Monopolistic Economics In The Beer Industry

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.