The paper "Diminishing Marginal Returns and Decreasing Economies of Scale, the Oligopoly Market Structure " is an outstanding example of a micro and macroeconomic assignment. Diminishing marginal return is a phase when the business increases one input of production by keeping the others inputs the same the marginal product decreases. On the other hand, decreasing economies of scale state that when the business multiplies their factor of production by using double the same inputs output increases but less than double to input. Apart from this basic difference, another difference that exists is that in the case of diminishing marginal return one factor on input is changed whereas in the case of decreasing economies of scale all the factors of production vary (Farmer, 2009).
This has been highlighted through the diagram and example provided below An example will further help to understand the differences that exist. Suppose a firm uses 1 labour and 1 capital and is able to produce around 50 units. Now multiplying the labour to 2 but keeping the capital constant it is seen that the output reached 90.
This shows that the output has increased but the marginal product has decreased. In the case of decreasing economies of scale both the factor of production i. e., labour and capital are doubled to 2. This shows that the total output increases to 95 but hasn’ t grown by 50 as both the capital and labour has been multiplied. Thus, the difference between diminishing economies of scale and diminishing marginal returns is clearly visible resulting in different outputs due to change in inputs. 2. The oligopoly market structure provides an opportunity for the few players present in the market to be able to earn abnormal profits.
This is the situation which is completely evident in the case of the jeans industry where there are two players and they don’ t look towards competing with each other directly. This has made both the player in the jeans industry to decide the price they are willing to charge to their individual customers and while doing so it has been ensured that both of them don’ t indulge in a price war which will result in a reduction of prices and make the consumer gain and they will lose their share of profit (Litman, 2005).
Borland, J. (2001). Micro Economic Refors in Australia: An Introduction. Department of Economics, University of Melbourne. Retrieved on September 12, 2012 from http://www.economics.unimelb.edu.au/staff/jib/documents/micref.pdf
Bernstein, W.J. (2004). The Birth of Plenty: How the Prosperity of the Modern World was Created. McGraw-Hill
Farmer, R. E. A. (2009) The Macroeconomics of Self-Fulfilling Prophecies, 2nd edn, Cambridge, MA:MIT Press.
Litman, T. (2005). Transportation elasticities: How prices and other factors affect travel behavior. Victoria, Canada: Victoria Transport Policy Institute.
Louviere, J. (2008). Analyzing decision making: Metric conjoint analysis. Newbury Park, CA: SAGE Publications