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1、1.0 IntroductionThis report is mainly about the explanation of a minimum of three costs to the Sony firm, the description of the characteristics, price and output behavior of oligopoly structure and monopoly structure with the aid of relevant diagrams, the objective of profit maximization and growth
2、 maximization theory. 2.0 Cost 2.1 Total CostFixed costs (FC): costs do not vary with the level of output. Variable costs (VC): costs do vary with the level of output. Total Cost (TC) is the sum of FC and VC. (TC= TFC+TVC) It shows the relationship between total cost of goods and the quantity of out
3、put produced. VC curveTC curveFC curveQuantity of OutputCost0Because fixed costs do not vary with outputs and it is always a constant quantity, FC curve is a horizontal line. Variable costs do vary with outputs and rise as outputs increase, so VC curve is an upward slopping line curve from the origi
4、nal point. Ditto, because total cost is the sum of FC and VC, TC curve is also an upward slopping curve. It parallels to the VC curve. When Sony new products expand, there are more labors are hired and the division of labor and specialization will raise the efficiency and productivity. However, the
5、quantity of output is limited by the size of Sony, so some labors share the same equipments and the crowded condition. Additional works add less to productions, reflecting diminishing marginal products, so the production function gets flatter. When Sony is crowded, producing extra goods cost a lot o
6、f extra labors. So when the quantity is large, TC curve gets stepper. (SQA, 2013, page15-16) 2.2 Average Cost Average fixed cost (AFC) is the cost of each fixed typical and average variable cost (AVC) is the cost of each variable typical. Average total cost (ATC) is the sum of AFC and AVC. AFC0AVCAC
7、MCQCThe law of diminishing returns: when a production unit expands, because of the division of labor and specialization output will increase. With increases in output the ability to produce more is limited by the size of the firm. More and more labors are hired at a firm, and they share the same equ
8、ipment and work in more crowed conditions. All theses are lower labor productivity. This means each additional worker contributes less and less to production. (SQA, 2013)ATC curve is “U” shaped. At very low levels of output ATC is high. ATC declines as output increases. The bottom of the U-shaped AT
9、C curve exists when ATC is minimized. The quantity that minimizes ATC is called the efficient scale of the firm. When output is small, ATC is very high because FC spreads over a small number of units. With outputs increase AFC falls rapidly and AVC also falls because of the division of labor and spe
10、cialization. Sony may be able to purchase more materials at lower cost because they can order large quantities as the production is enlarged. Because of the law of diminishing returns AVC will increase rapidly and be the key factor that makes ATC rises rapidly. 2.3 Marginal Cost Marginal cost (MC) m
11、easures the total cost that arises from an extra unit of production. AC curveMC curveQuantity of OutputCost0Firstly, because of the division of labor and specialization with the increases of variable factors the efficiency of production will arise. MC falls as output increase. And then according the
12、 law of diminishing returns, as continually increasing the input of variable factors the production is inefficient. So after that MC rises as output increases. That means Sony will cost more to produced extra units. Whenever MC is less than ATC, ATC is falling; when greater than ATC, ATC is arising.
13、 The MC curve crosses the ATC curve at the efficient scale. 3.0 Oligopoly 3.1 Definition An oligopoly is a market dominated by a few large suppliers. (tutor2u, 2013) 3.2 CharacteristicsThere is high degree of industrial concentration in an Oligopoly. There are many barriers to entry exist. An oligop
14、oly can earn super normal profits and prices are unlikely to change very often.Oligopolies used considerable non-price competition. (SQA, 2013)3.3 Price and output behaviorOPQp1Q1DDGElasticInelasticA result of oligopoly may therefore be that a business may appear to face a kink in the demand curve f
15、or its product. Price is OP1 and output is OQ1. According the law of demand, at prices higher than OP1 demand is elastic (Quantity demanded responds strongly to changes in price) raising prices will cause loss of market shares. At prices lower than OP1demand is inelastic (Quantity demanded doesnt re
16、spond strongly to changes in price) cutting prices will force rivals to follow suit and there will be little gain in the way of additional sales. The price will always be in P1. There no price war in an oligopoly because firms fear that if they reduce prices their market share will remain much the same as before. Firms are more likely to compete with non-price competition, such as adve
