Economics: Micro and Macro Theory and Application
In economics, and cost accounting, total cost (TC) describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs (capital) that cannot be varied in the short term, such as buildings and machinery.
TC = FC + VC
Average cost equals to total cost divided by the number of goods produced (output). It is also a sum of average variable costs plus average fixed costs. Average costs may dependent on the time ...view middle of the document...
The behaviour in an oligopoly can be explained using the game theory. There are big barriers to entry and exit. Oligopoly is a form of imperfect competition, characterized by the highest degree of monopolization.
Oligopolistic firms have the ability to create new institutional forms, which allows for the improvement of their monopolistic position. This process is known as mergers and can take different forms:
Cartel - a monopolistic agreement (usually secret) between independent (financially, technically and legally) producers, aiming to reduce or completely eliminate competition between them. The agreement may relate to the size of production, distribution outlets or the level of prices.
Syndicate - a form of union monopoly which restricts its members by controlling their legal independence and manufacturing. Companies included in the syndicate form a joint sales office.
Trust - is the highest form of union monopoly. It was created from a number of larger companies, which form one company under common management and supervisory board. Companies lose all their self-reliance in terms of sales and manufacturing. In contrast, owners of small independent companies become shareholders of the trust.
Consortium - a combination of a syndicate with a trust or cartel. It is a union of large companies, different industries, trading companies or banks
OP – Price
PQ – Output
At prices higher than OP, demand is very elastic. This is because the oligopolistic fears that they raise their prices, their competitors will not follow and they will lose share of the market.
At prices higher than OP, demand is very inelastic. The oligopolists will not lower their prices because they know that if they do, their competitors will follow and therefore, they will gain very little from this move.
Monopoly is a market structure characterised by:
* Occurrence of only only a single supplier or manufacturer of the goods / services, which controls the supply and prices, and many customers;
* Presence of barriers that prevent other companies from entering the market (eg, legislation, patents, costs, etc.) ;
* Uniqueness of the product of the monopolist (does not have a good or a close substitute).
Monopoly can be:
State - when the law of a state allows you to provide a service or produce a specific range of goods to only one entity (eg spirits monopoly, monopoly lottery, etc.) ;
Forced - when one of the producers of the goods / services reaches a position in the market that makes other manufacturers go bankrupt;
Natural - due to the nature of the service provided / goods when competition of many entities, for technical reasons, is impossible or difficult (eg, railroads, supply of electricity and gas , telecommunications , etc. ) .
In the case of natural and enforced monopolies, many countries in the world created a special legislation which regulates the monopolised market, artificially creating the conditions for the...