Understanding Market Structures and Cost Concepts
Cost Accounting and Economic Concepts
Costs (Pre-accounting) – Including financial transactions, amounts paid by the factors, or the acquisition of goods or services. Economically – Have been at all costs, independently of whether or not that reflects transactions amounts.
Types of Costs
- Total Cost – Value input in the process of obtaining a quantity of production.
- Fixed Costs – Do not depend on the volume of business (e.g., building rent, payroll of managerial employees).
- Variable Costs – Depend on the volume of production of the company. This applies to the wages of casual workers, the value of the raw materials necessary for production, and the cost of energy resources used.
- Marginal Cost – Cost increase because of additional drive.
Isocost Line – Geometric location of all combinations of factors the company can acquire at a given total cost.
Balance Point – The point of contact between the isoquant associated with planned production and the tangent isocost.
Neutral or Limit Profitability – Refers to the production volume (X) where the company generates zero profit. Revenue covers all fixed and variable costs.
Market Structures
Monopolistic Competition
Characterized by many offerors and a non-homogeneous product with barriers to entry.
Barriers to Entry
- Absolute Cost Advantages – Occur when incumbents have superior production techniques.
- Product Differentiation Advantages – Exist when the distinction is very strong; established firms have an advantage over potential entrants.
- High Capital Requirements – Represent a major barrier to potential incoming businesses.
- Economies of Scale – Increased production leads to decreased average costs.
- Internal Scale – Within the company.
- External Scale – Affecting the industry as a whole.
Market Structure Characteristics
- Degree of Concentration – Refers to the number of offerors.
- Degree of Product Homogeneity – Refers to quality and design differences.
- Barriers to Entry – Difficulties faced by new entrants.
- Existence of Perfect Information – Economic agents are able to learn about the best opportunities for buying and selling offered by the market without any costs.
Perfectly Competitive Market
Characterized by many bidders, a homogeneous product (identical goods), no barriers to entry, and perfect information (better opportunities).
Imperfect Competition
There are numerous markets and offerors. Many products are not homogeneous. Some barriers to entry exist.
Imperfect competition occurs when an economic agent can influence the market price by acting individually. This is associated with increased market share, a decreasing demand curve, and barriers to entry.
Monopoly
Characterized by a single offeror. Companies producing substitute goods may increase their profits. The monopolist can fix the quantity. The product is homogeneous. There are significant barriers to entry.
Oligopoly
An imperfectly competitive market where a few companies control the supply without reaching agreements among themselves. Characterized by few bidders, a homogeneous product, and barriers to entry.
Cartels
Agreements among firms in an oligopolistic market to eliminate or restrict competition between them.
- Quantity Agreement – Distribution of market supply percentages among offerors.
- Price Agreement – Setting the selling price through a pact between different companies.