ず

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团
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目
R A F F L E S IN S T ı
T U T ı
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l Y EA R 5 H 2 EC O N O M ı
C S 2 0 16

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国

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C O NTEN TS
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P r o f it m a x im is in g O b je c ü v e

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S iz e o f F ir m s

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1
回 T h e U a d itio n a łth e o ry o f th e lirm a s s łlm e s th a t litm s a im to m a x 沁 出 ie p ı
o ıit . T h i s i s

'

国 d e t b y th e m a r g in a lis t p rin c ip le . c o n s id e r in
g
t h e l i n n s in d i v id u a ı s h o r t a n d lo n
g
r u n

目 l i i c o s ts a n d re v e n u e . H o w e v e r
,
t h i s i s n o t a h » a
y
s t h e c a s e a s finns d o h a v e a R e m a tiv e
o b je c tiv e s

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 Y o a , 5 H ? L c ￠« . . N o te s 2 0 16
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Ħ" " d D e c ï s Jo "
团
团

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国
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国
O u t lin e 团
团
A . O BJEC Tı
v E S O F Fı
R ııS

1 . P ro f ıt n ıa x ım ııln
g O b jm v e
1 1 M a r g in a * s t P rin c i ıe in D e te
.

p rm in in g p ro fit M a x im is in
g O u tp u t a n d p ric e
目
1 2 L im ita tio n s o f th e T r a d itio n a ıT
.

h e o ry o f p ro fit M a x im is a ü o n

2 . Aıte m a t lv ・ O W tıv e s o f n rm s
2 1 E n tr y d e te rre n c e
.

2 2 R e v e n u e m a x im is a tio n
.

2 3 P ro fit s a tis flc in

.

g
2 4 M . a rk e t s h a re d o m in a n c e

3 . C o n c ıu s ı
o n
の
B . C O S TS A N D R EV EN U E

1 . ı
n tr o d u c d o n
1 1 ロe fin .
itio n s
1 2 T h e P ro d u c tio n F u n c tio n
.

1 3 S h o rt & L o n b ru n P ro d u c tio n
g
.

1 4 A c c o u n ü n g & E c o n o m ic C o
.
st

2 . S h o r t+ u n P ro d u c tk »n a n d C o s ı
s
2 1 S h o rt P ro d u c tio n -
r u n

2 2 S h o rt .
C o s ts -

r u n

2 3 D e c is io n
.
k in g in th e -
m a
S h o rt -
r u n

3 . Lon g P ro d u c tıo n a n d -
r u n
C o l ts
3 1 Lo n g .
P ro d u c tio n -
r u n

3 2 L o n g ru n C o s ts
.

3 3 D e c i s i o n g in th e
.
Lo ng -
r u n

4 . S iz e o f fırm s
4 1 E
4 2 C m .
. x is te n c e o f S m a ll F irm

x is te n c e o f S m a ll a n d
s

L a rg e F irm s
魯
5 . R e ve n u e

6 . P ro f it M a x im is in
g E q u lıib r lu m

A P P E N D IC E S

垦甲妇 婴 n 얜 些；P .

'
S lo m a n , J .
,
E co n o m ic s , 6 E d ilio H e rtfo rd s h ire P re n tic e H a il
,
T
.

L ip s e y & C o u ra n t , E c o n o m ic s , 1 ť E d itio n , H a r p g r C o llin s

B e a rd s h a w J E co nom ic s A S tu de nt
' "
G u id e 5 E d itio n P e a rs o n E
,
d u c a tio n
_
. s , ,

M aunde r , P & M ille r , R . E co no m ic s E x p la in e d 3

"
E d rt ıo n , C a M n s E d
, , u c a ü o n a l
"
Beg g D , .
,
E c o n o m ic s 7 E d it io n M c G ra w H ill
. .
, .

Pa rk in , E c o n o m ic s 7
"

E d itio n
, , A d d is o n W e s le
y
 Vea, 5 H 2 L e c lu m N e le s 2 0 1 6

F t. s . n d D e c is io . s

A t th e e n d o f th e ıe c t u re s e ri e s , s t u d e n t s s h o u ıd b e a b ıe t o
E x p la in th e s ig n ilic a n c e o f th e m a rg in a lis t p r in c ip le in d e te r m in in
g p ro lit m a x im is in g e q u ilib r iu m
E v a lu a te th e p ro ıit m a x im is a tio n g o a l o f firm s a s s u m e d b y tra d itio n a l e c o n o m ic th e o ry
Id e n tify a n d e x p la in a l t e r n a t i v e th e o rie s o f ıirm b e h a v io u r. try d e te rre n c e p ro ï it s a tis lic in g a n d m a rk e t
E n
,

s h a re d o m in a n c e

ı D is tin g u is h b e tw e e n a c c o u n tin g a n d e c o n o m ic c o s ts
D is tin g u is h b e tw e e n th e s h o rt a n d th e lo n g ru n
D e fin e v a rio u s s h o rt a n d lo n g ru n c o s t c o n c e p ts
S k e tc h th e v a rio u s s h o rt ru n a n d lo n g ru n c u rv e s a n d iltu s ı
ra te h o w ch a n g e s o n c o s ts a Ħe c l lh e v a rio u s
c u rv e s
E x p ıa in th e fa c to r s ıh a t a c c o u n t fo r th e s h a p e o f th e lo n g ru n a v e ra g e c o s t c u rv e
E x p la in M e th re e re v e n u e c o n c e p ts

\
\
\
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\

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V* w 5 H 2 L e c tu r e N o te s 2 0 1 6
R rm s a nd D e c ı
s io n s \
A . O B JE C T ı
V E S O F Fı
R M S 回
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团
ı
n th e p re v io u s to p ic w e l o o k e d a t th e b e h a v io u r
,
o f ra tio n a l c o n s u m e r s in
w e ig h in g u p th e b e n e fit ( u tiı
it y ) o f co n su m in g v a rio u s a m o u n ts o f g o o d s o r 团
c o m b in a tio n s o f g o o d s
a g a in s t th e ir c o s t th e ir 国
( p ric e s ) i Th e d e m a n d s id e o f . e .

th in g s In th is to p ic , w e w i l l l o o k a t th e w o rk in s o 回
f th e s u p p l c u rv e a n d fin d o u t
.

g y
h o w a ra tio n a ıp ro d u c e r ( l irm l m a k e s d e c is io n s .

国
1 . P R O m M ıS ıN G g B J E C T ı
v E 园
回
So fa r w e h a ve a s su m e d th a t s u p p Iy c u rv e s a ne u p w a rd s lo p in g th a t a h ig h e r
p ric e w iı
ıe n c o u ra g e fir m s ıo su p pı
y m o re B u t ju s t h o w
国
.
m u ch w ilıfirm s c h o o s e to
su p p ł 园
y a t e a c h p ric e ? ı
t d e p e n d s ıa r g d y o n th e a m o u n t o f
p ro fit t h e y w iı
l m a k e . ı
f 田
a firm c a n in c re a s e its
p ro fits b y p ro d u c in g m o re , i t w i ıl n o r m a ıı d o s o .
y

\
The lr a đ ü o n a l th e o r y o f s u
p p ı
y , o r
W o f ñ m n, a s s u m e s th a t f ir m s a im t o
m a x ım is e p ro fit in th e s h o r t ru n Ħ o llt
.
is m a d e b y fir m s m o re fr o m th e
earning
sa ı
e o f g o o d s th a n th e y c o s t to A firm
'
p ro d u c e
(
回
.
s t o t a l
p
r o f it T r) is th u s th e
difenence b e tw e e n its to ta l re v e n u e
(T R ) a n d its to ta l c o s ts o f
Ħ o d u c tio n ( T C )

\
.

Tt = p .
q

aced w ith w rc e re s o u r c e s , firm s h a v e to d e c id

\
e w h a t g o o d s a n d s e r v ic e s to
p ro d u c e in o rd e r to
y ie ı
d th e h fg h e s t ı e v e ıo f p ro fits F irm s a ls o h a v e to d e c id e o n .

ho w t￠» p ro d u c e th e s e
g o o d s a n d services i Th e m e th o d o f p r o d u c tio n ) . e .
.

E c o n o m ic p r o fit m a y e ith e r b e
p o s itiv e , z e r o o r n e
ga üve .
\
\
P o s itiv e e c o n o m ic
p ro fit is k n o w n a s >
T R T C

i w m m m d m o r
AR > A C
マ e 口口n o m ic pr o f it S k 门口四门 日s O Q t m a !」
p ro l 险 TR -
T C

\
，

or
AR =
h c

N e g a tiv e e c o n o m ic p r o fn ( i b s s ) is T R <
. e . a
T C
k n o w n a s ıu b Q o r m a lQ ro fit
AR
o r
<
月
国严
A C

1 1 M A RG ı
. N A U S T P R IN c IP L E ı
N D ET ERM ı
N ı
N G P R O F IT M A X ı
M ı
S IN G
O UTPUT A N D PR ı C E

R e c a ll fro m U n it 1 1 th a t in E c o n o m ic s
.

, w e a r
gu e th a t ra ü o n a l d e c is io n -
k in g

\
m a

in v o lv e s w e ig h in g u p m a r g in a l c o s ts a n d m a rg ı
n a ı b e n e fı
ts o f a n y a c tiv it
y . A n
in d M d u a l sh o u ı
d ta k e a n a cūo n ir a n d o n ly if M B M C S im ila rly
.
, r o d u c e r s m k e
p

p ric e a nd o u tp u t d e c i s i o n s b a se d on th e m a r g in a lis t p rin c ip le im is in g p ro fits

, m a x

a t th e o u tp u t w h e re m a r g in a l
g æ l§ m a rg in a ıc o s t a n d w h e re

\
m a ı g !
@ s t is . T h is is illu s tr a te d u s in
g th e T a b le b e lo w .

2 ￠o * łi t í o h d m t ą ţ o t \ ı
\
\
3 \
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ł
目
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Y ・ır 5 H 2 L e c tu re N o te ı 2 0 1 6
F irm s a n d D e c iıio n s

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t h r q r d * t & o n 昏乱 t \ t 0 \ t a L L . h

Ta
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b ı
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二
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1 旧ı l= 国 ı 1团 团 园 1园 区 园 圃 t a \

\
， 。4
v
L \ lł i n
q
T he fir s t tw o u m n s o f th e
co ı ta b ı
e re p re s e n t a g iv e n d e m a n d sch e d u ı
e fo r a firm .
2 ・
A L i &
\ i ı
s i »

&
'
M p ńc e fa ı
ıs, t h e d e m a n d f o r a f ir m s o u t
p
u t in c r e a s e s . U s in g th is in fo rm a tio n , w e

c a n d e r iv e th e v a lu e s fo r t o ta ı re v e n u e (T R ) a n d m a rg in a l re v e n u e (M R ), he re

ー
w

TR =
P × Q a n d M R
=
A T R LD Q re s
p
e c ü v e ı
y
.

The
バı U
fiM c o ı
u m n re p o r ts th e to ta ı c o s t o f p ro d u c in g 0 to 4 u n its o f o u t p u t . s in g
th is in fo rm a tio n , w e c a n d e r iv e t h e v a ıu e s fo r a v e ra g e to ta l c o s t ( A T C ) a n d

目 m a r g in a ıc o s t ( M C ) , w h e r e A T C
-
T C / Q a n d M C
=
A T C / & Q r e s p e c t iv e l
y
.

F in a lı
y , p ro fit fo r e a c h u n it o f o u tp u t ca n b e c a ı
cu ı
a te d » o m th e d if re re n c e
be tw e e n T R a n d T C .

ı
t is b e s t to t h in k a b o u t p ro f it m a x im is a tio n in te n n s o f w h e th e r a n e x tra u n it o f
o u tp u t s M »u ı
d b e p ro d u c e d o r n o t .

A s seen fr o m th e ta b le a b o ve ,
if M R > M C , t h e n t h e d m re v e n u d o b ta in e d fro m
th e n e x t is
u n it o f
prodn grater
th a n th e * id ra o d o f th a t u n it o f p ro d u c tio n .

Thu s t h e r e is a s t i ıl
e r M t o be g a in e d b y )h c r e a s fin g o u t p u t

\
, .

S im iı
a rı
y , if M C > M R , t h e a d d iü o n a ı r e v e n u e r e c e iv e d b r o n e a d d itio n a l u n it o f
o u tp u t is le s s th a n th e a d d itio n a ıc o s t it w o u ld in c u r , s o it s h o u ld c u t b a c k o n it s

o u tp u t t o in c re a s e p ro fits

\
.

T h e firm w iı
l th u s c h o o s e to p ro d u c e 3 u n its o f o u t p u t ( w h e r e M R = M C
)a nd g a in
$ 1 2 in p ro fit .

Ļ N o te
d is c u
T h e d ia g ra m m a tic re p re s e n ta tio n o f th e p ro rit m a x im is in g e q u ił

s s e d In g re a te r d e ta il in F in n s & D e c is io n s ıP a rt B , S e c tio n 6
ib ń u m
.
w ill b e

1 2 U M IT A T IO N S O F T H E T R A D ı
. T IO N A L T H E O R Y O F P R O F ı
T - q ,ı ıi
U m e 4
M AX ı M IS A T ı
O N

Th e b a d M o n a l p ro fit -
m a x im is in g th e o rie s o f th e firm h a v e b e e n c riu c is e d fo r b e in g
u n re a lis tic . T h is is m o sıı
y d u e to th e fa c t th a t ( i) ı
irm s w is h to m a x im is e p ro fits b u t
a re u n a b le to d o so a n d /o r O i) ï irm s h ave o th e r a im s o th e r th a n p ro ıit
m a x im is a tio n (w ill b e e la b o ra te d o n in M e n e x t s e c tio n )
tū h . . \. &
r
In th e re a l w o rld , ï irm s m a y ıu M o n t
c ı ņ + a c c u ia b ï n f o rm a t io n i a b o u t
de m a nd a nd c o s t c o n d itio n s th a t e x is t . A s sucH ,
th e
y
m a
y
n o t b e a b le t o u s e

c o n c e p ts o f m a rg in a l c o s t a n d m a r g in a l re v e n u e w h e n m a k in g p ric e a n d o u tp u t
= d e c is io n s F o r e x a m p le , m a r g i n a l r e v e n u e m a y b
. e d if f ic u lt t o c o m u t e iv e n t h e
p , g

-
'
T h e re fo re , p
r ic in
g
d e c i s io n s a r e o f te n m a d e b a s e d o n n r m s e v a lu a ı io n o f th e
e s tim a te d d em an d fo r th e go od o r s e rv ic e , ra t h e r t h a n b a s e d o n p
r e c is e

in fo rm a tio n o n th e a c tu a l d e m a n d fo r th e g o o d o r s e r v ic e . F irm s a ls o te n d to w o rk

目
■

目
团
团
 立
国
yea r S H 2 L e d u ro N o te s 2 0 1 6 国
F im s a n đ D e c is io . s
目
o n th e b a s is o f
e x p ï i c i t ș t s in s te a d o f e c o n o m ic c o s t . H ence t ru e ro f it c a n

bexımi$ģilţ i D i a
, p o n l
y
.

The
d e c is io
« ė ı n
n fo rm ä iil to tm a ke p ro fit m a x ĺ m ı
s ln g
n s m a y a ls o b e s i n ilic a n ll h i h in
g y g s o m e c a s e s , s u c H a s in Iirm s th a t h
a ve
s e v e ra l p m d u c lio n lo c a tio n s (p o s s ib ly in le m a tio n a lly ) a n d m u ltip le p ro d u c t
ūring
M o re o v e r th e p ro b le m o f d e c id in g th e m iii
F « m s o p e ra
e re is
, t h
q ıto m a x im is e p ro lits iw .

te in a ! a M E e n ų tı q m iıiiit q h e r e b ó ú i d e m a n d a n d c o s
W t c o n d itio n s
ch a ng e T h e s e m a y a ris e i ñ b ó t h th e a c tio n s o f a ï irm a s
.

w e ll a s m a n
y oM er
fa c ıo rs o u ts id e th e ñ rm s c o n t r o l i
'

( p ric e d e te rm in a n ts o f d e m a n d a n d M e
. e . N o n
-

a c tio n s o f o th e r firm s
) T h e tirm is n o t , t h e r e f o r e , f a c e d w i t h s t a t i c
.

c o s t a n d
re v e n u e c u rv e s fro m w n ic h it c a n re a d o
ff its p ro lil im is in g o u tp u t a n d ric e -
m a x

p .

B e s id es M e d if ic u [tie s th a t firm s m a y e n c o u n te r ĺ n m a k in g d e c is io n s th a t a llo w

th e m to m a x im is e
p ro lits is im p o rta n t to
, it u n d e rs ta n d th a t s o m e Iirm s m a y
c h o o s e to fo c u s o n a c h ie v in g
m g s i i ë ū N e s in s te a d . T h is is p a rtic u la rly s o in
lirm s w h e re th e re a re d iffe re n t
g ro u p s o f d e c is io n -
m a k e rs w it h e a c h
g ro u p
h a y in
,

g a d iĦė re n t o b j e c tiv e irr m in d w h e n m a k in n s T h is

g d e c is io . s e c tio n s e e k s to
e Jq la in th e n o n
p ro lit m a x im is rFıg b e h a v io u r o f re a l w o rld ï irm
-

s b y lo o k in a t n o n -
g
tra d itio n a l o b je c ó v e s o f firm s a n d o th e r fa c to rs
.

: S

\
回
国
目
■
O ne o f th e fe a tu re s o f a c o m p le x
e c o no m m o d e rn
y is th a t p e o p le (p rin c ip a ls )
ha ve to e m p lo y o th e rs (a g e n ts ) to c a rry
o u t s p e c ia lis e d ta s k s F irm s fr e q u e n tly .

\
e m p lo y c o n s u lta n ts to
g iv e th e m a d v ic e o r e n g a g e th e s e rv ic e s o f s e c ia lis
p t ıirm s
暴
飞
电4凸 t * 曾 屯々
4 叫 岱 +o 4 掣
・ -
。
s u c h a s a n a d v e rtis in a g e n cy ir is th e s a m e w ith th e e m lo
g °
þt ı* \ ( o
- '

p y e e s o f th e \ ł * ï \ \ ı h ı h

co m p a n y The ' '

-
y a re o fte n s e e n a s a g e n ts o f t h e i r e m p l o e r A s a łirm
y g ro w s in
.

s iz e , t h e o r g a n i s a u o n o f t h e s e c o m
p a n ie s is s u c H th a t th e re is a s e a ra tio n o f

\
p
o w n e rs h ip fro m c o n tro l O w n e rs h ip is in th e h a n d s o f s h a re h o ld e rs
.

w h ile th e
) ; ￠ĺ t A * h\ i b \ * Y ıa ł
c o n tro l o f D a y to o
y p e ra tio n s is la l g e ty in th e d ire c to rs a n d m a n a e rs
- -

T h is
o a

.
g .

'á e rit io b }e m
r e s u lts ín
t h e i w n đu Ė p ! w h e re th e o b je c tiv e o f th e s h a re h o ld e rs
( P rin c ip a l) w h ić ii Ì s p r o fit m a x im is a tio n m a y b e d iffe re n t » a m th a t o f
a nd n ts ) ' ' " h "

akï .Tazg
' " r' "
th e d ire c to rs

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Ļ . h . .
T *

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F im s a n d D e c is io n s

. . . 4 o \ r n ţ P
3
d iv id e nd p a y m e n ts a n d a r is in g s h a re p ric e . M a n a g e rs , o n t h e o t h e r ha n d , m a
y

ha ve o e c ıi v e s s u c h a s p o w e r,
bonues , ıa
q g
e e x
p
e n s e a c c o u n t s , p
r e s t i e a n d
g

th e ir s e lf in te re s t ,
s ta tu s . In -
m a n
(s w o u ld
a
g
e ı
h u s m a x im is e w h a t is know n a s

\i . ır . T h e
.\ p ï . \
p e rh a p s th e m o s t fa m o u s o f a ll a [ t e r n a t i v e t h e o r ie s o f th e lirm is 1h a t d e v e lo e d
p
\

by w w [ a m B a u m o l in th e ıa te 1 9 5 0 s T h is is th e th e o r iń f s a ı e s m v e n u lto ta ı
y
.

g
r ıv m u ı x lm is ıtıo O fte n
t・ \ t
, t h e in c o m e o f s a le
ţ s m a n a e r s a n
m ı
d c o m m is s io n i ın u
_ g . . . &
b á sė d e h p ïo y e e s a re la r g e ly d e
'

pe nd e nt o n th e ï irm s t o t a l re v e n u e T h e . h ig h e r
th e to ta l re v e n u e g e n e ra te d , t h e
g re a te r th e c o m m is s io n T h u s tirm s
.
, w ith a
'

d o m in a n t s a le s d e p a rtm e n t m a y c h o o s e to m a x im is e r e v e n u e æ M e r ı
h a n p ro lits
M o re o v e r , e x t r a Ħ o f i t g e n e r a t e d is u s u a ll
y
s
p
e n t o n a d v e r ıi s i n
g
to in c r e a s e

re v e n u e fu rth e r .

U
G
-

ra p h ic a lly , r e v e n u e m a x im is a t io n is a c h ie v e d a t t h e o u t
p
u t w h e r e M R O iv h e .
re
n o â d d jtjg n a lı l ca n be re a p e d fm m p ro d u c in g a n d th e n s e llin g a n e x tr a
u n it o f o u tp u t ( i . e . w h e re th e M R c u rv e in te rs e c ts th e x -
a x is ) .

M a x im is e rs be h ave in a tra d itio n a l e c o n o m ic w a

y a n d a lw a y s lr y to m a k e th e °. 4 , e u e ・. e . . . 4 il l . h &
: c h o ıc e ih o m th e a v a ı
ı» S t i ı b ı i i ıa b le a ı te m a ü v s lic e r s o n t h e o t h e r
e , S a t is L e " - . I L Ie
" Q . ◆ d
h a d e x a m in e o y a lim it e d s t o f te m a ü v e s l a n d c h o o s e th é
+

th e m T h is is b e c a u s e a im in g lo r th e o p tim
. a l s o lu tio n m ay n e c e s s i t a t e d ļ ë §
, ・ \ţ u h °\ i . . ł h . . I iM e

m " t . T 4
g m 【i i q o f tim e y a n d re s o u rc e , e n e r
g s . s a tis lic in g b e h a v io u r a c c u rs w h e n t

f ö r m i n f m u m a c c ę p ta b le le w 台 o f re v e n u e
andpr?rłL

s a tis fic e rs , w h e r e m a n a
g
e r s in t h e f ir m a im fo r a t a r
g
e t ıe v e ı o f
p
ro f ıt ra th e r th a n

th e a b s o lu te m a x im u m le v e l . T h is is p o s s ib ly d u e to th e fa c t th a t th e s h a re h o ld e rs

o f th e firm (w h o a re p rim a riı

y in te re s te d in m a x im is in g p ro ı
its ) a re re m o v e d fr o m
th e o p e ra tio n s o f th e firm to b e fu lly a w a re o f th e o p tim a l d e c is io n s th a t n e e d to
b e m a d e in o rd e r to m a x im is e p ro fits . T he d e c is io n -
m a ke rs , s u c h a s r e
g
io n a l

m a n a g e rs c o u ld d e c id e a a in s t m a k in r o f it
-
im is in g d e c is io n s in ca se s

■
m a x
, g g p

w h e re th e y d o n o t s ta n d to b e n e fit . In s te ad , t h e r e
g io n a l m a n a g e r s c o u ld d e c id e

to a c h ie v e a g iv e n le v e l o f p r o fit s th a t a re d ee m ed to b e a c c e p t a b le b y th a t

s h a re h o ld e rs eve n th o u g h it fa lls b e lo w th e p ro fit

-
m a x im is in g le v e l, a n d e n
jo y
o th e r b e n e fits s u c h a s s h o rte r o p e ra tin g h o u rs a n d lo w e r le v e ls o f s tr e s s T he se

\
.

'
a c tio n s a re c o n g ru e n t w ith W illia m s o n s a r
g
u m e n t th a t
p
r o v id e d s a t is f a c to r
y

le v e ls o f p ro fits a re a c h ie v e d , m a n a
g
e r s o n e n h a v e t h e d is c re t io n t o
p
u r s u e t h e ir

o w n in te re s ts a n d m a n a g e ria l u tility is m a x im is e d .

\ 2 . 4 M A R K E T S H A R E D O M '" A N C E
\・t
m

\ '
M a rk e t s h a re is c o m m o n ly m e a s u re d b y th e p ro p o rtio n o f th e firm S Ħ i

\ \ w e ı* v i s t h e 1 1 a .

4 \.' "c

" '" h . w ・ u
\
ı Ţ e nga g e
s u ffic ie n t p a s t p ro tits to
in p re d a to ry p ric in g
co pe
, e

w ith
s
p
e

th e
c ia ll
y
in

lo s s e s in c u rre d
s it u a t io n s w h

in th e p ro c e s s
e r e t h į e f i

.
n

O
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ve r
a s

\
tim e , r iv a l lirm s m i
g
h t n o t b e a b le t o c o
p
e w it h t h e ıo s s e s in c u r r e d a s a r e s u lt

o f m a tc h in g th e la w p ric e s s e t b y th is lirm a nd c h o o s e to e x it th e m a rk e t .

ı
 Ye a r S H 2 L e c fu m
回
N o te s 2 0 1 6
国
F im s a n d D e c is io n s
四
T h is a llo w s th e re m a in in
g ı
irm s to in c r e a s e th e ir m a rk e t s h a re
C o rre s p o n d in g le v e l o f m a rk e t a n d
po w er .

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Be h a v io u ra l e c o n o m is t s b e lle
w M a t la r e b u s in e
g s s e s a re c o m
p le x a

æ
m a de up o f m a n
y d ifıe re n t E a c h g ro u p o f slakeholde .

d ilfe re n t o b ie c liv e s o r o a ls th a t m a
g y or m a y not be
s in g le ı h e o ry b a s e d o n re s tr ic tiv e a c o n f l i c t i n g It is u n lik e ly th a t a -

s s u m p tio n s s h o u
ld b e a b le Io ta k e
S o m a n y fo rc e s , a lło f w n ic h t o a cco unt o f
, s o m e d e re e o r a
fo rm u la tio n of a tirm
'
s ric e
g n o th e r w i lt h a v e a s a
y
in th e
p a n d o u t
p
u t d e c is i o n . O lte n t h e ln ıııt o u p a t
a n y m o m e n t w ill fo c u s o , d o m
w
n th e ir o w n o
d e c is io n s m a y b e ta k e n a t a lo
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fo r e x a m pı
e p ric e a n d o u tp u t
c a l le v e l b
y m a n a g e rs -
iu ıs h a re h o ld e rs ta k in
o n ly a d is ta n t v ie w o f M e
w

c o m p a n y s p e rlu rm a n c e g
a n d s tra te
g y .

M o æ o v e r, m a n A. ! ・ * ĺ
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f ir m s d o n o t m
fı r
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la rly tr u e o f le ï h n o lo
g y s ta rı p s F o r e x a m p le , S k y w -
u .

c re a te d In 2 0 0 3 ; w h e n it tile d fo r
a ï ir m

a n IP O in 2 0 1 0
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ı» * ıb ı ￠ı n Ħ p
i* o ıt n iı In d e e d , i n t h e s h o
+ rt ru n it m a
g

P re fe ra b le to ru n a t a lo s s , a n d a i m f o r r e v e n u e y be
m a x im is a f io n
b ra n d p re s e n c e a n d a lm fo n o r e s t a b lis h in a

= W n o t d ia s im ila rly , i n a r e c e s s io n i .
g
iw .

, t

V L T h i n ı' ĥ ĥ ' =
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ltim
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-

, ïo .
s u c c e s s fu l R m a y e n a b le h i h e r & D
g p ro lits in th e M u re T . h is is a ls o e v id e n t in
s tra te g ie s th e t a im to d e le r e n u
y a n d in c re a s e m a rk e t s h a re .

ffin a lly , n 《t Iıæ

f i r m s t h a
叫声聞M o m
,
t d
-

o c o l
m a y ha ve litu e o r n o in c e n tiv e
m a x im is e
.
to
p ro lits c o m p a re d
le v e ls o f c o m to th o s e w n o fa c e h ig h
re la te s c lo s e ly to th e ir le v e l o f a s t p e tiü a n T h is .

p p ro fits T h e lu x u ry o f b e in
g a b le to w a it fo r
.

d e fe rre d ı
o n g ru n p ro lits m a
y o n ly b e th e p re s e rv e o f e s ta b lis h e d m
u llin a tio n a ï s
T h e s ig n ific a n c e o f th e c o n c e t o f °M s In d e te rm in in
.

b e h a v io u
p
r w ilt b e c o v e r e d in F irm s & D
g re a l ld c o m p e tiu v e q .
-
w o r

e c is in n s II .
.

SUM M A RY O F PA RT A

rf
P r o f it is th e d if r e re n c e b e M te e n to ta l re v e n u e a n d to ta ı c o s t . It is m a x im is e d
w h en m a
rg in a l re v e n u e ls e q u a ls to m a r g in a l c o s t .

rf
Ħ rm s u s e t h e m a r in a ıi s t r in c i le
g p p w h e n m a k in d
g e c is io n s w e i h in
,
m a r g in a ıc o s t a n d m a r in a ır e g g
g ve n ue .

rf
M o s t l ir m s a im to ro f it m a x im s e th
p , o u h n m a
g y b e d if fic u lt to d o s o in
v B e s id e s p ro fit m a x im is a tio n
r e a ıi l
y
.

je c tiv e s i n c l u d i n g
, l ir m s d o h a v e v a r io u s o th e r o b
e n try d e te rre n c e , r e v e n u e m a x
g
i m is a t io n , p
r o f it s a t is f id n a nd m a rk e t s h a r e
do m in a n c e .

rf
T h e u lt i m a t e a im o f th e f ir m w i lı d e e n d ıa r e l o n th
p g y e d o m in a n t s t a k e h ıd
o e r ,
th e ir s ta e o f d e v e ı
g o p m e n t a n d th e
p re v a iı
in g c o n d itio n s in th e m a rk e t .

区
丁
 Y ・ır S H 2 Lecı
u m N o te ı 2 0 1 6
F Ir m s ın d D e c i s i o n s

B . C O STS A N D R EV E N U E

1 . ı
NTR O D UC Tı
O N

Fı
rın O r g a n iz a tio n o r e n te r ń s e
p fo rm e d b y e n tre p re n e u rs w h o b rin
g to g e th e r
fa c to rs o f Ħ o d u c ü o ı
a nd
p ro d u c e g o o d s o r s e rv ic e s
, ıa b o u r a n d c a
-
it a ı t o
p

fo r sa ı
e .

> ı
n d u s tr y C o m p ń se s a g ro u p o f firm s th a t p ro d u c e a s in g le g o o d o r s e rv ic e ,
o r a g ro u p o f re la te d
g o o d s o r s e rv ic e s .

> M a rk e t ı
t e x is ts w h e n e v e r
p ro d u c e rs a nd c o n s u m e rs co m e to g e th e r to
tr a n s w ith e a c h o th e r . ı De m a n d a n d su p p ı
y
. e .
.

ĺ ・"
1
・o
4 ・ı a u ı* i ￠e

Ex a m p ı
e s

ın d u s Ħn ıı
*
Sm a rt p h o n e S a m su ng , A le
,
H u a w e i
, S o n
,
p p y

X ia o m i, B la c k B e iT
y

F a st To o d M c D o n a ı
ď s K F C
, ,

T e ı
e c o m m u n ic a tio n s M 1 , S t a r h u b , S in t e ı
g

1 2 T H E p R O D UC Tı
. O N FU N C Tı
O N

> P ro d u c t io n p ro c e s s b y w h ic h fa c to rs o f p ro d u c tio n a re u s e d to c r e a te g o o d s
a n d s e rv ic e s .

P ro d u c t io n fu n c ü o n sh o w s th e m e th e m a tiic a l re la tiio n s h ip i b e tw e e n th e
o u tp u t o f a g o o d /s e rv ic e a n d th e fa c to r s o f p ro d u đ io n u se d in p ro d u c in g
th e m , f o r a
g
iv e n ıe v e ı o f t e c h n o ıo
g y
w it h in a s
p
e c if i c e r io d o f t i m e . ı
tsh o w s
p

ho w
o u tp u t w lı
l b e a fı
e c te d b y c h a n g e s in th e q u a n ü t o f o n e o r m o re fa đ o r s
y t
Q f p r o d u c tio n . ł

To ta ıP ro d u c t = f ( la n d , ıa b «» u r , c a
p
l t a ı, e n tr e
p
r e n e u rs h i
p )

1 3 SHO RT A N D L O N G U N
. P R O D U C T IO N

To in c r e a s e p ro d u c tio n ,
fir m s n e e d t o a c
q
u ir e
g
r e a t e r
q
u a n t it ie s o f c e r ta in f a đ o r s

o f p ro d u c ü o n . H o w e v e r, t h is m a
y
n o t a ıw a
y
s b e
p
o s s ib ıe im m e d ia t e l
y
.

ı
f th e firm w a n ts to in c re a s e o u t p u t in a h u rr y , it w i ıl o n l
y
b e a b ıe t o in c r e a s e t h e

qua n tity o f c e rta in in p u ts . E g . . R a w m a te ńa ı

s, f u e ı, t o o ls &
p
o s s ib ı
y
la b o u r . T he se
a re k n o w n a s v a rı
a b le fa c t ￠
»r ı+ B u t it w iı
l ha ve to m a ke d o w ńh it s e x ı
s tın g
bu iı
d in g s a n d m o s t o f its m a c h in e r y . T he s e a re k n o w n a s f ix e d fa c t o rs .

The s h o r t ru n is a tim e p e rio d d u ńn g w h ic h a L U E f c to r o f p ro d u đ io n i$

p
fix e d . ı
n th e s h o rt ru n ,
o u t
p
u t c a n in c r e a s e d O N L Y by .
u s in g m o re v a r la b ı
e

' ・\ ・ « h
ı
n p u ts t o b e v a r le * e x c e p t th e ı
e v e ıo f te c h n o ı
o g y .
ı

h » ı l * \ i l *
'
L

:\ 4 » ł\ r i o 4

Fo r e x a m p ı
e , t o m e e t r i s in
g
d e m a n d , a n a irl in e h a s s e v e r a l o
p
t io n s : in c r e a s e t h e

n u m b e r o f f l ig h t s w ith its e x is tin g fı

e e t, h iń n
g
m o r e c r e w , u s in
g
m o r e f u e l o r b u
y

m o re a n e s
p ı . ı
n th is ca se , v a ń a b le f a c t o r s i n c l u d e in c r e a s in
g
n u m b e r o f
flights ,

h iń n g m o re c re w a nd u s in g m o re fu e l . The se m a y b e a ı
te r e d in th e s h o rt ru n . O n
'
th e o th e r h a n d ,
t h e a i r ıi n e s f ix e d f a đ o r s a r e t h e a ir
p
ıa n e s . T he se ca n o n ı
y b e
a ı
te re d in th e ı
o n g ru n .

吕
 i:
・

A .A ı・h b in a .
' " h

・ ï ı. ı
ıı ・t ł

ye a r S H 2 L e c tu ï e N o ￠
e a 20 16
a L ' "
' l Ł F lm
" ・・ ° ı s a n d D e d
t' d o . s
ï * "
a

N o te T he a c tu a l ı
e n g th o f th e s h o rt ru n w ill d iĦe r rro m
n rm to fir m a n d fr o m
m d u s t r y Io in d u s try - ï l is N O T a fix e d p e rio d o f tim e .

1 4 A C C O U N T IN G A N O E C O N O M IC C O S T
.

W nen m e a s u rin g c o s ts , e c o n o m is ts a lw a y s u s e th e co nce pt of o

回
p p o rtu n ity c o s t 国
Eco n o m ic co st is a m e a s u re o f th e to ta l o p o rtu n it
.

p y co st o f u s in g s c a rc e ■
re s o u rc e s to p ro d u c e o n e p a rtic u ı
a r c o m m o d ity in te rm s o f th e ne xt b e st
alternative fo re g o n e ı
tc o n s is ts o f e x p lic R a n d im
p lic it c o s ts o f p ro d u c tio n
.

\
.

To ta l E c o n o m
m l
ic c o s t - E x ic it c
p l o s t ◆ lm
p ılc lt

> Fa c to rs n o t o w n e d b y th e f ın n + E x p lic it c o s ts p a y m e n ts m a d e

\
to
o ◆ s id e s u p p lb rs o f ir vp trt s The se in c lu d e sa ı
a rie s a nd w a g e s p a id
.

to
e m p lo y e e s , p r i c e s o f r a w m a t e r i a ıs i fin is h e d m a te ria ı -
a n d s e m s, o v e rh e a d
c o s ts a n d p a y m e n ts in to d e re c ia tio n a n d s in k in
p g fu n d a c c o u n ts .

Fa
in
c t o rs

vo ı
ve a
a ı
re a d y

y
o w n e d
d ire c t p a m e n t o f m o n e
y to
b y th e f ir m +

a
lm p lic lt c o s t s
th ir d p a rty , b u t
C o s ts
w h ic h
w h ic tıd o

n e v e r th e ıe
n o t

s s
\
invoı v e a s a c rillc e o f s o m e a R e m a tiv e
For exam pı e , t h e s a la r y .
fo r o n e b a n

e n tre p r e n e u r , a n d
g y
回
t h e in t e r e s t f o r e
g o n e o n fu n d s s u p p ı ie d b y b u s in e s s 回
o w n e rs T h e s e te n d to b e d iffic u ı
.
t to e s t im a te / c a lc u ı a te in r e a lit y .
目

2 . S H O R T R U N P R O D U C T IO N A N D C O S T S

2 1 S H O R T R U N P R O D U C T io N
. -

P ro d u c tio n in th e s h o rt ru n is s u b e c t
to d im in is h ın
j g returns .

L łi J
, 4 f・t
p ro d u c tio n in th e s h o rt ru n
g o e s th ro u g h 3 s ta g e s
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A G E R EASO N
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o f w o rk e rs to e m
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atanincreañgi A s th e ï irs t W o rk e rs a re T . . '

a
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e m p lo y e d , t o c a r o u tp u t
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N o te : M a rg in a ı
in itia lly H s e s m o re a n d
P ro d u c t is th e e x tra m o re ra p id ı
y T he -

o u tp u t p ro d u c e d b y a s s u m p tio n b e h in d th is is
e m p lo y in g o n e m o re th a t w ith o n ly o n e o r tw o
u n iE of a v a r ia b le w o rk e rs e ffic ie n c
y is la w ,
Ta c to r
s in c e w o rk e rs a re s r e a d
p
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STA G E Z
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d e c re a s in g m a r g in a l o m m ı
o w d @ l a ris e s ris e s . h o w e v e r, m a in a l
qg

à u tp u t (M a rB ı
n a ı à iiā m ı xeâ la đ o r is p ro d u c t ta lls d u e to
V ro d u L t o f ııb o u r b e in g o v e r -
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ili§e g In s u f fic ie n t s p a c e o r
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l
'

ib m bu at u m ım ı
n ıı _ :M
. _
n ĺi t
d e a e a s in g ra e \
t a p p lie s .
T h e fo rth w o rk e r is a b ıe
to c o n d u c t to c o n t r i b u t e
E a c h a d d itio n a l u n it o f to th e p r o d u c tio n p ro c e s s
la b o u r a d d s le s s to but b y a iiä lı
ef q x te n tł
ı
o ta l o u tp u t th a n th e c o m p a re d to th e p re v io u s
p re v io u s u n it o f w o rk e rs .

la b o u r . T h is m e an s
th a t m a r g in a l o u t p u t is T h e sa m e a p p lie s f o r th e
fa llin g . Tin h w o rk e r .

To ı
a ıB gQ m a ıls , T h e a d d iti o n a l o u tp u t E v e n t u a ll
y , a s m o r e a n d

n ext w o rk e rs a re

n e g a tiv e , be c a use th e y
'
w ill g e t in o n e a n o th e r s

w ay . T h is is th e ca se fo r
th e s ix th w o rk e r an d
be y o n d .

Ho w w e n
e x p a n d p ro d u c t io n ?
Bu ild a n a d d iü o n a l I
'
'

fM o ry o r in c r e a se th e

s iz e o f th e g ņ g _
fÆ t
o ı
o r in c re a s e th e n u m b e r o f

to o ls e tc . T hat is ,

in c re a r e u ie quanı
ity oï

» t @ w . h o w e v e r,

th is c a n o n ly hap pe n in

th e lo n w n .

n
A
in e p t h k n o w l ed g e of the sh o r t- r
u n p
r od u c t ion fun c t ion is no ￠ req u i red .

10
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r ı* \

ı* \= r * /

h il l /
Y b w 5 H 2 L e c lu n N o b s 2 0 16
E 1h [m F r m s a n d D e c is iio n s

2 2 SH O R T R U N C O STS
.
-

ı
n th e s h o rt ru n a firm c a n n o t v a r y its tlx e d fa c to r s It
,
v a rie s its o u t u t b
p y v a r y in g
.

th e a m o u nt o f w n e b Je fa c to r s . ダ

2 2 1 F IX E D A N D V A R IA B L E C O S T
. .

fıx « m b ic o s t th a t d b e s n o r v @ Ľ m « u t ie u a u ı
t is a c o s t th a t m u s t
be p a id e ve n w h e n p ro d u c tio n d o e s n o t ta k e E R
pla ce .
g . e n t, h e a t in
g
b i lls ,

a n d m a n a g e ria ıc o s ts .

V M ab h c o * t is c o s t th a t v a rie s Q u M le v e l łIt is n o t in c u rT e d w h e n
p ro d u c tio n . D o e s n o t ta k (
þ
la c e . E 9 . .
C o st of ra w m a te ria ls , W ag e s ,

p e rc e n ta g e ta x

2 2 2 TO TA L C O ST
. .
, A V E R A G E C O S T & M A R G ıN A L C O S T

> T o tııC o s t (T C ) is lt h e s u m o f th e c o s ts o
w th e fa đ o rs o f p ro d u c tio n a firm
u s e s in p ro d u c tio n .

To ta ıC o s t ( T C ) = T o t a ı F ix e d C o s t
(T F C ) ◆ T o ta ıV a ń a b ıe C o s t

0 T F C is th e c o s t in c u rT e d in th e s a tio n o f fix e d fa c lo r s ￠ o f
W
p ro d u c tio n .

o T V C is th e c o st in c u r r e d in th e u t ilis a t io n a f v a r ia b le fa c t o tt i o f
p ro d u c tio n
h q & A
C o s t i$ the co s t pe r un i t of ou t p t r
u ai ・ TC / Q- A
F C . AV C

w h e re A F C is to ta l fix e d c o s t p e r u n it o f o u t u t
p A F C -
T F

& A V C is to ta l v a ria b ı
e c o s t p e r u n it o f o u t u t
p .

AV C = T V C

> M a r g in a ı C o s t M C
( ) c ha n g e in to ta ı c o s ts fro m in c re a s in g o o n e \
W Į y
a d d iü o n a l u n it .

M C .
=
T C
,
-
TC . 1
N u m e ric a l lı
ııłs tr a øo n ( w lıl n o t ı» te s te d )

C o n s id e r a firm -
H oı
e y W ly
oo ı , w h ic h r o d u c e s s w e a t e r s
p .

It u tiı
is e s m a c h in e s a n d w o rk e rs in th e p ro d u c tio n o f s w e a te rs . ı
n th e s h o rt r u n ,
m a c h in e s a re fix e d fa c to r o f T he
p ro d u c tio n .
firm h a s in its p o s s e s s io n 1 u n it o f
m a c h in e w h ic h c o s ts $ 2 0 . W o rk e rs a re v a ń a b le fa c to rs o f r o d u c tio
n ı
tca
p . n h ire
w o r k e rs b y p a y in g $ 2 5 f o r e a c h w o rk e r

/
ç ix J t* A ・t ,
n ų t \ i\ ￠ d

The ta b ı
e b e ı
ow s h o w s th e p ro d u c ü o n a n d o
ls ts fig u re s o f H o le
y W o o ı
ly

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y ・・r 5 H 2 L e c fu m N o lo * 2 0 1 6

F irm s ・n d D e c i s i o n

2 2 3 SH O R T R U N C O ST C U R V ES
. .

U s in g th e v a ı
u e s g iv e n a b o v e ,
w e s h a lı
p
lo t t h e A F C , A V C , A T C a n d M C c u r v e s .

N o te Y o u a re n o t e x p e c t e d to iı
ıu s tra te th e s e c u rv e s w ith n u m e ric a ı
团
fig u re s , a

s k e tc h o f th e m w iı
ıd o .

C o l t ($ )

\
\
回
国
0 4
0 5 10 1S 20 25

\ F ig u re 1 A F C c u rv e Q u a n t it y o f

o u tp u t

\ AFC c u rv e is g »n d n u o u s u
A s o u tp u t h s in g . T F C is
N
s p re a d o v e r
ger
s ı n g
o p ı .

q u a n t itie s o f o u tp u t , A FC ,

d e c re a s e s I .

\
\
\
园 2 -

田
O
0 5 10 15 20 25

\ Fı
gu re 2 A V C c u rv e
Q u a n t It y o f

O u tp u t

\ A V C c u rv e is U h
A V C in itia lıy d e c r e
a
a se s a s
.

p ro d u c tio n e x p e ń e n c e s In c r e a s in g m a r g in a l

n ï s fr o m e h iń n g
trı o f firs t tw o w o rk e rs . Eve r y w o rk e r c o s ts th ë $ 2

四
国
T he
u n its
firs t w o rk e r a d d s 4

o f o u tp u t . T h is
u n its o f o u t p

w ill r e s u ı
t in a fa lı in
w h ile

A V C
th e se co nd
fo r th e
w o rk e r a d d s 6
ra n g e o f o u tp u t

p ro d u c e d b y th e s e 2 w o rk e rs .

AVC s u b s e q u e n tı
y in c re a s e s a s p ro d u c tio n e xpe ńe nc e s c r e a s j r n g

\ a r g fn a l r e ıu r n s M o m th e h irin g o f th e th ird a n d s u b s e q u e n t w o rk e r s
m .

E v e r y w o rk e r S M R ñ s $ 2 5 to h ir e ł H o w e v e r , t h e t h ir d ,
f o u M a nd fifth ,

s ix th w o rk e r a d d s o n ly 4 , 3 ,
2 a n d 1 u n its o f o u t p u t . T h is re s u lts in a n

in c re a s e in A V C fo r th e ra n g e o f o u t p u t p ro d u c e d b y th e s e w o rk e rs .

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0 5 10 is 20 25

Fı
gu m 3 A C , A V C ・ n d A F C c u r v ・ ı Q u a n d t
y o f 国し
o u tp u t
目
A s A T C =
A F C ◆ A V C , th e s h a
p e o f t h e A T C c u r v e is d e t e r m in e d b th e
y
v e rd c a l s u m m th e A F C a nd A V C c u rv e s

\
« .

N
T C cu r ve
A .
o t e W e co m m o n l y
de n o t e th e Ą as si mp l y ' C ı \

A s A FC a nd A V C a re in itia lı
y d e c r e a s in g a s Q in c r e a s e s t h u s
,

d e ç re a ş e s ,

A VC

\
s u b s e q u e n tı
y in c re a s e s w h ile A F C c o n tin u e s to d e c r e a s e . How e v e r,
: m n a n u e s ļ Q a l ļ a s d e c re a s in g e « e c ts
oAVûoutweighs in c r e a s in g

:_ \ L
«
】 e v
ę o ļ ļ aa ılv In c r e a s e s a s in c r e a s in g e f ï e c is o f A V C o u tw e i h s
g

\
d e c re a s in g e n e c ts o f A F C .

A FC c o n tin u e s to fa lı
, t h e v e r ü c a l d is t a n c e b e t w e e n A T C a n d A V C

d e c re a se s a s Q in c re a s e s ( th e v e rtic a ıd is ta n c e b e tw e e n A T
C a n d A V C
re p r e s e n ts A F C
) . T h is re s u lts in th e i n c e o t A T C a o d

\
. (

の\
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目

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目
0 本 ― ―

0 5 10 15 20 25

Fı
gu re 4 M C c u rv e Q u a n ılv
O f o u tp M
M C C u rv e is U « h a e d
p .

13

回
国
■
 Vea , 5 H 2 L=d u . N đ e s 2 0 16
Ħrm l a n d D e d s Jw l s
\,A￠\a . f 4 n
i. . .
/

T ĺ it irs t w o r\\ e r a d d s u n its o f o u t p u t ,

w n i le M e s e c o n d w o rk e r a d d s 6 rt \ . . h &

s ix M w o rk e r a d d i o n ı
y 4 , , 2 a n d 1 u n it s o f o u t p u t . T h is re s u lts in a n
in a e a s e in M C lo r M e ra n g e o f o u tp u t p r o d u c e d b y th e s e w o rk e r s .

c « (ı)

4 . "

be e m p ı o ye d w h ic h m e a n s th a t W c n cnaa * d
ı . Tc ris e s a s w e ll ( a s
T C = T F C ◆T V C ) . M C a ı
so ris e s .

T h e re e x is t s a m a th e m a t ic a ıre la t io n s h ip b e tw e e n M C a n d A V C a nd
A TC
W nen M C < A C , A C m u s t b e f a ııi n
g (a s a d d it io n a ıu n its o f o u tp u t
c o st ı
e s s th a n th e a v e r a g e h e n c e th e ir p r o d u c tio n p u lls A C d o w n )
W n e n M C > A C , A C m u s t b e h s in g (a s n e w u n its o f o u tp u t c o s t
m o re th a n th e a v e r a g e )

A ppı y in g th e a b o v e c o n d itio n s to th e p ı
o ttin g o f M C , A V C a n d

A T C c u rv e s ,
w e o b s e r v e t h a t th e M C c u rv e m u s t ın t re r s e c t U ıe

AVC and A T C c u rv e s ıt
ı t Æ

S U M M A R Y O F S E C T IO N 2 2 .

ł It ls im p o rta n t to d is ü n g u is h b e tw e e n fix e d a n d v a ria b le c o s ts in th e s h o r t r u n .

C h a n g e s in fix e d a n d v a ń a b le c o s ts h a v e d if fe rin g e « e c ts o n M C , A C a n d A V C .

W e te n d to s k e t c h t h e s e c o a t c u rv e s ra th e r th a n p lo t th e m . T hu s , t h e r e is r « »

n e e d to m e m o riz e e x a c t n u m e ric a l v a lu e s .

ł O fte n AVC c u rv e s in a n e c o n o m ic a n a ı
,
w e u s e t h e M C , A C a n d
y s is re g a rd in g
th e s h o rt r u n . A F C is u su a ı
ly d e riv e d * o m s u b tra c tin g A V C * o m A C .

14
 目
Vo a , 5 H 2 L. tu . N o te s 2 0 1 6
F l. s . '" e d s l o . .

2 . 3 D EC ı
sıo N M A K ı
N G IN T H E S H O R T R U N -

'
m o n s ï it￠
ē d in

'
O n a ñ rm s s ht ru n d e c is io n
a re s ig n ilic a n t in d e te rm in in
n m
'
g s h o rt
-

o u
中u t d e c is io n s . p ro v id e d th a t

Æk Æ #
ill c o n tin u e l.
. od u ce . o th e rw is e . it

If o n ly lix e d c o s ts c h a n e
g
们
(a s
, m a r in a l c o s t s a re
th e a d d itio n a l c o s t o f
引
g u n a ñ e c le d

p ro d u c in g a n e x tra u n it o f a
g o a d re m a in s u n c h a n g e d
) H o w e v e r, .
a v e ra
W ill ris e P ric e a n d o tıt u t re m a in s u n g
e c o s ts

p
.
c h a n g ę d a n d p ro ￠ it fa lls .

们
W he n v a ria b le
a v e ra g e c o s ts w ill ń s e T h e firm
c o s ts ch a n g e

c a n p a s s o n s o m e o t th
g

e
.
(e .
g . w a
ge s ris e s ,
) b o t h m a r in a l c o

c o s t c h a n g e s to
s t s a s w e ll a s ll
c o n s u m e r , m e a n in th e
g b o th p n c e a n d o u t p u t w ill c h a n e
g .

L . . tn r ń . . h i . . \ť o
ıı国ı ı
1
3 L O N G R U N P R O D U C T IO N A N D C P . . . . . n . L . .

I
.

O STS
3 1 LO N G R U N P R O D U C T ı
.
O N n

If th e firm w e re

団
to d o u b le a ll its in u ts w
p , o u ld it d o u b le ils o u t u t ? O r w ill it
" .r 【 p m o r e
e ss th a n d o u b le ? T h re e
p o s s ib le s itu a b o n s c a n b e d is tin g u is h e d
,

N o te th a t th e
w o r d s m ean th a t
ķ ıï in p u ts in c re a s e b y th e s a m e
eE p o rU o n .
1
c o n s ta n 幢
哩 亜 亜 匯 整郵
o u tp u t
E g W he n
, incrėmtely to th e in c re a s e in in u ts
p .

a H in p u ts a re in c r e a s e d tp u t \
.

LĶ Ac
.
b y 8 % in c re a s e s b y c. h .\ . H
, o u
th e sa m e
p e rc e n ta g e i. e . 8% .

> D e c re a s in g R e t u r n s to S ca ı
e
O u tp u t in m p n q p Ħ le s s th a n p ro p o rtio n a te ly to th e in c r e a s e in in p u ts
T e c h n ic a l d is e c o n o m ie s a re
.

p re s e n t . D e c re a s in g returns to s c a le \ f& i " し恤 A u

ca n b e a
ro u g h ly r e p re s e n te d b
y th e ris in g s e c tio n o f L R A C .

E g W n e n a ll in p u ts a re in c re a s e d b 8 %
. .

y , o u t p u t in c r e a s e s b 5 % .
y

> in c re a s in g R e t u r n s t o S c a ı
e

O u to u t in c re a s e s m o re ţ a n p ro p o r tio n a te ly to th e in c re a s e in in
im p H e s th a t a v e ra g p u ts T h is .

e c o s t fa n s a s o u t u t in u Çq \ \ \ " a \. 8 ' "

p e a s e s ( k n o w n a s te c h 3
n ic a r
e c o n o m ie s o f s c a fe
) . " t . . A
W
E g W h e n a H in p u ts a re
. .
in c re a s e d b y 8 % . o u t
p
u t in c r e a s e s b m o r e t ha n
p ro
y
p o rtio n a te ly to 2 0 % .

Tho u g h th e L a w o F R e t u r n s to S c a le is n
o t s ta te d in th e s ￠
y ￠
a b u s , a n
a w a m n e s s o f th e c o n c e t is re
p q u ire d .

15
 Y e a r 5 H 2 La d ・. N e le s 2 0 1 6
R m s a n d D e o s io n s

3 2 LO N G R U N C O S TS
.

ı
n th e lo n g ru n T he re a r e th u s n o ı
, a ll f a c to r in
p
u t s c a n b e v a ń e d .
o n g -
r u n fix e d
c o s ts .
A ı . 1 h e n , ın t h e ı
on g iu n a re v a ria b ı
e c o s ts .
\

3 Z 1. LO N G R U N A V E R A G E C O ST C U R V E

The ı
o n g ru n a v e ra g e c o s t ( U Ą A C ) c u rv e sh o w ho w a v e ra g e c o a t v a rie s w ith
O u tp

LR A C

Ei ・
4 ..
. H o \ Lt ' " A q h
\
m o t e f r o n a c « \ t

:\
\ M ı
n in ıu ııı E m c ı
en t s c a ı
e

X * h q \
\ q i h a t o f * \
u
t

> Q u a n o ı
y o r

O b E s o u tp u t Q
( }

F ig u re 6 L R A C c u rv e

> The L R A C cu rv e is t y p ic a lı
y U
-
s ha p e d
A
s o u t p
u
t r i se s . A t f i rs t ä w r a l
ge
c o l t s h ı ￠ as t he I irm b e n e f its f rom
o ts c ( R e fe r to S e c tio n 3 . 2 2) .

■
W n e n th e b n ru n a v e ra e c o s t is a t ï t c m ın ım u m t h e f ir m
g g , h a s r e a c h e d

iķ Jp ı*n h n u m eM c fe n t s c ıle .
+

ı
t is th e p o in t w h e re th e L ıA C s to p s
fa llin g It is . th e o p tim a l o u tp u t Iw el b e yo n d w h ic h g g n ific a n ļ o ı
a d d jļ į o n a l e m n o m įæ Q t sca ı
e ca n ļE a ç h i ( R e fe r To .
S e c üo n 3 . 2 3) .

ı
T h e h s in a rt o f th e L R A C c u rv e s h o w s v e r ı e c o s t ı ın c l
g p ! g r e a s ın
u

re fı
ec d n g h em e l d fs e c o n o m fe s o f s c a a ( R e fe r to S e c tio n 3 . 2 2) .
'

ı
A ıı
p o
in t s o n th e in e
ı re p r e s e n t le a s t -
c o s t fa đ o r c o m b in a tio n s
p o in ts
abo ve th e lin e a re a tta in a b le b u t u n w is e , w h i le
p
o in t s b e ıo w a r e

u n a tta in a b le g iv e n p re s e n t fa c to r s o f p ro d u c tio n .

N o te B e s id e s th e c o n v e n Eio n a ıU -
s h a p e d L R A C c u rv e , s o m e f i r m s d o e x
p
e r ie n c e

co n « n u o u s ı
■ y fa llin g L R A C c u rv e s ( a ls o k n ow n a s n a tu ￠
a l m o n o p o lie s ) a s

ı e c o n o m ie s o f s c a le a r e e n jo y e d o v e r a n e x t r e m e l y la r g e o u tp u t . T h is is e s p e c ia tı
y
fo r firm s w ith s ı
g n ilic a n tı
y h ig h f u a d c o s ts .

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国
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团
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 y e a r S H 2 L e c fu ıe N o ta s 2 0 1 6

F ł. s a n d D e c is io n s

C o ıt l $ i

SRAC ,

- c

:i: b
į

q H Łt o h o h { * d ・ F a c q
\t t ・ \lj Q ı
r
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n b e
上
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j ( h q p h o . M a ï
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上 O u a n u v q t Ce
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>
iQ
m ・4 a
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Q n w
o u tp u t }
Fı
目u r・ 7 T h ・ r・ı
a t io n ıh ıp b ・t w ・e n S 只是 C a n d L 只是 C

Th e LR A C is c o m m o n ly
'
k no w n a s a firm s
pı
a n n ı
n g c u rv ・ b e c a u s e o n th e
ba s is o f th is c u rv e t h
h e * ız ・ a n
, e f ir m d e c ıd e s t d ıc a ı
e o f ı
tı p ı
a n t
(in d u d ln g la n d ,
W i d in
! g s , fa c to rie s a nd h e a v y m a c h in e r
y ) in o rd e r to w o d u c e
a l i M e l o f a t th e ı
o w e « r m g
■
L e ť s a s s u m e t h a t a f a r m e r o n l ro d u c e s w it h tw o in u ts : la n d
y p p a n d

ı
a b o u r . Th e fa n n e r w o u ı
d lik e to e x p a n d h is p ro d u c tio n a n d c o n s id e r s h is
ı
o n g
-
r u n o
p tio n s .

T
o s i mp
ı
ify
ou r an a l ys i s, l
eť s a s s u m e t h a t t h e r e a r e o n l y
3 po s s i bl e f ar m

(o r p la n t ) s iz e s .

ı
E a c h fa r m s iz e , w ith its ow n p a rü c u la r ı
e v e l o f th e fix e d in p u t o f la n d is
,

r e p re s e n te d b y th e c ru v e s S R A C 1 , S R A C a n d S R A C in F i u r e 7
z a g .

ı
A s s u m in
g
th a t th e fa rm e r is in it i a ıl
y p
ro d u c in
g
a t Q 1 o n S R A C 1 , bu t w u ld
ı
ik e to in c re a s e p ro d u c tio n to Q z The fa rm e r h a s 2 o tio n s
p
.

R e ta in h ls c u rr e n t fa r m s iz e b y re m a in in g o n S R A C 1 In th e s h o rt

ru n

In c r e a s e th e s iz e o f h is fa rm an d p ro d u c e o n S R A C z, producing
Q 2 a t a ı
o w e r a v e ra g e c o s t (d u e to c o s t b e n e fit s a ris in g * o m

e c o n o m ie s o f s c a le )
■
A s th e fa rm e r in c r e a s e s o u t
p
u t in th e s h o rt ru n , it w ill be p o s s ib le o n ly to
p ro d u c e a t th e lo w e s t p o s s ib le cost on S R A C 1 u p to p o ı
n t a (m in im u m

po in t o f S R A C 1 ) . A t th is p o in t , t h e fa r m e r s h o u ıd c o n s id e r in c r e a s in t h e
g

s iz e o f h is fa rm (g o in g in to th e lo n g ru n ) a n d m o v e o n to S R A C 2 ・

■
If th e d e c i s i o n S m a d e to in c r e a s e th e fa r m s iz e a n d m o v e o n to S R A C
2 ,

o u tp u t c a n c o n tin u e to in c r e a s e a t th e lo w e s t p o s s ib le c o s t u n til
Ħ »in t b
is re a c h e d , w h e r e t h e fa r m e r o n c e a
ga in s t s h o u ld c o n s id e r in c r e a s in g
fa rm s iz e (g o in
g in to th e lo n g ru n a g a in ) a n d s w itc h in g to S R A C 3 ・

ı
F ro m th is s u c c e s s io n o f a n in f in it e n u m b e r o f S R A C c u rv e s w e c a n

c o n s tru c t a L R A C c u rv e w h ic h e n ve w s th e S R A C c u rv e s . At a ny

17

■
 Yea, S H 2 L e c lu n N u e s 2 0 1 0
F ,m l a n d D e c Jd o , &

o u tp u t ı
e v e ı ,
t h e L R A C c u r v e i s t a n
g
e n f t o e a c h o f t h e SRA C c u rv e s ( n o t
n e c e s s a riıy th e m in im u m p o in t o f th e S R A C c u rv e ) . I t r e
p re s e n ta th e
ı
o w e st p o s s lb ı
e a v e ra g e c o st fo r e a c h ı
e v e l o f o u tp u t, ıv e n t h a t a ll
g

re s o u rc e s a re v a r ia b ı
e .

The p o in ts o f ta n g e n c y b e tw e e n L R A C a n d S R A C c u rv e s d o n o t o c c u r i t
th e m ln ı
m u m po ı
n tı o f th e S R A C c u rv e i e x c e p t a t 廿ı
e po ı
n t w h e re th e
m in im u m e fllc ie n t w b (M E S ) ı
a a c h ie v e d .

3 2 2
. . ı
N 了E R N A L E C O N O ı
ııES & Dı
S E C O N O M IE S O F S C A L E

E c o n o m ie s a n d d ls e c o n «x n ı
e s o f sc a b a re m e a s u re d In te rm s o f a 1 ı
rm
'
ı ,

p ıo d u c tio n iT h e y a n e c o n c e r n e d w iıh h o w W
l a m m « u a M (A C ) o f p ro d u c tı
o n
c n a n 9 e s a s th e 明 ı沁 o f p 闻 心 u c 则o n ı 门口闻旧旧会 ı .

ı
. NTER N A L EC O N O M ı
ı E S O F SC A LE
1 k i4
T h e s e a re c o s t s a v in g s th a t o c c u r a s a re s u lt o f th e ñ r m '
s e x a n s io n / In c r e a ı ln
\ t q \l3
p g

th e s c a ıe o f p ro d u c th n \t
, a
ý th en d h a v e b e e n c r e a t e d b ,
n

* ・
・ rû

\ D ia g ra m m a tic a ııy , ıt i* r e
p
r e s e n t e d b t h e m ın a r t o fh e LR A C cu M .
ı
y g p

T h e re a re v a l大 ıu s s o u rc e s o f i n t e r n a l e c o n o m ie s o f s c a ıe ţ « r \
.

a . Te c h n !ç ļ l E c o n o m ı
e s o f S c a le

T h e s e re fe r to g a in s In fr o m s c a lin g u p p ro d u đ io n
p r o d i e n q .

So m e in p u ts a re o f a m in im u m s iz e a nd ca nn o t b e d iv id e d in to s m a lle r
u n its i Th e y a re in d iv is ib ı
e La rg e a f lio r d i\ t « h l
le ￠
im n s ca n to in v e s t In
ye ı ı
. e . -
.
t ・

i s t c a p ila ı m a c h in e w ł P u rc h a s in
g
s u c H f a c to r s o f p r o d u c t io n m a y
'
no t be fe a s ib ı
e if a fir m s o u t
p
u t is s m a ll a s it m e a n s o e r a ü n b e ıo w lt s
p g

m a x im u m c a p a c ity . Fo r e xa m p ı
e , a s u
p e r m a r k e t m i
g
h t in v e s t In d a ta b a s e

te c h n o ıo g y th a t im p ro v e s s to c k c o n tro l a n d re d u c e s tra n \ r ta ū o n a n d
d is b ib u ıio n c o s ts .

L a w o f ın c r e a s e d D ım e n s ıo n s ( th ・ % o n t ıı
n w p đn c ı
p b g
A n y c a p ita ı e q u ip m e n t th a t ı s u se d to c o n ta in m a te ria ls , f o r e x a m
p
ıe , a

bıa s t f u r n a c e o r a n o ll ta n k e r , w l ıı t e n d t o c o a t le a s
p e r u n ıt o f o u tp u t th e

ı
a ger Jt* a lz a T h is is ı
in k e d to th e c u b fc la w w h e re d o u b lin g th e h e ig h t
a nd w id th o f a ta n k e r o r b u n d in g le a d s to a m o re Ih a n p ro p o ro o n a t e
in c re a s e In th e c u b ic c a p a c ity . T h is m e a ns th a t th e a v e ra g e c o s t o f
c o n ta in in g a n d tra n s p o rtin g th e m a te ria l, fo r e x a m
p
ıe , o l ı, w l ıı fa ll. The
ic a tio n
ap p ı o f th is ı
aw o p en s u p th e p o s s lb lı
lv o f s c a le e c o n o m ie s In
d is trib u ü o n a n d fre ig h t In d u s M e s a n d a ı
s o In tra v e ıa n d ıe ls u re s e c to r s w ith
th e e m e r g e n c e o f s u p e r< ru ls e rs It is a ls o im p o rta n t ı
n e n e r g y s e c to rs a n d .

in d u s trie s s u c h a s o f fic e r e n ta L a n «L w a g n g . Fo r In s ta n c e , A m a z o n

h a s irıv e s tie d ın s e v e ra l h u g e w a re h o u s e s a t it s c e n t r a ı d is tr ib u tio n p o ı

n ts -

ca p a bı
e o f s to rin g h u n d re d s o f th o u s a n d s o f ite m s .

回
国

国
团
团 18
 召
y e . . 5 H 2 L e c lu m N o ta s 2 0 1 6
F '" S ' " D e a s ıo n s

Sp e c la ı
ls a t io n & D iv is io n o f L a b o u r

Inarge -
s c a le p ı
a n ts ,
w o r k e r s c a n do sw p ie r a n d m o re r e p e tñ rv e
W ith th is Jo b s .

s p e c ia lis a t ı
o n a n d d iv is io n o f w o rk e ra
in in g
d A
t\ \
, ıe s s t r a is n e e d e d io h
W o rk e rs a ls o be co m e m o r e e f fic ie n t in th e ir
p a rtic u la r jo b
. * , . N
Ĥ m
t
・ .

, a n d le s s t i m e is
\ ın * ı* u ・1

- _

o n » u ıııu i» n ıııa w ıı L Tc c ııı ıu Ï '

+ y e o ın
p 0 8 e s
p e c i f ic a re a s . T he
m a n u fa c tu re o f c a rs ls o fte n u se d a s a n e xa m p ı
e o f th e a d v a n ta e s o f
g
d iv is io n o f ı
a b o u r, b u t t h e
p
r in c i
p
ıe a
p p
ıi e s t o a n
y
m a s s
p
r o d u c t io n
h o Y *
!
h W íh t
A

te c h n iq u e .

R ead m o te a b o u t o n e o f th e rm t o b s e rv a tio n s o f la b a u r s e c ia ı
p is a lio n in
N pe n d b c ¡!

b . F lru n c h l E c o n o m ı
e *

"
X
Ī
L a rg e fı
rm s a ls o te n d
'" t .
\ ・. h
to b e p u b lic lim ite d c o m p a n ie s s uch
. tirm s ca n ra is
c a p ita l m o re e a s ily ı
h ro u g h M e is s u a n c e o f b o n d s d e b t s e
( c u ritie s is s u e d b
y
b o r ro w e rs s u c h a s Iirm s s e e k in g to ra is e fu n d s fro m th e ï in a n c ia ım a rk e ts to
)
th e p u b lic T h e y a re c o n s e.

q u e n u y b e tte r a b le to ta k e a d va n ı
a g e o f fin a n c ia l
e c o n o m ie s o f s c a le .

C . M a n a g e rı
a ıE c o n o m ie s o f s c a le ı
M a n a g e ria l e c o n o m ie s o f s c a le a re re la
te d to s p e c ia lis a tio n a n d d iv is io n o f
la b o u r T h e d if « re n c e is th a t s p e c ia h z a tio n
4
.

w w M ry M e l I
o c c u rs o n
Ju st a s w o r k f o r c e s p e c ia liz a tio n in c re a s e s
a
g .
・
° ,"
ţ tu . \ . . ţ . * t

o n a s p e c ific s te p in th e
p ro d u c tiw y b y tińińģ éinip ı
ó ye ë s ° - t ・ . Ļ . ţ . w . ・ \
p ro d u c tio n p ro c e s s , m a n a g e r i a a \
l s c a le e c o n o m ie s
in c re a s e p m d u đ iv Ħy b y e m lo in s e c ia lis ts
p y to
@ W & B e tıe r m a n a g e m e nt a n d
g
in c r e a s e d
p l
in v e s tm e m
æ -

_ p n
n h u m a n re s o u r c e s h ・ ・\
4 °*
áM
Ą
th e u s e o f s p e c ia lis t e q u ip m e n t , s u c h a s n e
t
tw o rk e d c o m u t e r s c a n
im p ro v e c o m m u n ic a tio n
p

, r a is e
p ro d u c ıi v it
y
a n d t h e r e b
y *e d u c e U ï it ę g į ・

团
M a n a g e ria l s c a le e c o n o m ie s a ls o e x te n d to 团
h u m a n r e s o u rc e s m a na g e m e n t
H R s p e c ia lis ts r a ls e p r o d
.

u c tiv ity a n d re d u c e u n it c o s H b y
ç e a tin g e Ħ c ie n t
a n d c o s i e f le a iv e h irin
g a n d h u m a n c a p ita l m a n a g e m e n t p ro c e s s e s
ı
d . M a rk e d n g

L a ◆ e s c a le b u y in g a n d s e
E c o n o m ı
e a

f
à i łt °u * ţ $
砂
firm s h a v e Ķ m a in iin g a d w
llin g g iv e th e
n ta g e c: a n d
fir m im p o rta n t s a v in s in
g co st . La rg e 目
b y th e ir s u p p lie r s b e c a u s e th e y b u y
a re a c c o rd e d a
p r e r e a l ļ re a tm e nt ■
m a te ń a ıs a n d c o m p o n e n ts in b u ı ra w
kJ
T h is a ılo w s th e in to d ic ta te th e ir re u ire m e n t s w ith n e a rd to
q g p ric e , q u a l i y a n d i
d e liv e ry m o r e e fre c th re ly T h e u n it c o s t

目
o f tra n s p o rt in g th e s u .

p p lie s is a ls o
b w e r b e c a u s e th e c o s t o f tr a n s o rta tio n d o e s n o t in c re a s e a t th e s a m e
p ra te
a s th e q u a n u t y o f th e s u A m a z o n h a s h u g e b u in
p p ı
ie s
g p o w e r in th e
.

y
p u b lis h in g in d u s try ı t h a s a 3 0 p e r c e n t s h a r e o f trıe h s ic a i b o o
.

p y k m a rk e t in
th e U S a n d m o re th a n 6 0 p e r c e n t o f e B o o k s a n d u s e
, s t h is
p o w e r to j & u c e
p u b lis h e rs fo r th e b o o k s s o ıd o n th e A m a z o n w e b s ite .

T h e re a r e a ls o e c o n o m ie s in s e ı lin g T h is c a n re s u ı t * o m b u lk a d v e rtis in .

g a n d
ı
a rg e -
le p ro m o tio n , a s t h e c o s t is s re a d o v e r a la r
\
s c a

p ge r vo ı u m e o f s a le s .

目
■

四
国
19 国

■
园
田
l
'" ' "
H =
e . R ı
skm a rin g E c o n o m ie s

R lık n a e c o n o m le ı o f ıc a h
be« i r e fe r to th e a b ilių o f lirm s to s p re a d th e
u n c e rıa ird y in c o s t o f p ro d u c tio n o ve r a la m _ le v e l d q q tp u \ a n d th e re b y
h du c e u n ı
ıc o ıb !

Ħo d u d ng a l ad e
W ņ ty o f p ıq ç ņ . A n d o
p
e r a ü n
g in m ın y l e o g m p h ic \
Io c « o n ı , a r e to ıp r e a d riık , a n d h e n c e k e e
p
a v e r a
g
e c o ı t
-

p ro d u d ia n a t c o m p e ı
iıiv e le v e lB . Fo r e x a m p le , a ı h a r
p
h ik e In w a g e c o s t ın a

la c ıo r y ıilu a te d in E u ro p e ca n b e m lu g a te d b y re la tlv e ı
y c h e a p e r c o r ti o f

pm d ucuon in o th e r h c to rie s In o ı
h er co u nM e s . A s a n o M e r e x a m p le , la r
ge
lirm s c a n o b ta in m a te ria ls d iĦe re n t s o u rc e s to g u a rd a g a in ıt e v e n ts s u c H a s
c ro p la lı
u re s a n d s trik e s w h ic h w ill s lg n tñ c a n tly c a u s e c o s ts o f ra w m a te ria l to
s p ik e .

S p re a d in g ħ e riB k o f h a nd d e ve ı
o pm e n t c o s ts ls a n o th e r b e n e ï it fo r

\
R e s e a r c

P in d u s ı
is
ry R & D
e n o rm o u

p h a rm a c e u ık
c o m p a n ie s d e s t r e
'
s
ls c ru c ia l

a ls
and
c o m p a n ie s
ıo
w
.

m
Yet
in c r e a s in g

M
th e c o s t o f d ia c o v e rin g th e n e x t b lo c k b u s te r d ru g

th
S e v e ra ı o f th e
In
e ir
.

re c e n t
R &
m e r g e rs

D e
b e ı w e e n

x
y e a rs
e n d iı
um
h ave bee n

a c ro s s ı g re a te r v l i l m e
d riv e n b y th e

p
■ o r ıa le ı T h u ı, a v e
. ra e c o s t i ā re d u c e q
■ g

ı
ı ı
.N TER N A L Dı
S E C O N O M IE S O F S C A L E

目 In te
re s u ı
m a ıd is e c a n o m le s o f s c a le a re :ı
t o f th e e x p a n s io n o f th e lirm
iib r a i « ı
n _
ċ o ılıılh a t o c c u r to a ñ rm
'
a s a
lic ie s
,
w h ic h is th e r e s u lt o f th e l ir m s o w n
po
团 T h is o c c u rs b e y o n d M e M E S b t th e u p w a rd s lo p i g p o rtio n f h e

团 .

国
a . H i
gh co at o f m o n ito rin g & m a n ag e m e n t

目 ıj M o e
-

ėm p lo y e e s in b ig
p ro
,
d u c tiv ity

q e m p ıe . c
a nd
o r
th e

p o ra tio n s
q u a lity

imsuomanabtai
o f o u tp u t » o m th o u s a n d s
-
th is
o f

lin k s to th e c o n c e p t o f th e _
ptincipal g e n t -
a
p ro b le m i . e . Th e d M ic u llle s o f
s h a re h o ld e rs m o n Ħo tin g th e p e rfo rm a n c e o f m a n a g e rs 4 \・ "

b
. ° h " h \ .
* t e ł
p W

M In c re a r e e
・

a na ge m e nt Ħ ob ı
e m s o f d i n a t i o n m a y s U ı
e lirm becom e s

m T hu s , , la r
g
e r l ir m s o lt e n s u l te r
po o r
团 _

团
C O m m u ıi o n b e Æ ñ n d II d « lic u ll ıo m a in ta in a n e ffe c tiv q m « :/
r, 4 ţ .
t
・

■ b lo n n a u o in b e tw e e n d e p a rı
m e n ts , d lv ls io n s o r b e tw e e n h e a d o f f ic e a n d

1 o . " L ( . . \ 4 i a h \ , e
s u b s ld ia tie s . T im e la g s In th e ñ o w o f in fo rm a tio n c a n a ls o c re a te p ro b ı
e m s 3 t

In te rm s o f th e speed o f re s p o n s e to c h a n g in g m a rk e t c o n d itio n s For .

Ļ t\ u ņe h ' " [ ° ı
ra .
Tioh&
国 exa m pı e , a la r g e a u p e r m a r k e t c h a i n m a y b e
'
ta s te s a n d s h i o n s 廿 e n a m u c h s m a lle r , ıo c a ľ
le

re
s s

ta
re

i le
s

r
p o

.
n s iv e t o c h a n
g
in
g

回
国
团 '
\t
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o s s o f e ffic ie n c y th a t o c c u r s w h e n lirm s b e c o m e la rg e " " "

. H . \ ・
t
u n c a m
p
e m v e . Such lo s e s of e ffic ie n c y in c ı
u de o ve r p a y in g fo r °4 . . \ ; . *

回 re s o u rc e s , s u c H a s
p
a
y in g m a n a g e rs s a la rie s h ig h e r th a n n e e d e d to s e c u re
国
国 p ° i ・\ . \ . Q t th e ir s e r v ic e s , a n d e x c e s s iv e w a s t e o f r e s o u r c e s T h is m e a n s th a t a v e ra g e .

o s ts a r e h i gh e r t ha n c os ts e x p e r ien c e d b y
, l irme i n m o r e c o m p e t i tive
L

L \ A L c
m a rk e ts .

目
. . J \ 冒【。\ \
团 中 飞

回
国
■ 20

l
 「

回
国
目

Year5 H 2 L e c tu re N o te s 2 0 1 6
F lm s a n d D e c is io n s

Lo w m o ra le o f e m p ı
o y ee s

W he n
W o rk e rs
lirm s
b e c o m e to o la qg e , r e l a t i o n s h i s t e n d
in
la qg e \irm s m a y d e v e lo p a s e n s e o f
p t o b e c o m e
peimį u
团
T h e re la tio n s h ip b e 【w e e n m a n a g e m e n t a n d e m lo
a n d lo s s o f Wienat
ıWale p y e e s is im p o r ta n t L +w
ł. . \ ų i\
3
fo r m a in ta in in g » ro d u c tiv it w d ęņ ç y . A lo n g c h a m o f a u th o r ity in la r e
团
.

ıirm s le a d w o rk e rs to fe e l th a t th e g

ii
'
ņ y y a re o n l a s n a
Ñ iiđilńé
'
. , a n d ı
h e re fo re d o n o t c o n s id e r th e m s e lv e s
y ￠ ï ı c o g
in a v e
w la r e
to b e a n in te ra l a rt
o f th e g p
b u s in e s s

目
, t h e ir r o d u c t iv it m a
p y fa ıl le a d in
y t o
g

EXTE R N A L EC O N O M ı
ES O F SC A LE
ダ

EXternal e c o n o m ie s o f s c a le c a n b e d e f i n e d a s th e s a v in s in
g c o s ts th a t o c c u r
ı
o a lılirm

r l a i n
s a s a re s u lt o f th e ę x p a
ı
n ș io n g f
o c a tio n D ia ra m m a tic a ll
M e o r th e c o n c e n b a u o n o f
g
đ i
.

y , it is r e
p
r e s e n te d b
y t h e

W f th e L R A
国
C
c u rv e a s a v e ra e c o s ts fa ll fo r e a
g ch ı
e v e ıo f o u t u t
p T h e re a re
ecoř ioior
.

v a rio u s ty p e s o f e a te m a ı
s c a le .

电
C醐 同
t .
A

ł* 小 f i ın . " h t h \ J h ß \ e
' t

■
四
回

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đ. o w
m

F ig u re a E ıt e m a l e c o n o m ıe s o f s c a le

'"
3-.\ \
E
-
. c o n o m ie s o f ln f o rm a ü o ' ' .
3 . '
ł q \ f
. h

the d eveı op m e m of
l= a rc h Æ Ė@ e ĵ _
th a t s e v e ra l lirm s in a n tl . d la in a
in d u s try m a y b e n e rït fro m m a y im p ro v e ı
h e ı M
Ų Ç o f in d iv id u a l tirm s a nd
ıSqæcoets These m a y o r m ay notbe
p ro v ĺd e d b y
thwncreased & ;h o
-

ï e
°
p '

!nfolThave a llo w e d fo r Iirm s to

￥ i T ñ m i i å i ĺ Ħn i * g b (° if & f - & ( ' "
t ・\i a

b .. Eco n o m ie s o f C o n c e n tr
t r a tio n l/ A
g g lo m e ra tio
t ıo n E c o n o m ie s b o h
s # \
. ◆e T l , \ \
llm L: o
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mo q ・・ h

theëiijE
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ee cc o n o Mrin ie s m a y a ls o ree s u lt fro m 83
i i i ń i o 【b
u \e
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f ĥ u s in
,

a
d i s ü n đr Đm l o c a t i v n e .
g . s o ftw a re in s i l o n y a y in th e s ta te of
Ça i
'
o r S in g a p o re s t w in h u b s o f b
g
io m e d ic a l a n d e n
g
in e e r in r e s e a rc h -

B io p o lis a n d F u s io n o o ı
p is .

=
A v a i la b ï ıi t o f S k i ıl e
y d L a b o u r

W n e n th e d e m a nd fo r a c u la r t y p e o f s k iı
p ıf is la r g e e no u g h s e c ia l
, p
e d u c a tio n a l in s titu tio n s c a n
can a ı s o o in to e th e r to
trairijpibpı
b e
e in s u c H s k iııs F irm
set u p to . s

h e lp firm s in th e in d
j g
deveıopciıiüesfor th e ir w o rk e r s T h is w . ilı
u s tr y to
ó
tra in in g fo r th e ir w o rk e r i

21
 Ve « S H 2 L e c tu r » N d 2 0 1 6

FM s ın d O e i o n s

=
W e ll
-
D e v e lo p e d łn f r a s t r u c t u r e

W n e n m a n y f ir m s a re c o n c e n tr a te d in o n e a re a ,
m a r k e t i n
g o r g a n is a tio n s ,

be tte r ro a d s ,
r a 衣 v a
y
l in e s . A i r
p o rt s , p
u b ıi c u t il i t i e s a n d o t h e r c o m m g r c ia ı
+ q ll h a ų q ï q e t o A &
a re a
e u s u a lly s e t W to c a te r fo r t h e in d u s t r ie s S u c h
w e ł łv e l o p e d
hf r a s tru c tu r e h e lp s t o re d u c e
t s f o r in d iv id u a l f ir m s

ĺ ・ t
b\

ı
v . EXTERN Æ D ı
S E C O N O ııı
ES O F SC A LE

External d is e c o n o m ie s o f sca ı
e a re in c re a s e s in c o s t s th a t in
t o
an in d u s tr y a s a r e s u R o f th e
e m a m i o M e o r th e Q o n ç e n ir a tim o f
fı
rm s in a c e rta in lo c a ü o n . D ia g ra m m a ö c a lv , it is r e
p
r e s e n t e d b t h e u w a r d
y p

s h in o f th e LR A C c u rv e a s a v e ra g e c o s ts ris e fo r e a c h ı
e v e ı o f o u tp T h e re
a re v a r io u s t y p e s o f e x t e r n a l d is e c o n o m ie s o f s c a le ( e x t d Is E O S
) .

心目 围 ￠眄

U ı
A C I

L 争 Q = ıı叫 r 《
ı

叫 p« to o
Q o
F ıg u m 9 m m a ıd n o m i e * o f l e a k

a . ı
n c re a s e d S tra ı
n o n ı
n fr a s tm c tu re

W ith lo is a ü o n
ca ı i . e . c o n c e n tr a tio n o f firm s in a g e o g ra p h ic a ı re g io n a n d
e x p a n s io n o f p ro d u c tiv e a c ü v iü e s , C t u r e w ill b e
Fo r e x a m p le , . Ffic c o n g e s tio n re s u ı
ts in in c r e a s e d c o s ts o f p ro d u c ü o n
due to b s s o f ü m e a n d i n c r e a s u .

« * t t q e t * & k o f
u « Q a * t 色
b . S ho r ta g e o f I n d w ç ñ c re * o u r c e s
\ h \ Ļ t \ L ļ * & \ ï
« h n &
ĺ i \ ı
3

A h is
s a n in d u s tr y g ro w s ı
a r g e r, t m a y c re a te
\ n g sh o ￠
w
o f s p e c ific
ra w m a te ria ls o r s k iı
ıe d la b t»u r .
￠O m p e t i t i o r e s o u rc e s w ill p u s H
up p ric e s a n « L U æ g M u l 【 m s L o r e x a m p le , t h e e a s e in ・
*n \\
ţ
tQ & ıu \ e b h

de m a n d fo r s k ilı
e d e n g in e e r s m a y re s u ı
t in a ń s e in w a g e s th u s c o s ts .
Ł » A & o \ +
o
+

S U M M A R Y O F S EC Tı O N 3 2 2 . .

ł ın th e re a l w o rı
d io u s e c o n o m ie s a n d d is e v a r c o n o m ie s o f s c a le e x is t W n e n
\\ e ł
, .
s o . ţ L * r ° \k ų 》
a s k e d a b o u t th e e 自 c ts o f s c a lin g u p , b e s u r e t o e x p l a i n r e 【a t e t h e
\t
b e n e lits /c o s ts o f la rg e r o u tp u t to lo n g ru n a v e ra g e c o s t s ( in s te a d o f ju s t e
・+
q
it
s e ,
' "
\
lı d ・ n
' '
c o s t s
).

1 It is im p o rta n t to id e n M y a n d e la h n ra te o n th e m o s t re le v a n t s o u rc e ( s ) o f
e c o n o m ie s /d is e c o n o m ie s o f s c a le in th e g iv e n c o n te x t .

ł It is b e tte r to e la b o ra te o n m u lı
ip le u n iq u e s o u rc e s o f e c o n o m ie s o r
d is e c o n o m ie s o f s c a le ra th e r th a n ju s t o n e ( e .
g Te c h n
. ic a l IE O S )

22
 Y e ・r S H 2 L e đ u re N o te s 2 0 1 6
F Irm s a n d D ta c is io n s

3 2 3
. .
M IN IM U M E F F ı
C IE N T S C A L E

The e x te n t o f e c o n o m ie s o f sca ı
e ca n b e m e a s u re d b y lo o k in '
g a t a lirm
m in im u m
It is th e
s
e ñ lc ie n t s c a b
(M E S ) , s c a le o f p ro d u c tio n w h
e re th e In te r n a l
e c o n o m ie s o f s c a le h a ve b e e n
W e x p ı
o it e d a n d c o rr e s p o n d s to th e ı
ow e st
poin t o n th e lo n
g ru n a v e ra g e c o s t c u rv e It . i §ifs o k n ow n a s a n o ut u
w h ic h a fir m a c h ie v e s p t ra n g e o v e r
p o d u Ø iv e e ñ lc ie n c y

B e s id e s m e a s u rin th e e x te n t o f e c o n o m ie
g s o f s c a le E S in re la tio n to th e s iz e , M

o f th e m a rk e t te lls u s
th a t th e m a rk e t c a n a c c o m m o d a te W h e n I m ite p t h e J W n b Q r
f m in im u m e ffic ie n
t s c a le Q ļ ? tm a

s c a le e x is Ł M E S is u s u a ll a c h ie v e d a t lo
d Ô p p ä rtu n itie s fo r e
w le v e ls o f o u t u t T h
c o n o m ie s o f
.

, §
y p u s , M E S is u s u a l l .

a s m a ll p e rc e n ta e o f to ta l m a rk e t d e y
g m a n d a n d it ls lik e l th a
y t M e m a rk e t w ill b e
c o m p e t it iv e w ith m a n Iirm s a b le to a
y c h ie v e th e M E S T h e c o n
v e rs e is a ls o tru e .

F o r e x a m p le fo r a lirm in a
g iv e n in d u s try
,
p ro d u c in g a t M E S , i t n e e d s to to b e
P ro d u c e 2 0 u n its o f p ro d u c t (Q M E s ・ 2 0 0 0 团
,0
) If to ta l m
0
a rk e t d e m a n d is 1 0 0 0
00
.

u n its, th e in d u s try c a n a c c o m m o d a te 5 0 o f s u c H fir ms

,
团
T h e re fo re , i t m a k e s .
■
e c o n o m ic s e n s e in th is c a s e to h a v
e s e v e ra l lirm s / la n ts o f M
p E S to p ro d u c e fo r
h e m a rk e t ra ıh e r th a n u s t o n e la r e lirm
J g (a s it w ill in c u r v e ry h i h c o s ts d u e tū
g
L a ;. . \ \\J d ı
-

!
=

Th e m in im u m e ffic ie n t s c a le a n d th e c o n te
s ta b ility o f th e m a rk e t a ls o
dep e nd o n
th e ıu re f Co s ts 9 f p ro d u c tio n In a s e c ilic in
# a d u s tr y In in d u s tr ie s w h e r
o
.
.
p .

e th e .

ra tio o f lix e d
co s t
to
j s
h ig h , t h e r e is p le n t o f s c o e t o r
y p r e d u c in u n it g
四

o u tp u t )
bqeasfniüiiicāiìi-ófouı
Th
pta (i
e m a rk e t w i【
. e . M E s is o n ly re a n s e d
a t i g h re v e ls o f
国
l b e co m ë l ss
i
.

e ontestable a n d m o re h i h r c c e n tra te d
g y

3 3 D Ec ı
. s Io N M A K IN G ı
N TH E L O N G U N

In th e ı o n g ru n ıa d o a ll rs a re v a ria b ı
e j T h e
,
firm m a y e x p e rie n c e c o n s ta n t ,
in c re a s in g o r d e c re a s in
g returns to sca ı
e . B u t a lth o u g h a M fa đ o rs ca n b e
in c r e a s e d o r d e c r e a s e d
firm s
'
d e đ s io n in
, t h e
y a re
o f te ch ņ o ı
Q g y , H en ce , f ix e d c o s ts a f fe đ
t h e ıo n

o f
r u n s u c H a s w
g , h e th e r t o in c r e a s e t h e

r.Prod , ls F o r e x a m p ıe , f i r m s w i t h s i n i f i c a n t ı h i
r e q u ire d .

th e
te le c o m m u n ic a tio n s in d u s tr
g y g
h f ix e d c o s t s such (
y ) m a y c h o o s e to in c r e a s e th e s c a ı e o f
p ro d u c tio n

メ
in o rd e r to re a
p e c o n o m ie s o f s c a le a nd ı
o w e r th e lo n g
ge
-
r u n a v e r

If th e
'
c o s t o f p ro d u c tio n
a

firm
its
.
s a v e r a e r e v e n u e
g is u n a b ıe t o c o v e r
a v e r a g e c o ş ts M w
, it w i ıl s h u tĄ o w n .

c ls
ー
'
o i

吕łh 吕\ t 。 t e f i 官仇
售

At
H \* H Jų \ &
目
国
团
t * o ・
与 ı A 中 。
团
t o
回
国

ye ar 5 H 2 ı .M r e N M . . 2 0 1 6

F i. s a n d D e c is io n s

4 . S IZ E O F F ı
R M s

T he m a r k e t s tr u c tu r e o f a n in d u s tr y is a Ħe c te d b y b o th th e e x t e n t o f e c o n o m ie s o f

sca ı e to in d iv id u a l s u p p lie rs a s w e lıa s th e to ta ıs iz e o f m a rk e t d e m a n d

e a v a ila b ı .

' '
E ve n th o u g h th e co n c e p t o f e c o n o m ie s o f s c a ıe s e e m s t o p u t ıa r
g
e f ir m s a t a

c o s t a d v a n ta g e ,
in m a n
y
in d u s t r ie s it is
p
o s s ib ıe f o r s m a ııe r f i r m s t o m a k e a
p
r o f it

be c a use of va ńo u s d e m a n d a n d s u p p ı
y s id e re a s o n s .

S T E N C E O F S Wı
4 1 EX ı. A LL Fı
R M S

The a n a ı
y s is o f e c o n o m ie s o f sc a ı
e see m s to s u g g e s t th a t th e re a re e n o rm o u s

a d v a n ta g e s ı
n b e in g a ı
a rg e firm . T h is is b u e in c e rta in in d u s tr ie s s u c H a s s h ip

b u iı
d in g , o il , t e ıe c o m s a n d b a n k in
g . Bu t th e re a re m a n y re a s o n s w h y * m a ı

in d e p e n d e n t firın ı p e rs is t In m a n y in d u s trie s .

ı . D EM A N D Sı
D E FA C T O R S

O n th e d e m a n d s id e , s o m e f ir m s r e m a in s m a ll b e c a u s e la r
g
e s c a ıe
p
r o du c ü o n ls
s
n

o t Jus ö f ied by the si ze of the ma r ke t . T he tot aı de m a n d for the firm ' ou t pu t m a y

be s m a lıb e c a u s e o t

ı h a v e s m a ll a n d
F r e s h p r o d u c e s u c H a s f is h a n d v e e t a b ıe s te n d to
g

l i s e d m a rk e t s a s th e y a re p ę ń s h a b ı
e .

■
P r e fe re n c e fo r v ie t ra th e r th a n s ta n d a rd is a t io n a n d m a s s ro d u c t io n
q y p
'
e .
g . Ia d ie s fa s h io n a n d a c c e s s o r ie s .

ş
p e c i aıise d pr o d m Fo r e x a m p ıe, h i g
h l y speci alis ed ma c h i ne s an d too l s

o r p r o d u c ts o f re ı
ig io u s s ig n ilic a n c e m a y h a w lim ite d m a rk e t s .

T he m a rk e t m a y b e lim ite d b y p ric e e .

g . E x
pe n s iv e s p o il s c a r s , lu x u r
y y
a c h t s

a n d h ig h q u a lity je w e lle r )/ ・

> E b rs o n a ıııe d w w ıc e s
W n en d ire c t in d iv id u a ı a tte n tio n is n e e d e d , it is im
p
o s s ib le t o h a v e m a s s

T h Ġ
-

ucūon . For e x a m p le , s e r v ic e s f r o m ıa w
y
e r s , d o c t o r s o r d e n t is t s .

llrm s a r e s m a ı
l b e c a u s e p e rs o n a ıa tte n tb n to th e in d iv id u a l is re q u ir e d . F irm s
h a ird re s s in g a re a ı
s o s m a ll L
p ro v id in g re p a ir s e r v i c e s d
'

n
.
r ・\ o l c i \ ,
Þ
c r t
q
* ū
e m t h ţ6

ン \ 璽 鲤 l\m ı
1a ı
lo n 吕

m i io o ūd h a s g re a t b u ık In re la tio n to v a lu e , ta n spo rt c o s ts w ilıb e h ig h

r e la tiv e to io n c o s t s
to ta l p r o d u c ı In s u d ı c a s e s , . M e m a rk e t fa r M e
go o d is
'

ı
ik e ł
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n
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.

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,
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■
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ow le v e ı
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in d u s tr ie s u s u a ııy p r o v id e s e rv ic e s th a t re q u ir e p e r s o n a l a tte n tio n ıe .

g .

ta ilo rin g a n d p riv a te c l i n i c s . A v e ra g e co st s ) L æ o u tN

in c re a s tis A n y a d v a n t a g e s to . ı
a rg e e p ro d u c ü o n a re
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b y th e d is a d v a n ta g e s T h e . m u m s iz e o r firm s in su cH in d u s trie s is

sm a ı
lt
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firm s m a y c o 4 e x is t . T h is is ı
ik e ı n
y in in s ta n c e s w h e re e c o o m
ie s o f s c a ı
e +

a re q u ic k ly u s te g , . . Ilowed by c o n s ta n t e c o n o m ie s w h ic h p re v a l
 Ye u S H 2 L ı 20 1e
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o v e r a w id e ra n e o f o u tp u t e In
g g .
b re w e rı
e s . In th is ca se , th e L R A C
c u rv e is s a u c e r -
s ha p e d .

)Þ m m ba n ı・n
It is re ı
a tiv e ly e a s y fo r a s m a ll fir m to se t u p in in d u s tr ı
e s w h e re th e c o st o f
s e ttin g u p in s u c H In d u s tń e s is re la tiv e l ı
y o w .

> V ・c ı l d ı
ıın t ıg m d d ıı
S m a ll firm s te n d to e m e r g e w h e n a n e n tire p ro d u c tio n p ro c e s s i$ b ro k e n u p
in to a s e rie r o t s a n d d ifre re n t s m a ll firm s
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e ta s k .

>
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p
E x p a n s ıo n a n dıa r g ıc a l e p ro d u c tio n re q u ire fu n d s If th e lirm a a re u n a b ı
e to .

ra is e th e m o n e y , t h e
y w ill h a v e to m r ln ım ıiß S o m e firm s m a
y a ıs o re m a in
sm a ı ı d u e to c o n s tra in ts o f o th e r e
s s e n tia ı re s o u rc e s E n tr e p re n e u rs m a y .

p re fe r to be th e so ı
e p ro p rie to r In
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o rd e r to be in c o n tro l o f th e
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m e ans th e ris k o f In v e s ı
m e n t ls g re a te r T h e lo s s e s a re g re a te r if th e
.

b u s iness do ea n o t k T h e r e f o r e s o m e firm s re m a in s m a lıb e c a u s e

th e y a re u n w iıı
fn g to e x p a n d .

ı
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l
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.

OUUt m a y le a d to a ı a rg e e n o u h in c re a s e In
g m a rk e t s u p p l The h u g e
y .

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b w
.

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łm fita m a y p re w
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n t llrm s fro m
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Ł firm f m a y C h o o s e to re m ı
w
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>
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w q d w a g a n d p ro m o ü o đ w h ile s tlıı t e ta ı n ln g ıh e ırl
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\
a p p e a r c o n lin u a lı w h lı
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d
.

a p ro d u c t \ , to t a ı d e m a n d fo r th e p ro d u c t ıe n d s to b e lo w . T he fı
rm te n d s
to b e s m a ll a s ı
t ta k e s ü m e to
g r g L o u tp a c e riv a l fir m s , m
ou t0
e r ge o r f o r c e o th e rs

型资 中国 飘 m ax ı m ız a d o n lm a n a g ・r la ıa t d t u d o ıl
T h e re w iıl a lw a y s b e p e o p le m o tiv a te d b s a llL
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y
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\
th e ir o w n s m a ll b u s in e s s It ı s e a s ie r to s ta rt .
a s m a lı« rm th a n a la r g e o ne
So m e firm s re m a in s m a ı
.

\
ıb e c a u s e th e o w n e rs p re fe r to k e e p th e m sm a ı
l fo r
re a s o n s to th e
'

p ro fit m o tiv e . The o w n e r c o u ld

or m a y
v a l u e
w a n t to c o n tro l a m o n m a in ta in
g fa m ily m e m b e r s He .
c ou ı
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c o n te n te d w ith a r e a s o n a b le In c o m e
fro m th e ￠
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o c ia te d w ith e x a n s io n
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5 2 C O X I S T E N C E O F S M A LL A N D LA R
G E Fı
RM S
.

自
ı
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, la r
ge and sm a ı
l firm s c o e x is t in th e sa m e in d u s tr A go od
e x a m p le is th e re ta il m a rk e t fo r y .

目
fu rn it ur e T h e in d u s try h a s som e m a o r ı
p a y e rs in
.

e a c h o f its d if le re n t s e m e n ts e j
g ( .
g Fıa t p a c k a n d d e s ig n e r
.
-

fur nit ure )

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g ia n t IK Æ H o w e v e r, m u c h 团
su p p ı
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y
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=
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p ro d u c ts S m a ll
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-
s c a a n th e re fo r e e x tr a c t th e co n s u m e r s u r p lu s
th a t is p re s e n t w h e n d e m a n d is e s tim a te d to h a ve a lo w e la s tic ity o f d e m a n d .

H e re a re s o m e o f th e re a s o n s

\ > N a t u re o f t h e ın d u s t r y

S o m e in d u s tr ie s a re s u cH
'
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th a t e c o n o m ie s
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ıow o u tp u t ı
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y
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l
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t is th u s p o s s ib ı
e fo r a firm to
b e c o s t e fñ d e n t o v e r a ra n g e q t g y It w o u ı
d b e p o s s ib le fo r s m a ll a n d
la rġ e f irm s to b e e q u a ı
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l
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ıfan in d u s tr y c a te r s to a d iv e r s ifie d ra n g e o f p ro d u đ s a n d c u s to m e r s , it c a n

be s e g m e n te d . T h is a llo w s s m a ll firm s to c a te r to n ic h e m a rk e ts .
I i fırfņ s *
d ľ l ìiěiiiia a n d
' _

can fo c u s p ro d u c e tra te o n
- T , ! m ￠ .
c o n c e n

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ı
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sl H o n d a a n d T o y o ta c a n p ro d u c e c a rs fo r th e m a s s m a rk e t
w h iı
e P o rs c h e F e m a n d
ń c a n p r o d u c e m o re u p m a rk e t s o r ts c a rs
p S m a ıı .

p ro v is io n s h o p s c a n d is tin g u is h t h e m s e lv e s b y p r o v id in
g d e liv e r y s e rv ic e s n o
m a tte r ho w m uch g o o d s a re b e in g bo u g ht a n d c o is t w ith h u g e -
e x

\
s u p e rm a rk e t c h a in s .

P ro d u c tı
o n p ro c e s s c a n b e .
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s ı
n te g ra t e ￠】
If th e p r o d u c tio n c a n b e
s e p a ra te d in to v a s ta g e s it g iv e s s m a lıfir m s th e w
团 i
团 c h a n c e to c o m p ı
e m e n t la rg e r firm s in th e s a m e in d u s tr y T h e re ls a te n d e n c y .

■ fo r in d iv id m s m a ll firm s to s p e c ia ı
iz e in a g& E = o r m a k e
rcomponents fo r th e la rg e r o r g a n is a tio n s e g . A ir c o n d itio n ı
n g u n its a re m a d e

回 fo r th e m o to r c a r in d u s tr y b y s m a ı
ıe r c o m p a n ie s .

国
团
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团
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T e c h n o ı
o g lc a l p r o g r e s s
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o g y u se d to
b ! in t m s lv e ï w h ic h
f av o u re
H o w e v e r, r e c e n t d e v e lo
p
m e n ts in t e c h n o lo
g y
h a v e in c r e a s in l
g y

fa v o u re d s m a ll f rr m N
s . ew te c h n o lo g y is n o w i ń b e d d e d ïn S m Ę a ıe d
\
_

@ g p in m 4 T h e p r o d u c tio n p ro c e s s is a ls o p ı Iï ie d à n e e d in g fe w e r a n d

lesĦiūliċ yachines .
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F irm s ın d D e d s io n a

5 . R EV E N U E

Be s id e s c o s ts , f ır m s a ls o c o n s id e r r e v e n u e in t h e ir d e c i s io n m a k in r o c e s
g p s .

5 1 R EV EN U E C O N C E PTS
.

> Ħ io W R w e n u ・ 6 7 1 1 ls th e firm s t o '

ta l
earnings pe r P
[ e rio d o f tim e fro m th e
saı
e o f a p a rtic u ı
a r q u a n tit y o f o u t u t
p

@
.

w j
> A H H U * R ev en u ・ i$ th e a m o u n t th e firm e a r n s p e r u n it s o ı d . It fs
ıim p ly tM
p đc e o f th e g o o d Ç u n ı
e s s p ric e d is c rim in a tio n ls
p ra c t is e d ) .

> ı
￠ ın » ııl R ・w n u * Js th e e x tra to ta l re v e n u e
g a in e d b y s e lı
in g o n e
m o re u n it o f a
go od .

一 磊 T R L

T セ\ 中 试 O
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T R (S ) M R (S )
8 上 1 8
上 1 8
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1 1
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2
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1 1 -

C o ı
u m n s
1 a n d 2 p ro v id e th e d e m a n d s c h e d
u le ( s h o w s h o w m u c h is s o ld fo r
e a ch p ric e ) fo r a g iv e n firm M s u m ln g th a t th e fir m h a s a re la ü v e l ıa r e s h a re o f .

y g
th e m a rk e l It w iııfa c e a d o w n w a rd b in
p g d e m a n d c u rv e T h is m e a n s th a t if it
-
s
.

n
w a ts to s e ı ıg re a te r q u a n titie s o r its
g o o d , it m u s t lo w e r it s p r ic e R e c a ll th a t A R = .

P S in c e p ric e h a s to b e lo w e re d to s e lı m o re o u t u
.

p t , A R w i lı f a ll a s o u t u t
in c re a s e s .
p

Fu rth e rm o re ith a d o w n w a rd sı o p in g d e m a n d c u rv e
(A R ) ı
, w
, p r ıc e * a lw a y *
g re a te r th a n M R a t a n y o \ u t e x c e p t lb r th e fir st u n R . T h is re la tio n s h i
p a p p lie s
To r a ıi fı
rm s f a c i n g a d o w n w a rd s lo p in g d e m a nd c u rv e A ssu
. m in g th a t th e fir m
c tı
a rg e s a u n ifo rm ic e fo r e v e r y
v u n it o f its
d o o d i. e . It d o e s n o t p ra c tis e p ric e
d is c rim in a tio n ,
it h a s t o
ıQ p d Q e o n a ll u n its !N y d e r ūo s e ı
l a n e )M ą u Q Ķ T h u s ,
th e M R is e q u a ıto th e p r ic e he re c e iv e s fro m th e s a le o f th e la s t a d d itio n a l u n it
m in u s th e lo g g o f re v e n u e fro m th e s a le o f a lıo th e r u n its a t a lo w
e r p ric e .

5 2 R EV EN U E C U R V E S
.

F ig u r e 1 0 d \ th e A R a nd M R
firm c u rv e s fo r a
fa c in g a d o w n w a r d s h
p ln g
d e m a n d c u rv e (ty p ic a lly firm s w ith
it y ) A ñ rm
s e ttin g a b lı p ric e
th a t fa c e s a .

d o w n w a r d lo p in g d e m -
s a n d c u rv e m u s t o b v io u s l a ls o fa c e
y th e s a m e d o w w w a rd -

sıo p in g A R c u rv e T h e . M R c u rv e w ill a ls o s lo e d o w n w a r d s b u t w i l
p ı , b e b e lo w t h e
A R c u rv e a n d s te e p e r th a n k In th e p r e v io u s u n it , w e c o n s id e r e d th e e f lfe c t o f a
c h a n g e in p ń c e o n th e d e m a n d c u rv e H e re
'
.
, w e c o n s id e r th e e f re c t o f a ch a n g e in
o u tp u t o n a fin n A ch a n g e
s r e v e n u e in s te a d . In o u tp u t is re p re s e n te d b y a
m o v e m e n t a lo n
g th e re v e n u e c u rv e s . A ch a n g e in a n y o th e r d e te rm in a n t o f
re v e n u e w iı
l s h ift th e c u rv e s u
p o r d ow n . S h ifts m a y o r m a y n o t b e p a ra ı
le ı .

27
 Year 5 H 2 L e rl u m N e le s 2 0 1 6
F irm s a nd D ea sł
o n s

一 抹 ų h .

8 。。

N o te A R a n d M R c u rv e s a n e m o re re le v a n t in e x p la in in g k e y c o n c e p ts c o m p a re d
lo th e T R c u rv e .

6 . PRO Fı
T M AX ı
M IS IN G E Q U ı
L IB R ı
U M

A s m e nüo n ed in S e c ü o n 1 . 1 , t w o c o n d it io n s m u s t b e f u lf i l l e d fo r
p
r o f it

m a x im is a ü o n .

Fo r a firm th a t h a s p ń c e -
s e ttin g a b iı
ity , b o t h A R a n d M R a r e d o w n w a r d

s lo p in g . ı
n F ig u re 1 1 , p
r o f it m a x im is a t io n o c c u r s a t o u t
p
u t Q ・
w h e r e

M R =
M C .The p ro fit o b ta in e d is in d ic a te d b y th e s h a d e d a re a .

聞 、

O u ıM ı
aÞ ņ
O
q q q

F ig u re 1 1 P ro fı
t m a x im i* in g e q u ılıb r ıu m

At o u tp u t ı
e v e ıO Q 2 , M R > M C . E a ch a d d itio n a l u n it o f o u t p u t s o ı
d a d d s

m o re to re v e n u e th a n it a d d s to c o st . T h is in c re a s e s th e p ro fn s o f th e
firm . T hu s , t h e f irm is t h u s in c e n t iv is e d t o in c r e a s e o u t
p
u t b e
y
o n d O Q 2 to

g a in a ı
a rg e r p ro fit .

28
 习
Ym
回
r 5 H 2 Lm rņ N o t・5 2 0 1 6
国
F irm s a n d D e c is io n s
■
n n th e o th e r h a n d if o u t p u t e x
p a n d s b e y o n d O Q fo r e x a m
・
p le a t O Q .
ı
・
e a c h a d d itio n a l u n it s o ld a d d s m o re Io c o s t th a n Io re v e n u e a n d M R < M
E a c h a d d itio n a l u n it p ro d u c e d re d u c e s
C
th e p r o fits
th u s in c e n tiv
o f th e fir m . The fir m is
is e d t o d e c re a s e o u t u t t o m a x im
p is e
p r o f its

\
It is o n ly a t o u t p u t o q * w h e re M R =
M C th a t th e f ir m w ill b e in e
i Th e firm h a s m a x im is e d its q
u i li b r i u m

p ro fits
, e .

II. M C m u s t b e r ls ln
g

W h ile th e re m a y b e a n o u tp u t le v e l a t th e fa llin
g p o r tio n o f th e M C c u rv e
w h e re M R =
M C , t h e f ir m w iı
lnot s to p a t th is o u t u t a s a d
p d itio n a ı o u t u t
p ro d u c e d w ill s tiııa d d m o re to to ta ır e v e n u e th a n to p
to ta l c o

A t p r o fıt m a x ım ı* ın
g « łu ı
ııb r ıu m (w h e r e M R -
M C
E q u ıııb r ıu m o u t m O Q
a n d M c ıı r ı* ın
g )
p .
E q u ılıb r ıu m p rıc ・ re a d fro m A R
( c u rv e ) : O p .
T o t ııR e v ・n u e O P . B
q
T o t ııC o l l o c w
P r o f ıt C P . B D
 。

团
团

Ve a , 5 H 2 L ed .m N e la s 2 0 1 6
F ı. s . n d D e s Jo n s

\
\
\
团
团

孙
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团

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Ym r 5 H 2 L æ
F irm
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s ・n d Decis ions \
A P P E N D ı
x 1 LES SO N S FR O M A P IN F A C T O R Y
'

Ja c k o f a ı

s o m e tim e s
ıtr a d e s

e x p e rie n c e
, m a s t e r o f n o ne
'
. T h lı w e 小叔 n o w n a d a g e h e lp s e xp ı
a in w h y fir m s
\
e c o n o m ie s o f sca ı
e . A pe rs o n w h o tr ie s to d o e v e r th in
u s u a ll y g
y e n d s u p d o in g n o th in g v e ry w e ı
ı ı
f a firm w a n ts
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its w o rk e r s
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c a n ıB W B u t th is is
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d p ro d u c e s a
ı
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ı
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p ln fa c to r y S m ith w a s im 团
p re s s e d
.

b y th e s p e c la * s a tio n a m o ng th e w o rk e r s a nd th e re s u ltin 团
g e c o n o m ie s o f s c a le H e
w ro te 国
.

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a n o th e r s tra ig h te n s R
团
,

tin h g rin d s it a t th e
, a t h ir d c u ts it , a f o r t h
po in ts it, a 团
to p fo r re c e iv in 国
g th e he a d ; ı
o m a k e th e h e a d re q u ire s tw o o r th r e e
d is tin c t o p e ra tio n s to p u T it o n ı

国
s a pecu ı
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!
lt ls e v e n
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Sm ith r e p o rte d th a t b e c a u s e
o f spe d a ı is a tio n , t h e
p in fa c to r y p ro d u c e d th o u s a n d s o f
P in s p e r w o rk e r e v e r y d a y H e c o n je c tu re d t h a t if t h e w o rk .

e r s h a d c h o s e n to w o rk
s e p a ra te ly , r a t h e r t h a n a s
, m
a t e a m o f s
p e d a ıl s t s e y c e rta in l c o u ld n o t e a c h
y o f th e m
m a k e tw e n t , "
y p e r h a p s n o t o n e p in a d a ın o th e r w o rd s b e c a u s e
y ,

la ◆ e p in f a c to r c o u ı
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qp a n co st
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W n a sm a ll p in fa c to r
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The s p e c ia ı
is a tio n th a t S m ith o b s e rv e d in th e p in la c to r y is p re v a ı
e n t in th e m o d e m
e a »n o m y . ı
f yo u w a n t to b u iı
d a h o u se
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f Bu t m o s t p e o le tu m to a b u ild e r , ho
.

p w in tu m h ire s c a rp e n te rs
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, p
a in t e r s , a n d m a n
y o th e r ty p e s o f w o rk e rs . T he se w o rk e r s s p e c ia lis e in
P a rü c u la r jo b s , a n d t h is a l lo w s t he m to b e c o m e b e tte r a t th e ir o b s th a n
j if th e y w e re
gen e ra ı
is ts . ı
n d e e d t h e u s e o f
le c o n o m
, s e c ia ıi s a
p t io n t o a c h ie v e ie s Q r . ıc a lq ıis o n e
re a s o n m o d e m s o c ie ü e s a re a s
p ro s p e ro u s a s th e y a re .

团
团
目

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目
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目

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目

31 \
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 Ye a r 5 H 2 L e c tu re N o te s 2 0 1 8
F irm a a n d D e c is io n s

X 2
A p pE ND ı W HY IS sU PERM A R K ET p E T R O L IN T H E U K C H EA P ER THAN
O TH ER B RA N D S ?
A da Ħed m b r ń T h w w ,
ļ u t o n r 1 0 m l ç s / b l o o Ąu b ų r m a t r o ł ł
n - -

th \ k h ę b a a

O ne a s p e c t o f th e m a rk e t fo r p e tro l a n d d ie s e ıin th e u K is th a t ų p e n n a r k e t Þrlć e iĺ

a re consistentl)that o f th e U K a v e ra g e . w h a t a re s o m e re a s o n s fo r th ı
s?

1 S u pe in
. rm a rk e t s h a v e b ü y ln g ￠
'
r { tt la rk e g rı
g e q w w th e w h o ı
e s a le

fu e ım a rk e t a n d c a n n e g o ū a te ı
ow e r p 9 d s o m e s u p e rm a rk e ts d o n o t h a v e
lo n g te rm p u rc h a s e c o n tra c ts a n d lo o k to b u y p e tro ıa n d d ie s e l In w h o le s a le

m a rk e ts a t th e ı
o w e s t p ric e th e y c a n

2 T he y
. a re h a p p y to a c c e p t ı
o w e r p ro rı
t m a rg
m n e a ch ı
itre s o ld a s a

s tr a te g y to e in to th e ir s to r e s
g et p e o pı
-
In s o m e c a s e s th is m ig h t c o m e c ı
ose

to 飞o s s ıe a d iń ģ i (p ric in g beı
ow u n it c o §t) a n d a t th e v e ry le a s t It in v o lv e s

a a tls f ı
c ı
n g a p p ro a c *
!
3 . They ca n ru n p e tro l s ta tio n s a t lo w e r c «»s t b e c a u s e th e y g g y
o w n th e
\
a nd th e y ca n s trip o u t o th e r c o s ts b y s to c k in g th e ir s h o p s w ith th e ir o rw H

b ra n d s
ı
ı
4 . T h e a v e ra g e p ric e p e r
litre in c lu d e s th e p ric e s o f m a n y .
s m a e r ın d e p e n
w
w h o se p ric e s a re a ı
w ays h ig h e r b eca u se o f aø
rp e tro ı r e t a ııe -
a N

w n o m ie s o f iĉ à iie l T h a t s a id th e n u m b e r o f in d e p e n d e n t re ta ile rs ha s

be e n in s te e p d e c l i n e o v e r th e la s t 2 0 y e a rs
l b ra n d e d / p re m iu m fu e ı
s? A lı fu e ı
s s o ld ln
5 . Is s u p e rm a rk e t p e tro ! m f e rk i rt to

th e U K c o n fo rm to re le v a n t s t a d a r d d b u t a d e b a te ra g e s o n o n ı
in e m o to rin g

fo ru m s a b o u t th e r e la tiv e e f fic ie w o f s u p e rm a rk e t fu e ı
s .

32
A P P EN D ı X 3 N E T F U X 'S G R O W T H M A X IM IS A T IO N P L A N

h h p w w w w tu to r2 u
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o th e r fo rm s o f e n te H a in m e n t , t h e d riv e to g ro w y o u r In s ta lle d user b a se is rig h t u p a t

廿ıe to p o f th e o b je c tiv e iv e s
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m o re th a n 6 5 m illio n s u b s c rib e rs w ith n e a rly 3 m illio n o v e rs e a s a ı

s to m e rs a d d ed in

ł
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四
e M ix is a n e x a n ip le of how d is ru p tiv e y
i n t e r
ha ve m ire n t b b iė c ü v ė ä fro m th e s la n rd thery o f th e ñ rm . T he F in a n c ia l T im e s

r e p o r te d th a t N e M ix is la u n c h in g a n .
ııg n w n a m i i i i i M i i
th e a im o f re a c h in g 2 o o
. _ M a f ıe t f l i x w ill fe a tu re in J a p a n ,
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P o rin g e x p a n s io n in to C h in a n e x t y e a r
o rtu g a l a n d ita ly th is y e a r a n d is e x p ı .

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T he b u s in e s s re m a in s so m e d is ta n c e fro m
t
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s h a re h o ld e r s , N e t flix C E O R e e d H a sü n g s e x p la in e d th a t th e co m p a n y p la n s to

i througżfibnd Ďrñisį i s t a i i
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o p e ra te a ro u n q ñ i= ik ą v e n to ra k e i s ilb s ta n tia l
q

・
F \
.

33