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Cost Theory

Monopoly Market Structure

In a Monopoly Market Structure, there is only one firm prevailing in a particular industry. However, from a regulatory view, monopoly power exists when a single firm controls 25% or more of a particular market. For example, De Beers is known to have a monopoly in the diamond industry. A Natural Monopoly Market Structure is the result of natural…
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Variable Costs

Costs can be divided quite simply into two basic categories: variable costs and fixed costs. Variable costs are those that vary with production levels. As the volume of production increases, these costs increase; likewise, as the volume of production decreases, variable costs also decrease. This is in contrast to fixed costs, which exist…
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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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