Production, costs, and pricing
Overview
Industrial organization
Industrial organization
Industrial organization is the field of economics that builds on the theory of the firm in examining the structure of, and boundaries between, firms and markets....
– describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions. Issues underlying these decisions range from classical issues such as opportunity cost
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
to neoclassical concepts such as factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
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- a field of economicsEconomicsEconomics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
that studies:- the strategic behaviorStrategic managementStrategic management is a field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments...
of firmsBusinessA business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit... - the structure of marketMarketA market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
s- Perfect competitionPerfect competitionIn economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...
- Monopolistic competitionMonopolistic competitionMonopolistic competition is imperfect competition where many competing producers sell products that are differentiated from one another...
- OligopolyOligopolyAn oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
- OligopsonyOligopsonyAn oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of buyers...
- MonopolyMonopolyA monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
- MonopsonyMonopsonyIn economics, a monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers...
- Perfect competition
- and the interactions between them
- the strategic behavior
Production side of Industry:
- Production theoryProduction theory basicsProduction refers to the economic process of converting of inputs into outputs. Production uses resources to create a good or service that is suitable for use, gift-giving in a gift economy, or exchange in a market economy. This can include manufacturing, storing, shipping, and packaging. Some...
- production efficiency
- factors of productionFactors of productionIn economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
- total, average, and marginal product curves
- marginal productivity
- isoquantIsoquantIn economics, an isoquant is a contour line drawn through the set of points at which the same quantity of output is produced while changing the quantities of two or more inputs...
s & isocostIsocostIn economics an isocost line shows all combinations of inputs which cost the same total amount. Although similar to the budget constraint in consumer theory, the use of the isocost line pertains to cost-minimization in production, as opposed to utility-maximization...
s - the marginal rate of technical substitution
- Production functionProduction functionIn microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs...
- inputs
- diminishing returns to inputs
- the stages of production
- shifts in a production function
- Economic rentEconomic rentEconomic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
- classical factor rents
- Paretian factor rents
- Production possibility frontierProduction possibility frontierIn economics, a production–possibility frontier , sometimes called a production–possibility curve or product transformation curve, is a graph that compares the production rates of two commodities that use the same fixed total of the factors of production...
- what products are possible given a set of resources
- the trade-off between producing one product rather than another
- the marginal rate of transformation
Cost side of Industry:
- Cost theory
- Different types of costCostIn production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
s- opportunity costOpportunity costOpportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
- accounting cost or historical costs
- transaction costTransaction costIn economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
- sunk costSunk costIn economics and business decision-making, sunk costs are retrospective costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken...
- marginal costMarginal costIn economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...
- opportunity cost
- The isocostIsocostIn economics an isocost line shows all combinations of inputs which cost the same total amount. Although similar to the budget constraint in consumer theory, the use of the isocost line pertains to cost-minimization in production, as opposed to utility-maximization...
line
- Different types of cost
- Cost-of-production theory of valueCost-of-production theory of valueIn economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it...
- Long-run cost and production functions
- long-run average cost
- long-run production function and efficiency
- returns to scale and isoclines
- minimum efficient scaleMinimum Efficient ScaleMinimum efficient scale or efficient scale of production is a term used in industrial organization to denote the smallest output that a plant can produce such that its long run average costs are minimized.-Computing:...
- plant capacity
- Economies of density
- Economies of scaleEconomies of scaleEconomies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
- the efficiency consequences of increasing or decreasing the level of production.
- Economies of scopeEconomies of scopeEconomies of scope are conceptually similar to economies of scale. Whereas 'economies of scale' for a firm primarily refers to reductions in average cost associated with increasing the scale of production for a single product type, 'economies of scope' refers to lowering average cost for a firm in...
- the efficiency consequences of increasing or decreasing the number of different types of products produced, promoted, and distributed.
- Network effectNetwork effectIn economics and business, a network effect is the effect that one user of a good or service has on the value of that product to other people. When network effect is present, the value of a product or service is dependent on the number of others using it.The classic example is the telephone...
- the effect that one user of a good or service has on the value of that product to other people.
- Economies of scale
- Optimum factor allocation
- output elasticityOutput elasticityIn economics, output elasticity is the percentage change of output divided by the percentage change of an input. It is sometimes called partial output elasticity to clarify that it refers to the change of only one input....
of factor costFactor costFactor cost has the following uses in economics:*Factor cost or national income by type of income is a measure of national income or output based on the cost of factors of production, instead of market prices...
s - marginal revenue product
- marginal resource cost
- output elasticity
- PricingPricingPricing is the process of determining what a company will receive in exchange for its products. Pricing factors are manufacturing cost, market place, competition, market condition, and quality of product. Pricing is also a key variable in microeconomic price allocation theory. Pricing is a...
and various aspects of the pricing decision- Transfer pricingTransfer pricingTransfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property . Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other...
- selling within a multi-divisional company
- Joint product pricingJoint product pricingJoint Products are two or more products, produced from the same process or operation, considered to be of relative equal importance.Pricing for joint products is a little more complex than pricing for a single product. To begin with there are two demand curves. The characteristics of each demand...
- price setting when two products are linked
- Price discriminationPrice discriminationPrice discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider...
- different prices to different buyers
- types of price discrimination
- Yield managementYield managementRevenue management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed, perishable resource...
- Price skimmingPrice skimmingPrice skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management...
- price discrimination over time
- Two part tariffs
- charging a price composed of two parts, usually an initial fee and an ongoing fee
- Price points
- the effects of a non-linear demand curve on pricing
- Cost-plus pricingCost-plus pricingCost-plus pricing is a pricing method used by companies to maximize their profits.The firms accomplish their objective of profit maximization by increasing their production until marginal revenue equals marginal cost, and then charging a price which is determined by the demand curve. However, in...
- a markupMarkup (business)Markup is the difference between the cost of a good or service and its selling price. A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and...
is applied to a cost term in order to calculate price - cost-plus pricing with elasticity considerationsCost-plus pricing with elasticity considerationsOne of the most common pricing methods used by firms is cost-plus pricing. In spite of its ubiquity, economists rightly point out that it has serious methodological flaws. It takes no account of demand. There is no way of determining if potential customers will purchase the product at the...
- cost plus pricing is often used along with break even analysis
- a markup
- Rate of return pricingRate of return pricingTarget rate of return pricing is a pricing method used almost exclusively by market leaders or monopolists. You start with a rate of return objective, like 5% of invested capital, or 10% of sales revenue...
- calculate price based on the required rate of return on investment, or rate of return on sales
- Transfer pricing
- Profit maximizationProfit maximizationIn economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem...
- determining the optimum price and quantity
- the totals approach
- marginal approach of production
- William BaumolWilliam BaumolWilliam Jack Baumol is an American economist. He is a professor of economics at New York University and is also affiliated with Princeton University. Baumol has written extensively about labor market and other economic factors that affect the economy. He also made valuable contributions to the...
- Joseph Bertrand
- Antoine Augustin CournotAntoine Augustin CournotAntoine Augustin Cournot was a French philosopher and mathematician.Antoine Augustin Cournot was born at Gray, Haute-Saone. In 1821 he entered one of the most prestigious Grande École, the École Normale Supérieure, and in 1829 he had earned a doctoral degree in mathematics, with mechanics as his...
- Heinrich Freiherr von StackelbergHeinrich Freiherr von StackelbergHeinrich Freiherr von Stackelberg was a German economist who contributed to game theory and industrial organization and is known for the Stackelberg leadership model.-Biography:...
- Jean TiroleJean TiroleJean Marcel Tirole is a French professor of economics. He works on industrial organization, game theory, banking and finance, and economics and psychology. Tirole is director of the Jean-Jacques Laffont Foundation at the Toulouse School of Economics, and scientific director of the Industrial...
- Outline of production
- Important publications in production theory
- MicroeconomicsMicroeconomicsMicroeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
