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Cost Theory

Economies of Scale

An economy of scale is achieved when increasing the scale of production decreases long-term average costs. In other words, the cost of production per unit decreases as a company produces more units. Reducing the cost per unit of production is the most significant advantage created by economies of scale.For example, if we are producing a video…
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Monopsony Market Structure

A monopsony is a situation of the market wherein only one buyer exists in a particular area, typically along with many sellers. These sellers end up competing for the buyer’s purchases by lowering their prices.In the case of both monopsony and the much more well-known situation of monopoly, market conditions are imperfect. However, monopolies…
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Theory of Contestable Markets

The Theory of Contestable Markets states that when barriers to entry into a market are weak or low or in some cases non-existent, and assuming that all entrants have equal access to technology, there is a constant threat of potential entry. This continuous risk increases competition in the market since there is virtually no cost to enter or exit…
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Economic Profit

Economic profit is different from the general business term 'profit'. The general assumption is that firms are producing goods to maximize profits. However, economists also assume that firms may aim to maximize revenue (profit is revenue - cost), maximize market share or achieve a pre-defined level of profit.What is Economic Profit? Economic…
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Barriers to Entry

Barriers to Entry are designed to prevent potential competitors from entering the market. Some barriers to entry are placed by the government, while others could be related to cost. These barriers result in different market structures such as monopolies or oligopolies (a few firms). Telecommunications and international logistics are the two…
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Perfect Competition Rise in Demand

Perfect Competition or Pure Competition (PC) is a type of market structure, which doesn’t exist and is considered to be theoretical. There are very many small firms that produce an identical product. They sell whatever they can produce, and no single firm affects the market price.In the long run, with the entry of new firms in the industry, the…
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