General Introduction to Market Structures The worlds cheapest tablet computer is the Aakash tablet. Why is it so cheap?
Cheap labour, cheap quality materials just enough to be sustainable, less profit margins - they don’t really need to cover many costs like advertising campaigns, internal economies of scale, use of open source software including the linux OS, falling costs of motherboards, government subsidies of about 50% of the price. Economies of scale as 100 million schoolchildren are going to use it.
Short run is a period of time in which at least one of the Factors of Production (FoPs), such as capital and physical land, is fixed in the production process.
Long run is the period of time when all factors of production are variable, and therefore all costs of production are variable costs.
Note that economists don’t use the concept of short run as a measure of time, but as a definitional period of the length of time needed for a given firm or industry to increase fixed FoPs.
This will depend largely on the industry, e.g. fast food franchise restaurants vs. pharmaceutical companies.
An example of diminishing returns: restaurants earn lots from buffets as they know most people cannot eat 16 slices of pizza satisfactorily! They also pour you lots of water to make you full. Another example would be of productivity. Productivity can fall if you revise for too long at a time.
Law of diminishing returns - as more units of a variable factor of production (e.g. labour) are added to one or more fixed inputs (e.g. land or capital), the marginal product (addition to total product from adding the extra unit of labour) at first increases and then, after a point, decreases with each successive increase in the variable input, ceteris paribus. At first marginal product increases but after a certain point the extra output falls.
If you have fixed factor and you keep increasing variable factors, there are diminishing returns.
Diminishing returns happens only in the short run. They are not experienced in the long run as in the long run we can increase all factors of production.
DMR = Dimishing marginal returns. Its useful to know it because it maximizes efficiency as a company can know when they hit maximum capacity. After this point, efficiency and productivity theoretically.
Examples of costs:
Tax (but school doesn’t pay as we are a registered npo)