Economics

611 Words Feb 28th, 2015 3 Pages
Economics - Assessment Task 1

1. Total cost is the figure that describes the total cost of production for an organisation. It is made up of both fixed costs, which are costs that are fixed in relation to output, and variable costs, which are costs that vary depending on the level of output. Before production commences, the total costs of the organisation will be the same as the fixed costs, as no raw materials or labour have been utilised. Although when production increases, variable costs will also rise, meaning the total costs will increase. This can be shown by the diagram below:

Average cost is the production cost per each unit of output. This can be calculated by dividing the total costs of the business by the number of units
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This means that firms must take into consideration the possible reactions of all other competing firms. Another characteristic is that products within an oligopoly will be similar.

In an oligopoly market, prices are stable. This is because firms within this market fear a price war occurring. When it comes to lowering or increasing price, oligopoly firms will consider the likelihood of competing firms doing the same thing, in order to avoid triggering a price war.

3. Another market structure is a monopoly. This is a situation in which a single company owns all of the market. It is defined by a lack of competition meaning high prices being charged by the solitary company operating in the market, and the restriction of other producers entering the market. In their attempts to maximise profits, these firms will charge high prices and rarely respond to consumer needs. This is because consumers have no other choice in terms of competition, so they will buy from monopolist firms regardless.

There are several characteristics of a monopoly. Firstly, extreme economies of scale are available to monopolist firms, giving them a huge advantage over any other company. Because of this and relatively low costs despite large product ranges, supernormal profits are achieved. Another characteristic is the inelastic demand for these firm’s products.

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