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Posted on September 4th, 2012, by

The absence of economies or diseconomies of scale in a given industry can affect the performance of firms consistently. In this respect, it should be said that the absence of economies or diseconomies of scale will influence the costs curve of companies substantially since economies and diseconomies of scale involve the effects of market expansion on companies’ costs and performance. In fact, it is obvious that if companies cannot benefit from the market expansion they will need to change their costs significantly in order to survive and take the leading in the market. At the same time, it is obvious that companies will not be able to increase their output significantly even if they increase costs respectively because the lack of expansion prevents companies from increasing their outputs whatever costs they direct into the production process, for instance. Instead, companies need the market expansion in order to maintain their growth and increase outputs respectively to their investments. Basically, the increase of outputs leads to the decrease of costs and the market expansion become beneficial for companies. In such a situation, it is obvious that if companies fail to expand their market, they need to increase costs in order to maintain their competitive position, while outputs are likely to decrease. In a long-run perspective, the industry without economies and diseconomies of scale are likely to be monopolized as the company which proves to be able to maximize investments and minimize its revenues will survive, while other companies are doomed to failure. In other words, the company that can afford minimal outputs for a longer period of time and is able to invest to acquire or merge with its rivals will survive in the industry and it will become the monopolist.


Question 2

In a perfectly competitive market, a company needs to maintain its competitive position. This can be done through the improvement of the quality of products or services the company sells to customers and through the formation of customer loyalty. In such a situation, it is obvious that the company cannot minimize its costs because this can influence the overall performance of the company in the highly competitive market. It proves beyond a doubt that the reduction of costs can affect substantially the quality of products or services of the company and company-customer relationship. As a result, this will deteriorate the competitive position of the company in the market.

At the same time, the increase of costs will deteriorate the marketing performance of the company because the company will not receive revenues which allow the company to invest in its further development. In actuality, the decrease of revenues is very dangerous for a perfectly competitive company because it limits substantially its opportunities to develop its business. As a result, the balance between costs and revenues is of the utmost importance for a perfectly competitive firm. However, it is extremely difficult to reach such a balance, especially in a perfectly competitive market because rivals always attempt to introduce innovations and use new marketing strategies to take advantage in a perfectly competitive market. But there are no leaders in the perfectly competitive market that put all companies in practically equal position, where there is little room for overtaking main rivals.


Question 3

The position of a monopoly in the market is extremely beneficial. At the same time, being a monopoly does not necessarily mean that the position of the company is totally secured. In fact, there is a risk of emergence of competitors which may enter the market with a better product or service which outpaces that of the monopoly consistently. On the other hand, to create a better product or service does not always allow competitors to enter the market controlled by a monopoly. In this respect, it is important to lay emphasis on the fact that a monopoly can raise entering barriers consistently, preventing its potential rivals from entering the market. The monopoly can introduce restriction on the mobility of resources, which can be an effective tool to raise entering barriers and prevent competitors from entering the market. For instance, the company, which holds the monopolist position in the market, can restrict the use of resources by other companies, if it uses its invention and its rivals fail to get the access to the technology of the production of this good. In such a way, companies can take advantage of introduction of new technologies, while the monopolist takes a leading position where there is no other companies which can produce similar products. For instance, if a monopolist company controls the supply of resources which are needed for the production of certain goods, it can naturally prevent other companies from entering the market if it restricts the supply of these resources to other companies. In this respect, it is important to stress the fact that monopolists tend to create the full cycle of production, where all stages of the production process are controlled by the monopoly and other companies do not have access to resources which are used in the production process.


Question 5

The introduction of minimum wage of $10 per hour to workers over twenty-two years of age puts employees under the age of twenty-two into an advantageous position in regard to their job opportunities. To put it more precisely, employers will be more interested in the employment of younger employees, under the age of 22 because they can pay lower wage to such employees. Therefore, it would be quite logical to employers to hire more younger employees. At the same time, if the demand for employees under the age of 22 increases it will likely to increase their wage too, although the growth of demand will persist only on the condition that the level of wages of employees under the age of 22 remains lower than the wage of employees above 22 years of age. Consequently, employees under the age of 22 can count for the increase of job opportunities and higher wages. On the other hand, it is obvious that employers are unlikely to sign long-run contracts with employees under the age of 22. To put it more precisely, employers can hire employees under the age of 22, sign a contract which expires till the twenty-second birthday of employees and after that employers can refuse to prolong the contract with employees at the age of 22 and hire new, younger employees signing similar, short-run contract. This means that younger employees may have little career opportunities if employers use the aforementioned strategy en masse. On the other hand, the increase of wage will mainly have a positive impact on employees under the age of 22.

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