Economics

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What is the computing? in terms of math


Industry structure is often measured by computing the Four-Firm Concentration Ratio. Suppose you have an industry with 20 firms and the CR is 20%. How would you describe this industry? Suppose the demand for the product rises and pushes up the price for the good. What long-run adjustments would you expect following this change in demand? What does your adjustment process imply about the CR for the industry? Now consider that the industry has 20 firms but the CR for the industry is 80% instead of 20%. How would you describe this industry? What are some reasons why this industry has a high CR while the other industry had a low CR? Is it possible for smaller firms to thrive and profit in such an industry? How?

  • Economics -

    Do a little research, then take a shot. What do you think?

  • Economics -

    My thinking is 40% CR, and smaller frims would thrive, due to less overhead. What is you take ?

  • Economics -

    My thinking is 40% CR, and smaller frims would thrive, due to less overhead. What is you take ?

  • Economics -

    I don't understand how you answer addresses the original question(s)

    An industry with 20 firms and a CR of 20% means that all firms are exactly the same size. Which implies that the industry is highly competitive and there is no improvement from economies of scale. An increase in demand would likely cause more firms to enter (rather than each existing firm expanding). Economic profits would be squeezed to zero.

    An industry with a 80% CR is most like an oligopoly. Oligopolies arise from a variety of reasons. a) barriers to entry, b) huge capital start-up costs, c) limited access to a critical component or natural resource, orownership of a critical patent, d) large economies of scale, e) governement intervention, f) etc.

    Economic models of oligopolies tend to vary depending on specific circumstances. That said, usually, the dominant firms in the oligopoly will exercise some monopoly powers. As such, the dominant firm will set P at points above MC=MR and earn economic profits.

    Small firms can thrive and profit in an oligopoly if, for example, it has access to the critical resource, or patent, or government protection. Small firm will also thrive if it can maintain marginal costs under the price set by the dominant firm. (However, if there are gains from economies of scale, the small firm may easily get gobbled up by a larger firm).

    I hope this helps.

  • Economics -

    Thank You

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