Sunk Cost:

KEY TAKEAWAYS

 Sunk costs are those which have already been incurred and which are
unrecoverable.
 In business, sunk costs are typically not included in consideration when
making future decisions, as they are seen as irrelevant to current and
future budgetary concerns.
 Sunk costs are in contrast to relevant costs, which are future costs that
have yet to be incurred.
For example, XYZ Clothing is considering shutting down a production facility, any
of the sunk costs that have end dates should be included in the decision. To make
the decision to close the facility, XYZ Clothing considers the revenue that would
be lost if production ends as well as the costs that are also eliminated. If the
factory lease ends in six months, the lease cost is no longer a sunk cost and should
be included as an expense that can also be eliminated. If the total costs are more
than revenue, the facility should be closed.

Incremental Cost:

What Is Incremental Cost?

Incremental cost is the total cost incurred due to an additional unit of product
being produced. Incremental cost is calculated by analyzing the additional
expenses involved in the production process, such as raw materials, for one
additional unit of production. Understanding incremental costs can help
companies boost production efficiency and profitability.

KEY TAKEAWAYS

 Incremental cost is the amount of money it would cost a company to make

an additional unit of product.
 Companies can use incremental cost analysis to help determine the
profitability of their business segments.
 A company can lose money if incremental cost exceeds incremental
revenue.
Since incremental costs are the costs of manufacturing one more unit, the costs
would not be incurred if production didn't increase. Incremental costs are usually
lower than a unit average cost to produce incremental costs. Incremental costs
are always comprised of variable costs, which are the costs that fluctuate with
production volumes. Incremental costs might include the following:

 Raw materials such as inventory

 Utilities, such as the additional electricity needed to power the equipment
 Wages or direct labor that's only involved in production
 Shipping and packaging

Example of Incremental Cost

Let's say, as an example, a company is considering increasing their production of
goods but needs to understand the incremental costs involved. Below are the
current production levels as well as the added costs of the additional units.

 10,000 units has a total cost of $300,000 or $30 per unit ($300,000 /
$10,000)
 12,000 units has a total cost of $330,000 or $27.50 per unit ($330,000 /
$12,000)

As a result, the total incremental cost to produce the additional 2,000 units is
$30,000 or ($330,000 - $300,000).

 The incremental cost per unit equals $15 ($30,000 / 2,000 units).

The reason there's a lower incremental cost per unit is due to certain costs, such
as fixed costs remaining constant. Although a portion of fixed costs can increase
as production increases, usually, the cost per unit declines since the company
isn't buying additional equipment or fixed costs to produce the added volume.
Market Based on Competition : Normally the market based on competition is
classified on the basis of number of sellers and buyers. Of which the market of
sellers is more important. The types are: perfect competition, monopolistic
competition, oligopoly. The two major classes of market based on competition
are: Perfect competition and imperfect competition.

Perfect Competition
Perfect Competition : Perfect competition market is an ideal market. It is only
possible theoretically, not practically except the agricultural sector. This market is
rarely observed, because the terms for establishing perfect competition are no
met that easily. In economics, the study of perfect competition is very important. As
this helps in understanding the characteristics and behaviour of other market based on
monopoly, monopolistic competition, oligopoly.

Perfect Competition: Definition

(1) According to Mrs. Robinson: Perfect competition exists where the demand of
product of the producer totally depends on its price.

(2) According to Prof. Leftwich: Perfect competition is a market system where

there are many firms that sell identical products, with no firm large enough that
can influence the market price.
A perfectly competitive market has the following characteristics:

 There are many buyers and sellers in the market.

 Each company makes a similar product.
 Buyers and sellers have access to perfect information about price.
 There are no transaction costs.
 There are no barriers to entry into or exit from the market.
Imperfect competition
Key Terms

monopoly: A situation, by legal privilege or other agreement, in which solely one

party (company, cartel etc. ) exclusively provides a particular product or service,
dominating that market and generally exerting powerful control over it.

Monopolistic competition: A market structure in which there is a large number of

firms, each having a small proportion of the market share and slightly
differentiated products.

oligopoly: An economic condition in which a small number of sellers exert control

over the market of a commodity.

The major types of market structure include the following:

Monopoly: An industry structure where a single firm produces a product for
which there are no close substitutes. Monopolists are price makers. Barriers to
entry and exit exist, and, in order to ensure profits, a monopoly will attempt to
maintain them.

Monopolistic competition: A market structure in which there is a large number of

firms, each having a small portion of the market share and slightly differentiated
products. There are close substitutes for the product of any given firm, so
competitors have slight control over price. There are relatively insignificant
barriers to entry or exit, and success invites new competitors into the industry.
Oligopoly: An industry structure in which there are a few firms producing
products that range from slightly differentiated to highly differentiated. Each firm
is large enough to influence the industry. Barriers to entry exist.

Perfect competition: An industry structure in which there are many firms, none
large enough to influence the industry, producing homogeneous products. Firms
are price takers. There are no barriers to entry. Agriculture comes close to being
perfectly competitive.

1) Monopoly
The economists consider the ‘Perfect Market’ and ‘Monopoly’ as two completely
opposite theories. Monopoly is an imaginary concept. The monopoly observed is
in reality imperfect monopoly.
Monopoly has originated from the Greek words, ‘Monos’ which means ‘Single’
and ‘Polein’ means ‘Seller’. So, Monopoly means the market having one seller.

Monopoly : Definition
1 According to Prof. Chamberlin: ‘‘When the product supply is controlled only by
an single enterprise, it is Monopoly.”

2 According to Prof. Stigler: “only one enterprise is the seller of the goods or
product.”

Characteristics of monopoly market:

A monopoly can be recognized by certain characteristics that set it aside from the
other market structures:
 Profit maximizer: a monopoly maximizes profits. Due to the lack of
competition a firm can charge a set price above what would be charged in a
competitive market, thereby maximizing its revenue.
 Price maker: the monopoly decides the price of the good or product being
sold. The price is set by determining the quantity in order to demand the
price desired by the firm (maximizes revenue).
 High barriers to entry: other sellers are unable to enter the market of the
monopoly.
 Single seller: in a monopoly one seller produces all of the output for a good
or service. The entire market is served by a single firm. For practical
purposes the firm is the same as the industry.
 Price discrimination: in a monopoly the firm can change the price and
quantity of the good or service. In an elastic market the firm will sell a high
quantity of the good if the price is less. If the price is high, the firm will sell a
reduced quantity in an elastic market.
2) Monopolistic competition
Monopolistic competition is a type of imperfect competition such that many
producers sell products that are differentiated from one another as goods but not
perfect substitutes (such as from branding, quality, or location). In monopolistic
competition, a firm takes the prices charged by its rivals as given and ignores the
impact of its own prices on the prices of other firms.
Unlike in perfect competition, firms that are monopolistically competitive
maintain spare capacity. Models of monopolistic competition are often used to
model industries. Textbook examples of industries with market structures similar
to monopolistic competition include restaurants, cereal, clothing, shoes, and
service industries in large cities.
Monopolistic competition is different from a monopoly. A monopoly exists when
a person or entity is the exclusive supplier of a good or service in a market. The
demand is inelastic and the market is inefficient.

Characteristics:

Monopolistic competitive markets:

 have products that are highly differentiated, meaning that there is a perception
that the goods are different for reasons other than price;
 have many firms providing the good or service;
 firms can freely enter and exits in the long-run;
 firms can make decisions independently;
 there is some degree of market power, meaning producers have some control
over price; and
 buyers and sellers have imperfect information.
3) Oligopoly Market:
 Oligopoly markets are markets dominated by a small number of suppliers. They
can be found in all countries and across a broad range of sectors. Some
oligopoly markets are competitive, while others are significantly less so, or can at
least appear that way. Competition authorities are often called upon to
investigate concerns of co-ordinated actions or lack of vigorous competition.

However, detecting the root cause of sub-competitive performance in oligopolies
can be challenging, and the manner in which it occurs (e.g. whether through an
explicit agreement among the firms to restrain competition, or something less)
may greatly affect the analysis and available tools/remedies under competition
law. This can potentially lead to enforcement gaps whereby welfare-reducing
conduct is not addressed.

What are the characteristics of an oligopoly?

 A Few Firms with Large Market Share.
 High Barriers to Entry.
 Interdependence.
 Each Firm Has Little Market Power In Its Own Right.
 Higher Prices than Perfect Competition.
 More Efficient.