David Smith- 'Free Lunch' (Pt. VII- On Markets, Costs, and Competition)

 

The next chapter is all about businesses and how they operate in the market system. Smith first outlines the differences between fixed and variable costs and some examples of both of them. Variable costs are those which increase with output (e.g. wages), whereas fixed costs are constant, regardless (e.g. depreciation of capital investment). From his discussion of costs, he moves to ‘economies of scale’ which is the phenomenon in which average costs and marginal costs first decrease, and then increase with growth (although, the diagram to the left shows them as slightly different, as marginal cost is the cost per EXTRA unit, rather than MEAN cost per unit produce in total). He then enters an analysis of how monopolies (or oligopolies when there are a few companies that dominate the market in a cartel-like system) and competition affect the (sub-) market that they are in. He explains that due to the ability of monopoly-holders to become inefficient and ‘bloated’ under no competition means that prices may rise due to inefficiency and be artificially inflated to gain ‘supernormal’ profits. Competition is then discussed as the utopian alternative to a monopoly citing the internet as an example of where competition is almost perfect.  Anybody with and internet connection is able to set a firm be it: B2C (business to customer), B2B (business to business), or B2G (business to government). The markets of ‘e-tailing’ also, very rarely have information failures as people can simply search for what they need. From this Smith leads on to a brief introduction to ‘Game Theory’ and how it can be used to predict (to a fair degree of accuracy) what households, firms, or governments are likely to respond to stimuli. This is particularly useful when assessing ‘flows’ and ‘colours’ of stock markets. To finish this chapter of the book, Smith goes on to discuss both capital investment by firms and the ‘stakeholder model’ that can be used in social cost-benefit analyses. He once again touches on depreciation, opportunity costs, and government investment and how they all are so closely interlinked.

Hey guys,

Just wanted to say that I'm going to start adding more different types of content for those who are perhaps studying Economics, or for those who just enjoy its study- don't worry, though as this won't mean I stop posting about the books I read and enjoy!

Keep an eye out,
K