Econ ch 14
Alfred Chandler, a professor at the Harvard Business School, has observed, "Imagine the diseconomies of scale—the great increase in unit costs—that would result from placing close to one-fourth of the world's production of shoes, or textiles, or lumber into three factories or mills!" The shoe, textiles, and lumber industries are very competitive with many firms producing each of these products. Source: Alfred D. Chandler, Jr., "The Emergence of Managerial Capitalism," in Alfred D. Chandler, Jr. and Richard S. Tedlow, The Coming of Managerial Capitalism, New York: Irwin, 1985, p. 406. What does Chandler's observation suggest?
Smaller firms can produce at a lower long-run average cost than larger firms.
If an entrepreneur is planning on producing 6,000 units, should he choose the smaller or larger operation?
The larger operation
Predict the effect on the price and quantity of nutritional advice offered in Florida if the Florida legislature repeals the requirement that only licensed dietitians provide such advice. The supply of services provided by dietitians will---- shifting the supply curve to the---- This will ----the equilibrium price and-----the equilibrium quantity of nutritional services.
-increase -right -decrease -increase
What benefits might a firm receive from attaining economies of scale before competing firms in the industry do? If a firm attains economies of scale, its average cost will be---- its competitors. This means the firm can sell its product at a----price than its competitors.
-lower than -lower
An article in the Wall Street Journal quoted a business consultant as saying that, "Today, companies are trying to get bigger to get economies of scale." Source: Sharon Terlep, "Big Companies Face Period of Rising Growth and Turmoil," Wall Street Journal, January 22, 2018. a. What are economies of scale?
A situation in which a firm's long-run average costs fall as the firm increases output.
Which of the following terms is a barrier to entry?
All of the above
Name one barrier to entry a new firm would face in competing with: i. Google in online advertising ii. Apple in smartphones iii. Facebook in social media apps iv. Amazon in online retailing
All of the above.
A column on bloomberg.com discusses whether tech firms like Google, Apple, Facebook, and Amazon will be able to maintain their high market shares indefinitely. The column notes that the firms "argue that their dominance is hardly durable because barriers to entry are low for new competitors. As Google is fond of saying, competition is just 'one click away.'" Source: David McLaughlin, "Did Big Tech Get Too Big? More of the World Is," bloomberg.com, March 22, 2019. What does the columnist mean by "barriers to entry"?
Anything that keeps new firms from entering an industry in which firms are earning economic profits.
When the market demand curve intersects the quantity axis at more than 1,000 units but less than 10,000 units.
Firms like BigAuto
When the market demand curve intersects the quantity axis at more than 10,000 units.
Firms like BigAuto
When the market demand curve intersects the quantity axis at less than 1,000 units.
Firms like LittleAuto
Can we be sure that the result of the decision will be to increase the well-being of consumers of nutritional advice in Florida? Briefly explain.
If the people who provide nutritional advice after a repeal of the licensing requirement are at least as good as the dietitians who are currently licensed, then consumer surplus in Florida will increase due to a lower equilibrium price and a higher equilibrium quantity.
How might technological changes reduce the importance of the barriers to entry you identified above?
It may create opportunities for new firms to offer goods and services that better serve their customers' wants.
Suppose you open a new restaurant in Los Angeles. Can you use economies of scale as a barrier to entry so that your restaurant will be profitable in the long run? Briefly explain.
No, because there are no significant economies of scale in the restaurant industry, except possibly at very low levels of output. Consequently, making your restaurant larger will not be effective in preventing other restaurants from entering the market and competing against you at about the same average cost.
Michael Porter has argued, "The intensity of competition in an industry is neither a matter of coincidence nor bad luck. Rather, competition in an industry is rooted in its underlying economic structure." Source: Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York: The Free Press, 1980, p. 3. Which of the following factors would not be included in Porter's concept of "economic structure"?
Whether the market is monopolistic or competitive.
Give an example of a government-imposed barrier to entry. An example of a government-imposed barrier to entry is
a and b
Why would the government be willing to erect barriers to entering an industry? The government would be willing to impose barriers to
all of the above
Which of the terms below is defined as "anything that keeps new firms from entering an industry in which firms are earning economic profits"?
barriers to entry
Three examples of oligopolies in the United States are industries that produce or sell
computers, athletic footware, and cigarettes.
What are the most important barriers to entry? The most important barriers to entry are
economies of scale, ownership of a key input, and government imposed barriers.
How do barriers to entry affect the extent of competition, or lack thereof, in an industry? Without barriers to entry,
new firms will enter industries where firms are earning economic profits.
What is an oligopoly? An oligopoly is a market structure
where a small number of interdependent firms compete.
Economies of scale exist when a firm's ___________ average costs fall as it __________ output.
long-run; increases
