How Returns to Scale Affect the Structure of a Market or Industry - Essay Example

Describe how Returns to Scale affect the Structure of a Market or Industry Returns to scale have important implications to the structure of both the market and industry. They are the guiding principles for long term production. They show what happens to the average costs when the scale of production is expanded (Samuelson & Marks, 2012: 247). Ultimately, increase in returns to scale results in lower prices and higher profits. When developing a new product, for example, usually the overhead costs are quite high.

However, when producing copies of the same product, the company spends very little. Now, if it is able to sell this product in the market, what happens is that customers will increase and will demand more. Hence, high demand will essentially lead to increase in the production. Unlike the overhead costs incurred when producing the brand, the extra copies are only a marginal cost as the company spends less to produce them. Thus, with marginal costs the company is guaranteed higher profits. From another point of view, though the total cost of production will go up if the scale of production is increased, the average costs will go down in the long run.

From this example, it is evidently clear that increasing returns to scale necessarily affects the structure of the industry because of high profits. Returns to scale can further affect the structure of a market if the industry is able to manufacture enough production for the whole market (Samuelson & Marks, 2012: 320-336). Obviously, if a single company is able to satisfy the high demand from customers by producing the amount they need, it creates a hurdle for other interested companies to come into the market.

Additionally, because of its huge customer base, it will spend less money to produce enough output. Thus, other companies will necessarily fail to compete with it because they will need to spend more costs to make production. Consequently, it creates a monopoly in the market. ReferenceSamuelson, W.F., & Marks, S.G. (2012). Managerial Economics. Massachusetts, MA: John Wiley & Sons, Inc. Accessed on 30/09/2014. Web link: https://www.sendspace.com/file/qgpjji