at these points is higher than the SMCs. At point 002 in Figure 14.2, the LMC is higher than the SMC as indicated by the perpendicular line connecting the LMC and the corresponding SMC curves. In the long run, after the optimum plant size might have been reached, cost may be reduced by a greater amount because inputs are optimally allocated.
Hence, the change in long run total cost is greater than the change in short run total cost and, therefore, long run marginal cost exceeds its short run counterpart.
4.0 Conclusion
The physical conditions of production and resource price jointly establish the cost of production. A detailed knowledge of the costs of production is essential to the individual firm and the economy as a whole. In this unit you have learnt a number of important concepts of cost in the long run and how it influence the firm's production decision. We established the fact that short run is the period of operation while long run is a planning period. Thus, the firm's long run decision focuses on the determination of which size of plant to build based on the short run operation. The general criteria for selecting the plant
size to operate will usually be based on the optimum position where unit costs are at the lowest point permitted by existing factor prices and technical knowledge.
5.0 Summary
This unit has dealt with the concept of cost in the long run. The following basic points were considered. We defined long run as a period of time of such length that all inputs, and invariably, all costs are variable. We indicated that the long run total cost is the same as the total variable cost since all costs are variable in the long run. We also established the 'fact that the long average cost of the firm can be obtain from the minimum points of a series of short run curves. We defined the LAC curve as the locus of points denoting the least unit cost of producing the corresponding output. We noted that in the short run, the producer must operate within the respective short' run curves for each plant size. In the long run, however, he can plan to build the plant whose size leads to the minimum unit cost of producing each possible output. LAC is typically U- shaped. When the LAC is sloping downwards. It connotes. Economies of scale while the upward sloping portion indicates diseconomies of scale. We finally indicated that the LAC is declining whenever LMC is lower and rising whenever LMC is higher than LAC and LMC curve cuts the LAC curve at the minimum point of the LAC curve.
6.0 Tutor-marked assignments
Question: a). What is the difference between the short run and the long periods of production
b). How is the long run average cost curve derived?
7.0 References and further readings
David Begg, Stanley, F. and Rudiger, D. (1991) Economics. (Third Ed.) McGRAW-HILL Book Company, England. Pp. 115-128.
Richard G. Lipsey (1983); An Introduction to Positive Economics. (Sixth Ed.) English Language Book Society, Weidenfeld and Nicolson Ltd, London. Pp. 219-223
Olukosi, J. O. and Ogungbile, A. O. (1989); Introduction to Agricultural Production Economics: Principles and Applications. AGITAB Publishers Ltd., Zaria-Nigeria.
Pp. 104-106
Ferguson, C. E (1972). Microeconomic theory. (Third Ed.) Richard D. Irwin inc.
Homewood, Illinois. Pp. 221-226.
Olaloye, A. 0 and Atijosan J. I. (1989). Introduction to Economic Analysis Obafem Awolowo University Press Ltd. lIe-lfe, Nigeria. Pp. 52 – 53
UNIT FIFTEEN: MARKET STRUCTURE Table of contents
1.0 Introduction 2.0 Objectives
3.1 Concepts of market, firm and industry 3.1 .1. Market
3.1.2 Firm 3.1.3 Industry
3.2 Elements of market structure 3.3 Features of perfect competition 3.4 Features of monopoly
3.5 Features of monopolistic competition 3.6 Features of oligopoly
4.0 Conclusion 5.0 Summary
6.0 Tutor-marked assignments 7.0 References and further readings.
Introduction
We have developed the principles of production and the general cost relationships that are derived from the production process. Any firm making production decisions will relate potential or forecasted revenues to these costs in order to determine output levels.
However, these decisions will depend on the market condition faced by the firm traditionally. Economists found it useful to classify markets into four broad types: Perfect competition, Monopoly, Monopolistic competition and oligopoly. This unit will focus on the concepts of market, firm and industry and also differentiates between the various market structures and their characteristics
2.0 Objectives
After studying the materials in this unit, you should be able to distinguish between the various types of market structures and also be able to do the following.
1. Understand better the concepts of market, firm, and industry.
2. Identify the various types of market structure; and
3. Describe the features of each of the market structures.
3. L Concept of Market, Firm and Industry
3.1.1 Market: A market may be defined as an area over which buyers and sellers negotiate the exchange of well - defined commodity. A market can also be viewed as a set of arrangement by which buyers and sellers are in contact to exchange goods and services. Market brings together buyers and sellers of goods and services. Whether the buyers and sellers meet physically or not, a market Performs the economic function of price determination and output policies.
Markets are separated from each other by commodity sold, natural economic barriers and barriers created by the central authorities (government). Individual markets differ from each other in many ways. The type of commodity sold or the nature of competition within the market can distinguish markets. Goods markets are those where goods and services are bought and sold. The sellers are the firms and the buyers are households and central authorities. The factor markets are those where services are bought and sold. The sellers are the owners of factors of production (usually households, but sometimes firms); the buyers are usually firms and the central authorities. Individual markets may differ from each other to the degree of competition among the various buyers and sellers in each market. In this respect we have competitive markets, monopoly, Monopolistic competition and oligopoly markets.