Market dynamics

The short-run refers to a period where at least one factor will be fixed.

In the short-run, labour is a variable cost but capital and natural resources are fixed costs.
Total costs are the sum of total fixed costs and total variable costs (TC = TFC + TVC).
Total costs increase as the level of output increases.
Cost schedules show the relationship between different types of short-run costs.
We use cost schedules to plot cost curves.

The following is important to take note of when analysing short-run total cost curves:

Total variable costs (TVC) increase as total output increases.
When output is zero, TVC is also equal to zero. The TVC curve thus begins from the origin.
Total fixed costs (TFC) remain the same for each level of output at R80. The TFC curve is thus a horizontal line from the cost axis.
Total cost (TC) is the sum of TFC and TVC. As a result, even when the output level is equal to zero, TC will be equal to R80, the TFC.
As output increases, so does TC. The TC curve is thus identical to the TVC curve, but has its origin at R80. This is because TFCs are payable whether or not production takes place.

We focus on the following per unit production costs:

Average total cost (ATC)
Average fixed cost (AFC)
Average variable cost (AVC)
Marginal cost (MC)

the module is mostly graphs3

In the long-run, a business has more options to choose from because all factors are variable. For instance, the business can increase or decrease factor inputs to suit production requirements. And all costs are variable in the long-run.

Businesses can compare the total production costs for various sizes of the business. This helps the business decide on the optimal production capacity where the business can achieve productive efficiency and maximise profits at the best production rate.

In the long-run the business is able to:

Increase or decrease production inputs.
Change location or expand business operations.
Use different methods of production.

Long-run average total cost is the lowest average cost of production for each level of output. It is calculated by dividing the total cost by the level of output.

Long-run total average cost = Total cost ÷ Output

LRATC = TC ÷ Q

Long-run average total costs can be represented in a cost schedule but it is more common to analyse long-run average costs using the long-run average cost curve.

Economies of scale, constant economies of scale and diseconomies of scale

Economies of scale	Also referred to as increasing returns to scale. The cost advantages that a business gains when long-run average cost decreases as the business increases the level of output. The decrease in the long-run average cost of production is linked to increased efficiency. Usually achieved at lower levels of output. Businesses can become more efficient if they specialise and use mass production systems.
Constant economies of scale	Also referred to as constant returns to scale. Occur when the long-run average total cost remains the same despite changes in the level of output. Usually occur at intermediate levels of output and may occur over a considerable range of output.
Diseconomies of scale	Also referred to as decreasing returns to scale. The cost disadvantage that a business experiences when the long-run average cost increases as the level of output increases. Occur when the size of business operations becomes too large to manage. At this point a business may be broken up into smaller units that make the business easier to manage. This may also be done to avoid losing out to smaller businesses that are still experiencing increasing returns to scale.

Economies of scale

Also referred to as increasing returns to scale.
The cost advantages that a business gains when long-run average cost decreases as the business increases the level of output.
The decrease in the long-run average cost of production is linked to increased efficiency.
Usually achieved at lower levels of output.
Businesses can become more efficient if they specialise and use mass production systems.

Constant economies of scale

Also referred to as constant returns to scale.
Occur when the long-run average total cost remains the same despite changes in the level of output.
Usually occur at intermediate levels of output and may occur over a considerable range of output.

Diseconomies of scale

Also referred to as decreasing returns to scale.
The cost disadvantage that a business experiences when the long-run average cost increases as the level of output increases.
Occur when the size of business operations becomes too large to manage.
At this point a business may be broken up into smaller units that make the business easier to manage.
This may also be done to avoid losing out to smaller businesses that are still experiencing increasing returns to scale.

Factors that impact on economies of scale

There are two main factors that impact on economies of scale:

The size of the business
Demand for the products

Economies of scale are only helpful when:

There is sufficient demand for a product.
The business is more capital-intensive and less labour-intensive.
Capital-intensive businesses enjoy economies of scale over larger amounts of output and favour larger businesses.
Labour-intensive businesses quickly run into diseconomies of scale.

Non-price competition

Businesses will use the unique features of their product to gain market share.

Businesses often focus on building brand loyalty, product recognition and product differentiation. The main tools used to implement non-price competition are advertising and marketing.

	Perfect market	Imperfect market
Number of producers	Many producers	One or a few large suppliers
Nature of products	Homogenous products	Product is unique, differentiated or homogenous
Barriers to entry	No barriers to entry Suppliers can freely enter and exit the market	High barriers to entry (monopoly and oligopoly) Low barriers to entry (monopolistic competition)
Availability of information	Consumers and producers have complete information about the market	Information about the market is incomplete
Control over pricing	Producers are price-takers Suppliers have no control over pricing	Monopolies are price-makers Oligopolies have some control over prices but are not considered price-makers Monopolistic competitors have limited control over prices
Market structure	Perfect competition	Monopoly Oligopoly Monopolistic competition

	Perfect competition	Monopoly	Oligopoly	Monopolistic competition
Price	Low Firms have no market power	High A single firm controls the market	High A few firms dominating the market There is often collusion in the market	Low Competition keeps prices low
Output	High Produce according to market demand	Limited to the firm's output	More than monopoly Limited to amount that the few firms can produce	Relatively high Many suppliers
Barriers to entry	No barriers to entry Firms enter and exit the market freely	High barriers to entry Monopolies use knowledge and advertising to restrict entry into the market Barriers to entry also include natural barriers, large capital, government support, economies of scale, legal barriers and trade barriers.	Relatively high barriers to entry Start-up and advertising costs prevent smooth entry Other barriers to entry include legislation, qualifications and licences.	Low barriers to entry Firms use marketing to gain advantage
Availability of information	Existing and new firms have perfect information	Knowledge of the market is restricted to existing firm	Information is not readily available to new entrants	Existing and new firms have perfect information
Size of profits	Normal profits	Economic profit in the long run	Economic profit in the long run	Normal profit
Nature of product	Homogenous Product is low cost and easy to reproduce	Product is unique and has no close substitutes	Differentiated product	Differentiated product
Examples	Agricultural products	Eskom Rand Water Railway services	Petrol stations Oil producers Airlines Cellphone network providers	Fast food outlets Hair salons Restaurants Clothing stores