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Similarities of monopsony and oligopoly
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SABMiller is one of the most successful brewers, as well as the largest Coca-Cola bottle manufacturer worldwide, thanks to its growing business in the soft drink industry. In South Africa alone, SABMiller owns 90% of the shares of the total beer market and 72% of the shares of the total alcohol market. The following essay, related to the attached article, explains the economic theory behind the firm’s short-run production and costs resulting a decrease in the quantity of labour employed.
Since SABMiller operate in the beer industry they face monopolistic competition, which according to Parkin et al. (2013:305) is a barrier-free market structure where many firms present, compete against each other. Each firm creates a product that differs from one another, also known as product differentiation, and competes on product quality, marketing programme and price. Consumers are usually very aware of the firms’ pricing of their products and available substitutes – so if a firm were to increase their price on a similar product, the quantity demanded of that variety would decrease and consumers would refer to close substitutes. Therefore firms in monopolistic competition have to be very observant of their consumer’s wants and preferences, what prices they charge and what quality is put into the process of production.
Parkin et al. (2013: 239) states that a firm’s short-run decision is a time frame, in which the quantity of one factor of production or more is fixed. The factors of production of firm are divided into two categories, from which fixed and variable costs are distinguished. The fixed factors are the firm’s factory, namely land, capital and entrepreneurship and the variable factor is labour. SABMiller are planning to retrench fo...
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...the units of output increase, the average fixed cost curve constantly decreases. The average variable cost curve also decreases in the beginning because of the diminishing marginal returns principle, but eventually increases, which supports the downward slope of the average total cost curve. However, the average total cost curve starts sloping upwards once the average variable cost curve starts increasing, resulting in a u-shape.
So when there is a decrease in the number of workers employed, there is a decrease in output, hence both the marginal cost curve and the average variable cost curve will decrease. The results are a decrease in total cost. It can be concluded that a short-run change in a factor of production, namely the variable factor labour, decreases the costs of the SABMiller more than the level of their output, and therefore aids in maximising profits.
According to Marketline (2013) most of the competitors in Irish soft drink market operates only in the beverages market and this makes their businesses fairly similar. This indicates that the occurrence of market fluctuations will boost the rivalry, because it affects each competitor in a similar way (Marketline, 2013). Another element that makes the rivalry to grow is low-priced switching costs for customers. This basically means that among competitors the prices in the industry do not fluctuate greatly. For most of the companies that operates in the Irish soft drink market the fixed costs are a majority of overall total cost. This means that the ease of exit will depend on the company’s business model. In other words it is harder to exit for companies that own a manufactory, warehouses, trucks etc. while it is easier to get out of business for those companies which tend to outsource everything. According to Marketline (2013) p...
The beer market has turned itself into an oligopoly in the past 100 years. Where there once were hundreds of brewers across America, there now are just a few major players in the industry. But what is an oligopoly? As defined by Ayers & Collinge in the textbook Microeconomics, “an oligopoly is characterized by multiple firms, one or more of which will produce a significant portion of industry output”(microeconomics). Oligopolies exist where a few large firms producing a homogeneous or differentiated product dominate a market. There must be few enough firms so that they are mutually interdependent, which means they must consider rival’s reactions in response to decisions about prices, output, and advertising. The causes of the beer oligopoly are as followed: 1. Economies of scale exist, which indicate that a few large firms would be more efficient that many small ones. 2. A high degree of capital investment required. 3. Other barriers to entry may exist like patents, control of raw materials, large advertising budgets, and traditional brand loyalty.
Additionally, consumers in the United States have begun an era of drinking more beer than wine or hard alcohol. As more beer is being consumed, sales are sky rocketing for not only local beers such as Budweiser, Lagunitas, or Heineken; but imported beers have begun to make popular appearances on shelves in stores more often. With this drastic change in the United States, international brewing companies in various countries will experience amplified demand for not only international products but a greater need for exported ingredients as well. Moreover, in the next few years the demand for imported beer will increase dramatically.
The 3 percent decline in sales causing a 21 percent decline in profits can be attributed to the identification of the accounting concept of operating leverage. Operating leverage is what business managers apply to boost small changes in revenue into sizable changes in profitability. Fixed cost is the force managers use to attain disproportionate changes between revenue and profitability. Therefore, when all costs are fixed every sales dollar contributes one dollar toward the potential profitability of a project. Once sales dollars cover fixed costs, each additional sales dollar represents pure profit. A small change in sales volume can significantly affect profitability (Edmonds, Tsay, & Olds, 2011). So, therefore, if sales volume increases,
Also, the companies suffer from price competition meaning that the highly fixed cost of the industry makes competitors to produce in bigger quantities so they can sell it and distribute cost for more units. And when that happens, it forces competitors to reduce their prices close or equal to their mean cost.
For instance, if a business wants to produce 5,000 more t-shirts, yet it will require the purchase of another machine, the marginal cost for the extra t-shirts includes the cost of the new machine. A marginal product describes the additional output that results from adding one more unit of input. It can be calculated by dividing the change in the total product by the change in the variable input. For example, in order to increase the t-shirt productivity by 1000 units, the company may hire two new employees to the production line. In which case, the total change in product is 1000 units. Although, hiring two more employees increases productivity, now the law of diminishing marginal product applies. Diminishing marginal product primarily indicates that increasing one input while retaining other inputs at the same level will initially increase output; however, further increase in the output level will eventually diminish. For example, hiring an extra two employees to increase productivity, will eventually have a limited effect or diminish the average income. Production function is a graph utilized to demonstrate the relationship between physical inputs and outputs, define marginal product, and distinguish allocative
When increasing amounts of one factor of production are employed in production by fixing some other production factor, after some level, the resulting increases in output of product become lower and lower. That is, first the marginal returns to consecutive little will increase within the variable issue of production turn down, then eventually the general average returns per unit of the variable input begin decreasing. The law of diminishing returns doesn't imply that adding a lot of an element can decrease the whole production, a condition called negative returns, though actually this can be common.
A change in quantity supplied is just a movement from one point to another in the supply curve. In opposite, the cause of a change in supply is a change in one the determinants of supply that shifts the curve either to the left or the right. These determinants are the resource prices, technology, taxes and subsidies, producer expectations, and number of sellers. An equilibrium price is required to produce an equilibrium quantity and a price below that amount is referred as quantity supplied of zero no firms that are entering that particular business. If the coefficient of price is greater than zero, as the price of the output goes up, firms wants to produce more of that output. As the price of the output goes up it becomes more appealing for the firms to shift resources into the production of that output. Therefore, the slope of a supply curve is the change in price divided by the change in quantity. The constant in this equation is something less (negative number always) than zero because it requires strictly a positive...
The beverage industry is highly competitive and presents many alternative products to satisfy a need from within. The principal areas of competition are in pricing, packaging, product innovation, the development of new products and flavours as well as promotional and marketing strategies. Companies can be grouped into two categories: global operations such as PepsiCo, Coca-Cola Company, Monster Beverage Corp. and Red Bull and regional operations such as Ro...
These situation give duopoly companies an effective motivation to agree to change a 'monopoly' price and share the resulting profit. It is stated that duopoly are most effective when consumer demanded for the product is not greatly affected by price. Furthermore, duoplies are more effective on the short term, as over a long term, prices often become more elastic as consumers finds another alternative for the product. Ho...
There are numerous forces that can affect long-run costs, some controllable and some not. When long-run average cost falls as output increases, economies of scale occurs. Diseconomies of scale occurs when long-run average cost rises as output increases. Changes in technology and changes in input prices cannot be reasons for rising or falling unit costs. Larger companies can divide production into specialized tasks to allow workers to become more productive to achieve economies of scale. Unit costs can also decrease from quasi-fixed inputs that don’t change much as output increases. Technological factors, the costs of capital equipment and the qualitative change in production process can also contribute to economies of scale. When output increases, long-run average costs can rise if the firm has inefficient management and disorganization. The larger the scale of the production facility, the more critical it becomes to have top management who are able to delegate responsibility and authority to mid-level managers. To avoid diseconomies of scale, firms will divide production operations into separate divisions to control the cost of monitoring and control
Job costing involves usage of situations where every job is done cost differently, consumers specifications play a bigger picture in this case. Direct and indirect costs are encountered. It is believed that job costing has lots of costs accrued from the production to the consumers (REEVE, J. M., WARREN, C. S., & DUCHAC, J. E. 2012). This involves labor, running of machines, and all the individuals who are involved in the production of a product from raw to the final product, indirect costs are applied in this order. Job costing order is best showcased in a manufacturing company, let’s take coca cola company, company specialized in beverages manufacturing and distribution, usually customers have no say in the final products of this company, but as the trends for consumption of a certain flavor, according to their statistics they will conform with the demands. The special requirements, like name branding on the bottles of the beverages, customization of the containers have had a significant impact in the consumption of coca cola products (Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. 2010).
That is, the size of labor may decrease or increase but the capital and other inputs will remain fixed. If the firm Suffers losses at its best level of output then, the business should try to reduce its marginal cost and function at the level where average and marginal product are positive or cumulative. If price drops below ATC, but relics above average adjustable cost, the company will continue to function in the short run, crafting the capacity where  MR = MC doing so reduces its losses. Whereas if price falls below average variable cost, the company will go out of business in the short run, dropping output to zero. The lowest point on the average variable cost curve is called the shutdown
Price competition among rivals is close to nil, industry participants are very competitive when it comes to product differentiation. Product offerings to satisfy consumer demands include a variety of coffee, juices, muffins, bagels, cookies, cream cheese sandwiches, soups and other miscellaneous items.
“For example, if the organisation decide to expand, fixed costs will definitely increase. Sometimes, organisations decide to reduce certain fixed costs to improve their cash flow, by moving to a less expensive workplace or reducing the number of employees”.