and the cost incurred is OC. Since Revenue is greater than cost, the firm earns abnormal profit equal to the shaded area (ABPC).

Loss

In the second figure, point E is the equilibrium point where MC intersects MR from below. The equilibrium level of output is OQ. The cost incurred is OC and the revenue earned is OP. Since cost is higher than revenue, the firm bears loss equal to the shaded area (ABCP).

Normal profit

In the third fig. (c), the equilibrium point is at ‘E’ where the conditions for equilibrium are fulfilled, i.e. MC = MR. The equilibrium level of output is OQ. The revenue and cost are at the same level (OP). The firm earns just a normal profit to sustain its business.

Note:  Since the monopolist  has no competitors, he has the freedom to restrict  output  and charge whatever price he wishes. But this is not always the case because of the following reasons:

  1. 1. Fear of potential rivals/competitors. This prevents the monopolists from charging a very high price, as this may attract new firms into the industry.
  2. Fear of the government intervention or regulation. In this case, the government can intervene by controlling the monopoly power especially if the product is essential to the consumers.
  3. Fear of boycott. The consumers may boycott the product produced by the monopolist. This fear compels the monopolist to change relatively lower prices and earn lower profits,
  4. Fear of emergency of new substitutes on market. The high prices charged by the monopolist can give an incentive to other firms to think hard so as to come up with alternative close substitutes which can be more efficient and sold at lower prices hence making monopolist lose.
  5. Fear of nationalization. The  government   may  take  over  the  monopolist   firm  in case  it is over- exploiting  the consumers  by charging  high  prices.

 

Advantages   (Merits/Positive   implications)   of Monopoly

  1. There is a possibility of price discrimination where by similar units of a commodity are sold at different prices to different consumers.   This enables   the low income   earners to consume   high quality products at lower prices.
  2. Ability to carry out research. A monopolist earns abnormal profits both in the short run and long run  and  therefore,   it  is  possible   to  carryout   research   so  as  to  improve   on  the  quality   of  the products.
  3. Economies of scale are enjoyed by the firm under monopoly. A monopolist   has  the  ability   to expand  the firm  using  abnormal  profits  earned  thereby  enjoying  economies  of large   scale.
  4. There is no resource wastage through advertisement. A monopolist   does not need to carryout persuasive   advertisement   because the commodity   sold has no close substitute.
  5. In case of government  monopolies, public  utilities   like  roads,  hospitals,   power  supply   etc.  can easily be controlled   and provided  to the public  fair prices  (lower  costs).
  6. Improvement in the welfare of the employees. This is because a monopolist is in position   to earn abnormal profits which it can use to improve on the welfare of its workers.
  7. Growth of infant industries. The infant industries   can be able to grow when they are protected by   the   government     from   external    foreign    competition.     In this   case,   the   infant   industries monopolize    the   local   market   and   therefore    they   are   in position    to   get   more   profits    for development   purposes.
  8. There is no duplication of services and goods. For example, if there is a firm producing   a certain commodity   in an area,  there  is no need  of setting  up another  firm in the same  area as this  leads  to resource  misallocation   through  duplication.
  9. Source of government revenue. Abnormal profits   made by the monopolist   can be taxed by the Government   and tax revenue is used to provide social infrastructure   like roads, hospitals   etc.
  10. A monopolist is able to use better techniques of production and employ high quality manpower. This is because he has enough money to acquire such technology and man power. This leads to the production   of better quality products.

Disadvantages (Limitations/Weaknesses/Negative implications) of Monopoly

  1. Monopoly firms produce at excess capacity both in the short  run and in the long run,  They  do not fully utilize  their resources  to the optimal  level.
  2. There is exploitation of consumers. The monopolist may end up restricting   output and charging high prices hence exploiting the consumers.
  3. There is absence of competition which makes the monopoly    firm to become   inefficient    and produce   low quality   output.   This is because   the commodity   sold by a monopolist     has no close substitute.
  4. Rich monopolies tend to exert pressure on government. They end up influencing    decision making in their favor.  This is because such monopolies   are the major controllers   of the economy.
  5. Limited choice of the consumers. A monopolist does not produce a variety of goods and services to the consumers. This limits the consumers’   choice and welfare.
  6. There are shortages of the commodity in the economy in case a monopolist stops producing.   This leads to structural inflation.  Therefore it is dangerous   for an economy to monopolize   the supply of a given commodity.
  7. A firm under monopoly may over expand in the long run leading to diseconomies of scales.  This is because the firm earns abnormal profits even in the long run.
  8. It leads to income inequalities. A monopolist charges high prices and earns excessive profits. This leads to income inequalities in the economy as the monopolist will be earning high incomes as compared to producers.
  9. It leads to low output. Under monopoly, there is under employment of resources which leads to the production of low output hence low levels of economic growth and development.

Measures to control Monopoly

  1. Use of price controls. This is where the government fixes the prices of commodities produced by monopolists. This helps to reduce the monopoly power. The government fixes the price below the one charged by the monopolists. This forces the monopolists to increase output if he is to earn more profits.
  2. Taxation. The government can impose high taxes on the monopolist so as to reduce on the abnormal profits. Taxation can be successful if the commodity produced by the monopolist has elastic demand.
  3. Nationalization. This is  where  the  government  takes  over  the  private  firm  owned  by  the monopolist  with the purpose of controlling  the supply of a given commodity.  In this case, the government can now provide the commodity at lower prices to the consumers.
  4. Anti-monopoly legislation. These are laws or regulations which are imposed by the government to control monopoly activities. Such laws prohibit monopoly activities as far as the supply of a given commodity is concerned.
  5. Subsidization. This is a policy where the government provides incentives to other firms through subsidized factor inputs with the purpose of encouraging them to compete favorably with the original monopoly firm, this helps to reduce monopoly power in the country.
  6. Privatization. The Privatization policy involves the transfer of ownership of state owned enterprises to private individuals.  This helps to reduce monopoly power possessed by the government parastatal.
  7. Liberalization. This policy helps to remove restrictions in trade activities. It allows other firms to freely join and participate in the economic activities which have been monopolized by a few firms hence reducing on the monopoly power.
  8. Anti-Protectionism policy. The government can remove trade barriers with the purpose of exposing local infant industries to external competitors. This helps to reduce the monopoly of the local firms.

Price discrimination (Parallel pricing)

Price discrimination is the process (practice) of selling the same commodity to different consumers at different prices by the same seller in a given period of time, for reasons not associated with costs. For example prices of entertainment tickets at different costs for public and students or children and adults.

Conditions necessary for Price discrimination to succeed

  • the commodity should not have close substitute.
  • Businesses must prevent resale. Prevention of re-sale could be enforced in many different ways. For example students can only receive student discounts with a legitimate student ID, children can easily be identified from adults.
  • The market in question must be geographically distant /spatially separated in case of seats for football or entertainment such that it is easy for monopolist to charge different prices in the different market places or transfer of goods from one market to another is difficult
  • There should be different elasticity of demand in the different markets.
  • Ignorance among customers about other markets
  • The seller or producer must be a monopolist or the market must be imperfect.
  • Personal services that can be resold or transferred e.g. medical Doctor, teacher, entertainment etc.
  • Product differentiation; artificial differences made on similar products by a way of branding, trademarks.
  • Low transport costs also lead to monopoly power in that goods can be transferred from one market to another without affecting their prices.
  • No government interference

 Forms (Basis) of Price discrimination

  1. Price discrimination according to personal   income.   This  is where  different   prices  are charged  to different   income   groups  for  example   charging   low  prices  to  the  low  income   earners   and  high prices  to the rich for the same service.
  2. Price discrimination according   to sex and age.  This  is where  different   prices   are  charged   for different  sexes  or ages for example  higher  charges  may be fixed  on tickets  for a football  match  for adults  and  lower  charges  tor  the  children,   lower  charges  on  tickets  for  a dance  for  females   and higher  charges  for males.
  3. Price discrimination according to status.   Students or soldiers in uniforms   may be charged lower than other groups of people for certain services like transport and entertainment.
  4. Price discrimination according     to   geographical     factors.      Price    discrimination      may    be geographical, for example   dumping   where   commodities    are sold at lower   prices   in   a foreign market as compared to the one charged in the domestic market.
  5. Price discrimination according to time of service.  This is where different   prices are imposed   on consumers   when getting services   at different   times or period   e.g.  film  shows   tend  to  be  more expensive    on  weekends    as  compared    to  week   days,   evening   dances   are  more   expensive as compared   to dances  organized  during  day time.
  6. Price discrimination according to use.  For example, during transportation,    low transport   charges can be charged on essential commodities   and high transport charges for luxurious   commodities.
  7. Price discrimination according to differentiation of product.    This   is where   consumers    are charged   differently   according to the class.  For  example  seats  in air transport,   first  class  seats  are charged  higher  amounts  as compared  to other  classes.
  8. Price discrimination according to the nature   of the product.    For example   packed   commodities are charged   higher amounts as compared   to unpacked   commodities    even if they are of the same quality.        .

Advantages   (Merits) of Price discrimination

  1. Price discrimination increases   the total revenue   of the monopolist.    This is because,   output sold increases   due to the act of charging   different prices to different consumers   of similar units of the same commodity.             .
  2. It helps to reduce income inequalities.      This  is because  the  rich  consumers   are  charged   higher prices  and the low income  earners  are charged  low prices.
  3. It enables the low income   earners   to get essential   commodities    at fair prices.   For example medical services, transport and housing etc.
  4. Price discrimination helps producers    or countries to dispose of the surplus   output through the process of dumping.  Dumping   is important   to the producer  because  it encourages   exploitation   of resources  within  the home  country  by widening  the external  market  for goods  and  services.
  5. The profits earned by a monopolist   through price discrimination    can be used to expand   on  the business   and to improve  on the welfare  of the workers.
  6. Price discrimination increases   quantity   sold and consumed example for electricity,   the first units are charged a high price as compared   to the extra units.   Therefore   the more units you use, the less charge you incur for the extra units.

 

Disadvantages (Demerits) of price discrimination

  1. Price discrimination leads to the provision of poor quality services especially to the low income earners.  This is because there is no competition   since it is carried out by a monopolist.
  2. Price discrimination based on dumping retards the development of young industries   in a country where the commodities    are dumped.   This is because   consumers    may prefer the cheap dumped commodities   as compared   to the expensive   locally produced   commodities.
  3. Price discrimination     on  the   international    market   leads   to  the   consumption   of  harmful   and expired commodities    for example  cheap  expired  drugs  or food  stuffs  sold to developing   countries by developed   countries.

 

Monopolistic (Imperfect)   Competition   market structure

This   is a market   structure    where   there   are   many   firms   selling   closely   related   (differentiated) products.    In this market structure,   the features of monopoly   exist side by side with those of perfect competition.

Features (Characteristics) of Monopolistic Competition

  1. 1. Existence of many firms. There are many sellers and buyers involved   in the exchange of closely related products.
  2. There is use of persuasive advertisement.  Firms   under   this market   structure  use persuasive advertisement in order  to convince   the  customers   to  buy  their  products   and  therefore   to expand their  market  share.
  3. Freedom of entry and exit. When a firm makes profits in producing a certain commodity,   other firms  are  free  to enter  in the  production   of the  same  commodity   and  when  firms  make  losses, some  firms are free to leave  production.
  4. Sellers (producers) are price makers. Firms  under  monopolistic competition   have  the  power  to either  their  control  output  or price  of the output  to a certain  extent.
  5. There is government intervention.   The government    can   intervene    by implementing    certain policies like taxation, fixing prices of commodities    in case firms over exploiting   consumers   etc.
  6. Profit maximization is the major goal of producers.   That   is, all producers    in this   market structure aim at maximizing   profits and minimizing   costs.
  7. Existence of brand loyalty. That   is, certain   consumers    have   a strong   attachment    to certain brands of commodities.    For example Colgate, Coca-Cola   products, Shell etc.
  8. The demand curve under this market structure is fairly elastic. This is because firms sell close substitutes and there is stiff competition.     In addition,   the  demand   curve  is down  ward  sloping from  left to right  because  each  firm has the ability  to control  price  or output  a certain  extent.
  9. There is existence of excess capacity in production both in the short and long run. Firms under this market   structure   do not fully   utilize   their   resources    to optimal    level   in the production process.
  10. There is existence of product differentiation.   Product   differentiation     refers   to  the  measures taken   by  producers    under   monopolistic     competition     to   create   artificial    differences    among products  of the same  category  to make  them  appear  as close  substitutes.

Methods of Product differentiation

  1. Using different colors
  2. Using different brands
  3. Using different packaging materials
  4. Using different designs.
  5. Using different trademarks.
  6. Using different tastes.
  7. Using different scents, for example the perfume   industry

The nature of the Demand curve, Revenue curves and Cost curves for monopolistic competition

The cost curves (MC and AC) are the same as those of other market structures.    The demand curve and the revenue   curves are downward   sloping   like those of monopoly.    This is because   firms under imperfect   competition    are price makers.   However,    the  demand   curve   is  more  elastic   than  that  of monopoly   due  to the  presence   of  close  substitutes   (differentiated    products)   and  many  competitors. The Marginal Revenue   Curve is below the demand curve (Average   Revenue Curve).

Short run equilibrium position of a firm under monopolistic competition

The monopolistically    competitive   firm earns super normal profits (abnormal   profits) in the short run. Equilibrium       is  attained   (profits   are  maximized)    at  a  point   where   marginal    cost(MC) is equal   to marginal  revenue(MR)    and marginal  cost curve  should  cut marginal  revenue  curve  from  below.

Illustration

From the figure above, SMC, is equal to MR at point E. Thus E is the equilibrium point. Corresponding to this equilibrium point, the firm produces OQ output and sells it at a price OP. Thus, the firm earns pure profit to the extent of PABC since total revenue (OPAQ) exceeds total cost of production (OCBQ).

A firm, in the short run, may earn only normal profit if MC = MR < AR = AC occurs. A loss may result in the short run if MC = MR < AR < AC happens

Long run equilibrium position of a firm under monopolistic competition

  • In the long run, monopolistic competition comes closer to perfect competition because the freedom of entry and exit allows firms to enjoy only normal profit. Because, of free entry  and  exit,  the  abnormal   profits  made  by the  few  firms  in the  short  run attracts new  firms   into  the  industry,     This   increases   the  production    and  supply   of  goods   and services which   are  close  substitutes   hence  a  fall  in  price  and     In  addition,   the  market share  of each  firm and the number  of consumers   reduces  hence  a reduction  in profits,
  • Also as  new  firms  enter  into the  industry,   the  demand   for  raw  materials   increases   which results into an increase   in the  factor  prices  hence  increased   costs  of production.    This forces the average cost curve to shift upwards until it is tangent to the marginal revenue curve.
  • Equilibrium is attained   (profits  are  maximized)    at a point  where  marginal   cost(MC)    is  equal  to marginal        revenue(MR)   and marginal  cost  curve  should  cut marginal  revenue  curve  from   below

From the graph, equilibrium is attained at point E where the marginal cost (LMC) curve is equal to the marginal revenue (MR) curve. At point E, the equilibrium output OQ, is produced and sold at price OP determined at point A.  Therefore, the selling price is equal to the cost price.   This implies that total cost is equal to total revenue and therefore the firm earns normal profits.

Advantages (Merits) of Monopolistic   competition

  1. Firms undertake product differentiation which enables consumers to enjoy a variety of products. This improves on their welfare due to a wide choice created.
  2. There is competition among firms which encourages efficiency in production. This leads to the production of high quality products.
  3. Because of many firms involved in production of differentiated products, there are no shortages of goods and services as in the case of monopoly. This is because even if one firm closes down, other firms can continue to produce goods and services.
  4. Creation of more employment opportunities. This is because there are many firms involved in production which  increases  the  utilization  of  resources  and  thereby  creating  more  employed opportunities.
  5. Through competition, research and innovations are possible. This is because each firm is aimed at increasing the quality of its product so as to compete favorably in the market.
  6. Source of revenue to the government through taxation of the abnormal profits earned in short run

Disadvantages (Demerits) of Monopolistic competition

  1. In the long  run,  firms   earn  normal  profits   and  therefore  it  is  not  possible  to  expand  on production and enjoy economies of large scale.
  2. There is production at excess capacity both in the short and long run.  This leads to underutilization of resources hence unemployment and underemployment.
  3. There is duplication of commodities in the market in form of product differentiation. This leads to resource wastage.
  4. There is too  much  advertisement  which  leads to  wastage of  scarce  financial  resources.    In addition  the  advertisement  costs  are  shifted  to  the  consumers  in  form  of  high  prices  hence exploiting consumers.
  5. Research is not possible in the long run. This is because firms earn normal profits and this may reduce the quality of the products.

Oligopoly Market structure

This  is a market  structure   where  there  are  few  but  large  firms  dealing   in either  homogenous    or differentiated                products.   When the few firms are dealing in homogenous   products,   then the market structure is called pure   [perfect]   oligopoly.    When the few  firms are  dealing   in  differentiated products, then the market  structure   is called  differentiated (imperfect)   oligopoly.

Under  oligopoly,   the  firms  are  very  few  and  therefore   the  decisions   made  by  one  firm  directly affect  the  decisions   of  other   firms  in the  same   industry.   Each  firm   has  a considerable    market share  and  it is difficult   for the  new  firms  to enter  into  the  industry  because  of the  large  size  and strength of the already  existing  firms.

Examples of oligopoly

  1. Companies   dealing in petroleum   products.  For example Shell,  Petrocity,  Total  etc.
  2. Telecommunication     industry.  For example MTN, UTL, Airtel etc.
  3. Newspaper   industry.  For example New vision, Monitor, Red pepper etc.
  4. Cement   industry.  For example Hirna,  Tororo,  Bamburi  etc.

Features (Characteristics) of Firms under oligopoly

  1. Few firms of varying sizes, that is    some  firms  are  large  and  well  established    while  others  are small  and not well  established.
  2. Close interdependence among firms. Each  firm   is concerned   with  the  activities   and  decisions made  by other  firms  so as to  make  a right  reaction.    Any decision   made by one firm, leads to a counter decision by other firms.  For example,   when one firm  increases  the  price other  firms  may not increase,  but when  it reduces  the price,  other  firms  may  also reduce
  3. Intensive advertisement.    Under oligopoly,   there is a lot of advertisement    and failure to advertise means loss of consumers   (customers)   and a sign of weakness.    Advertisement    is done through the media, trade shows, giving free samples etc.
  4. There is no  unique  pattern   of pricing,   This  is because  each  firm  wants  to remain  independent   so as to maximize   profits.
  5. There is stiff (cut throat) competition    among firms.    That is each firm acts in such a way to out compete other firms.   This brings about intensive advertisement.
  6. There is existence of price rigidity.    Prices under this market structure tend to be stable or rigid for a long time despite the changes in the costs of production.
  7. The major  aim  of  the firms    is profit   maximization,     Firms  produce   in such  a way  to  maximize profits  and minimize  costs.
  8. Firms are price makers. That is, they have control over the prices of their brands.
  9. There  is existence    of product    differentiation     under   imperfect    oligopoly    and    production    of homogeneous products under pure oligopoly.
  10. There is high degree of uncertainty among firms. That is, the decisions  made by one firm may, lead  to  unexpected   reactions   by other  firms.  For  example   when  one  firm  reduces  the  price,  it is not aware  of how  other  firms  will  react.
  11. There is restricted entry. It is difficult  to enter  into this  industry  because   of the  large  size of the already  existing  firms  and  huge  capital  required  to enter  into the industry.
  12. Firms have a kinked demand   curve.   The demand curve is elastic above the kink and is inelastic below the kink.
  13. There is wide spread use of non-price competition. Non price  competition   refers  to a situation where  rival  firms  compete   by using  other  means  other  than  changing   (adjusting)   the  price  of the commodity.    For example   use of advertisement,    carrying   out after sales promotion,    sponsoring games and sports etc.

 

Non-price competition  

This  is where  rival  firms  compete   using  other  means  other  than  changing (adjusting)   the price  of the commodity.   Examples   of non-price   competition   include;

  1. Improvement and maintaining the quality of the products   with the aim of promoting   customer loyalty.
  2. Giving   (distributing) free samples of the products   to customers.   This is mainly   used when the product is new on the market for example soft drinks, telecommunication     companies   etc.
  3. Use of persuasive advertisement with catchy  slogans   for example   breweries   companies,    soft drink  companies,   firms  selling  cosmetics   etc.
  4. Carrying   out promotional offers.  For  example   selling  the  product  at a lower  price  to customers through  sales  promotions,   giving  free training  services to customers   etc.
  5. Offering gifts and prizes. For example   petrol stations   giving soap and other detergents   to their customers
  6. Sponsoring sports activities like volley ball, football,  cricket etc.  This is aimed at winning   and selling the product to the consumers   who are supporters   of a given sports activity
  7. Supporting charity organizations by giving them household  items like food, clothing,   soap etc. For example child care centers, orphanage   homes etc.
  8. Carrying   out trade fairs and exhibitions.  For example   firms participating    in the international trade fair at Uganda Manufacturers    Association   grounds   in Lugogo to showcase   their  products.
  9. Providing    after sales services.  For example   providing    transport    for those   who   buy in large quantities,   free installation   services, repairs etc.
  10. Organizing consumer games  in  form  of  raffle  draws  where   a customer   buys  the  product   and enters  a draw.  The winners are given prizes for example cars, phones, domestic   appliances   etc.
  11. Opening up many branches and distribution centers in form of regional   distributional centers and shopping outlets.
  12. Using one stop shopping centers where the customer can conveniently    find all what he requires in one place.  This is common in big shopping   malls like Shoprite, Garden city.  Mazima  mall etc.
  13. Offering credit facilities to customers, for example   allowing   customers   to acquire   products   on hire purchase,   giving airtime on credit to their customers   by telecommunication     companies   etc.

 

Revenue, Demand and Cost curves under Oligopoly                                                                

  • The MC and AC curves are similar to those of other market structures. The AR curve is the same as the demand curve.  The demand  curve  is characterized    by a “kink”  (corner/bend)
  • The marginal  revenue   curve is characterized    by a discontinuous       This is due to the kink in the demand curve.  Because   of the  kink  in the demand  curve,  we have  two  demand  curves  where, the upper    part  is elastic  and the lower  part  is inelastic

 

Kinked demand Curve.

In an oligopolistic market, firms cannot have a fixed demand curve since it keeps changing as competitors change the prices/quantity of output. Their generalized demand curve is a kinked demand curve with two segments   having different   elasticity.

The  upper  segment   is elastic  at higher  prices  and  the  lower  segment   is inelastic   at  lower  prices. The kink  on the demand  curve  of an oligopolistic firm  is that  point  of price  rigidity  (administered price)  whereby   none  of the  firms  is ready  to increase or reduce  the  price.  This point is achieved in the long run after the negative effects of price wars.

From the figure, we know that

  • The prevailing price level = P. The firm produces and sells output = OQ0
  • The upper segment (dP) of the demand curve (dD) is elastic. A small increase in price above P to P2 leads a big fall in quantity sold from Q0 to Q1.
  • The lower segment (PD) of the demand curve (dD) is relatively inelastic. A big decrease in price from P0 to P1 leads to a small increase in quantity from Q0 to Q2.
  • Hence, no firm in an oligopolistic market will try to increase the price or decrease the price below price P since this leads to insignificant benefit.

 

Price rigidity (Administered Price)

This  refers  to a situation   where  prices  in the  oligopolistic    market  tend  to remain  stable  over  a given time  despite  the changes  in the cost of production.

Equilibrium position of a firm under oligopoly

The firm under   oligopoly   earns abnormal   profits   both in the short and long run.     Equilibrium    is attained  at a point  where  marginal  cost  (MC)  curve  is equal  to the marginal  revenue   (MR) curve  and MC  curve  should  cut the MR  curve  from  below.

  • From the graph, DKD is a kinked demand curve and K is the kink. Because of the kink, the MR curve is separated   by the discontinuous    gap, EF   into two MR curves.   The marginal   revenue curve above the gap is inelastic and the one below the gap is elastic.
  • The discontinuity in the marginal   revenue   curve   implies   constant   revenue   as price and output remain fixed at the kink.
  • Equilibrium is attained   at the  kink  where  MC is equal  to MR   in the  discontinuous  portion,   At equilibrium, output  OQ is produced   at the cost  price  OC  and  sold  at an administered price,  OP determined   at the kink.
  • The shaded area AKPC represents the super normal profits.

 

Advantages (Merits) of Oligopoly

  1. There is competition and leads to the production of high quality production.     This enhances   the standards of living of the consumers.
  2. There is existence of price stability under oligopoly. This is due to price rigidity determined   at the kink of the demand curve.   This helps to reduce price fluctuations   and consumer   exploitation in the market.
  3. Ability to carry out research. Oligopolistic    firms are able to carry out research   and improve   on their techniques   production.     This is because   they earn abnormal   profits   both in the short and long run.
  4. Firms under   oligopoly   can   offer   after   sales services   to   their    customers.     For   example transportation,    repairs of machinery,   guarantees   etc.  This increases on their customers’ satisfaction.
  5. Consumers have   a wide choice   due   to   the   production     of   differentiated     products    under differentiated oligopoly. This helps to cater for the different   tastes and preferences of different consumers.
  6. Firms enjoy economies of large scale due to their large scale nature of operation e.g.  in terms  of transport,   storage,  management   etc.
  7. It leads to development of social and economic infrastructure. This   is as a result   of large investments   established   in the economy.
  8. They provide employment opportunities to the people. This helps to improve   on their incomes and standard of living.
  9. There is efficiency in production.     This   is because   firms   are involved    in competition    and therefore   there is no wastage of resources.

Disadvantages (Demerits) of oligopoly

  1. There are high costs of production involved in form of persuasive   advertisement.    This leads to wastage and misallocation   of resources.
  2. There is consumer exploitation. Under oligopoly, firms may restrict output and end up charging high prices.
  3. It distorts the choice of consumers. This is due to persuasive   advertisement
  4. It leads to unemployment. This is due to collapse   of  the  small   firms  as  a  result   of  being  out competed   by the  large  scale  firms.
  5. It leads to income inequalities. This is because the incomes   are  concentrated    in the  hands  of the few rich individuals   who  own  large  firms.
  6. There is duplication of goods and services. This leads to resource wastage in the economy.
  7. Large oligopolistic firms operate on a large, scale. Because of this, they have economic power and can therefore influence the government   in their favour and in the disfavor of the population.
  8. Firms under  oligopoly are characterized  by high  levels of uncertainty,   This  limits  the  ability  of individual   firms to make  independent   decisions   because  they  are influenced   by other  firms.
  9. There is underutilization of resources. This is because   firms under oligopoly   operate   at excess capacity hence low levels of economic growth and development.

 

Revision   Questions

Section A questions

  1. (a) Distinguish between Marginal   revenue  and marginal  cost

(b) Explain  why the Marginal  revenue  curve  under  perfect  competition   is constant.

2 State four reasons why firms invest.

3 Explain why the average total cost curve (ATC) is u-shaped   in the;

(a)    Short run

(b)        Long run

4    (a) Distinguish   between fixed costs and variable costs

(b) Differentiate   between   prime costs and supplementary    costs.

(c) Give two examples of supplementary costs in an economy

  1. Study the table below and answer the questions that follow.  Show the working
Output 0 10 20 30 40 50 60
Total costs (in 000’shs. 100 120 220 300 360 400 420

(a)  Find the total fixed cost when output is 50kg.

(b)   Calculate the average total cost when output is 30kg.

(c)   Calculate the average fixed cost when output is 20kg.

(d)   Calculate   average variable cost when output is 50kg.

6   Given  the table  below

Output 0 3 4 5 6 7 8 9 10
Total costs (in 000’shs. 600 1650 1860 2100 2400 2800 3400 4300 5800

(a) Compute the schedule for TFC, TVC, MC, ATC, AFC and AVC                                .

(b)  What is the average fixed cost when output is 10?

(c)  What is the total variable cost for the first 3 units of output?

(d)  Which level of output represents    the optimum   level of the firm?

(e)  Which level of the output represents   the break -even point of the firm?

(f)   Which level of output represents   the shutdown   point of the firm?

(g)  If marginal   revenue   is constant   at 600/=   per unit of output,   what is the equilibrium    output level of the firm.

7   Mention four ways through   which a small scale firm can expand in size

8  (a) Differentiate   between  Industrial   inertia and Localization   of industries

(b) Give two disadvantages   of Localization   of industries.

9  (a)  Distinguish   between  excess  capacity  and over  production

(b)  Give two causes of excess capacity   in your country     (2mks)

(c)  Mention three ways of reducing, excess capacity   in your country

10(a) Distinguish   between a firm and an industry

(b) State two conditions   for profit maximizing   equilibrium.

11     Mention   four reasons  as to why  firms  continue  to operate  on a small  scale  despite  the benefits  of large  scale  production.

12 (a)   Define the term merger as used in economics

(b)   Mention three factors which hinder merging of firms in your country

13  (a)   Distinguish   between  horizontal   and vertical  merging  of firms

(b)   State any two reasons for merging of firms in an economy

14 (a) Distinguish   between “forward   vertical”   and “backward   vertical” merging of firms.

(b) Give two conditions   necessary   for merging of firms    in an economy

15 (a)   Distinguish   between forward linkages and backward linkages

(b)   Give two examples   of backward   linkages in your country.

16  (a) Distinguish   between  a marginal   firm and an optimum   firm

(b) Give two reasons as to why the government may influence the location of industries,

17 (a) Why is the firm under perfect competition   regarded as an efficient firm?

(b) State any two reasons why a firm may continue to operate below the Break-even   point.

18 (a)   What is meant by product differentiation

(b) Give any three methods of differentiating    products in an economy

19 (a)   What is meant by price discrimination

(b)   State three conditions   necessary   for price discrimination   to succeed

20 (a) What is meant by non- price competition?

(b) Give any three forms of non-price   competition   in your country.

21 (a)   What is meant by discriminatory    monopoly?

(b)   Under what conditions   is discriminatory    monopoly   profitable?

 

Section B questions

  1. (a) Distinguish between location of firms and localization   of firms

(b) Explain the advantages   and disadvantages of localization   of firms

2  (a)  Explain  the  features  of a perfectly  competitive   market

(b) Show and explain the equilibrium   conditions   of a perfectly competitive   firm in the;

(i)      Short run

(ii)     Long run    .                                                  .

3   (a) Distinguish between break – even point and shut down point of the firm.

(b) Explain  why  a firm  may continue  to produce  even  when  it is not breaking-even?

4   (a) What factors may prevent new firms from entering   an industry

(b) What are the merits and demerits of monopoly   in your country?

5  (a)  Explain  the  salient  features  of monopolistic    competition    in your country?

(b) Explain how the form under monopolistic competition    determines   output,   price and profits   in the short              run and  in the long run

6  (a) Account  for the rise  of monopoly   in your country

(b) Discuss the methods of controlling   monopoly   in an economy

7  (a) What are the  features  of an oligopoly  market  structure

(b) Describe the forms of non-price   competition   used by oligopoly   firms in your country

8   (a) Explain the features of the mobile phone industry    in your country

(b) Explain  how  profits  are maximized   under the  above  mentioned   market  structure.

9   (a) Explain how a firm under monopoly   maximizes   profits

(b) Assess the implications   (impact) of the existence   of monopoly   in an economy?

10   Explain the;

(a)  Features of an oligopolistic   market structure.

(b)  Advantages   of an oligopolistic   market to consumers.

(c)  Explain  how  an oligopolistic   firm maximizes   profits  in the short run.

Dr. Bbosa Science

+256 778 633 682

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