industrial economics

1. ECO 321: INDUSTRIAL ECONOMICS I
LessonTwo
SOME CONCEPTS IN INDUSTRIAL ECONOMICS
By
A. O. Babasanya Ph.D

2. Introduction
•Admittedly, industrial economics like
any other aspects of economics applies
some important concepts to discuss
and analyze industrial economic issues.
Thus, deal with the definition,
characteristics and quantification of
such concepts.

3. THE FIRM
• A firm could be defined as a business unit or an organization
owned by an entrepreneur singly or jointly; by a few or many
entrepreneurs; engaged in a productive activity of any kind
for the sake of profits in any form or any other well-defined
business objective. Most of such business units owned by
private individuals in the manufacturing trade and services
usually aspire for profits. However, there could be some other
business units such as government companies where profit
motivation would be secondary or missing altogether. In such
cases, services for the attainment of national development
could be the primary objective.

4. THE INDUSTY
•Conventionally, the concept, “industry” refers to a group of
business units (firms) producing homogenous product.
Besides, such firms could also adopt the same technique of
production and use the same raw materials.The restriction
to a single homogeneous product is, however, not met in
practice.

5. THE MARKET
• The market is defined economically as an avenue where closely interrelated
group of sellers and buyers of a commodity interact. The concept is not in any
form an equivalent of the industry since in the latter case the concern is only for
the seller’s side of the market. By including the ‘buyers’ ‘side’, the term
becomes more comprehensive connoting the composition of the buyers and
their geographical location along with the industry. Empirically, heterogeneous
group of goods that are substitute goods could have a market. Also there could
be markets within the market for every group of homogenous goods. Within a
market, some goods are usually treated as uniform. Conceptually, the edge of
the market is commonly defined, by a very low or zero cross elasticity of
demand between the good concerned and every other good. However in
practice it may be difficult to define the precise boundary for a market

6. A market is said to be imperfect if
•There is lack of information on any aspect of the market;
•Entry barrier exist to prevent free entry and exist in the
market
•The available products are not homogenous
•There is lack of large number of producers and buyers in the
market.

7. MARKET STRUCTURE
• Conceptually, the structure of any complete body refers to the pattern
or form or manner in which the constituent parts of that body are
arranged or interrelated in the body frame. In this context, and taking
the market as a complex ‘body’ it would be imperative to examine how
its different constituents (i.e. sellers and buyers) are linked together or
are interrelated within the market frame.

8. MARKET STRUCTURE 2
This can be specified in terms of organizational characteristics, which determine
the following relations:
• relations of sellers in the market frame to each other
• relations of buyers in the market frame to each other
• relations of the sellers to the buyers and
• relations of sellers established in the market to the new potential firms which
might enter the market.

9. MARKET STRUCTURE 3
The four main features are
• The Degree of Seller Concentration: This is the number of size distribution
of firms producing at a particular commodity or types of commodities in
the market.
• The Degree of Buyer Concentration: This show the number and size
distribution of buyers for the commodities in the market.
• The Degree of Product Differentiation: This shows the difference in the
product of different firms in the market.
• The Condition of Entry into The Market: This shows the relative ease with
which new firms can join the category of sellers (i.e. firms) in the market.

10. MARKET STRUCTURE 4
• Already the number of sellers as a crucial variable that determine the
structure of the industry in the theory of the firm is known. For example if
there is only one firm then we get the form of monopoly market, if there are
two, we get duopoly; if few then oligopoly and finally if there are many, then
the expected market would not relate to any of the forgoing forms. However,
the number of producers is expected to significantly influence the market
output and price, which would make them different from one market to
another. However the degree of products differentiation coupled with the
restricted number with such differentiated goods, provide the conditions for
monopolistic competition as another example of the market structure.

11. MARKET STRUCTURE 5
• It is important to note that apart from the aspect of the market structure stated
in the forgoing, there are other noticeable characteristics coexisting side by side
deserving analytical attention. Such sectors relate to the psychological,
technological, geographical and institutional factors prevalent in the market,
which probably condition the behaviour and performance of the firms in some
particular ways/forms. All of the factors with some others unlisted constitute a
set of the economically significant features of a market, which affect the
behaviour of firms.

12. MARKET POWER
• The market power is an economic terminology used too denote the degree of market
control arising out of the various elements of the market structure. It is a relative term,
which gives the firm a degree of discretion in controlling business operations and variable
such as the price, the output, and the nature of products that are on sale. With a high
degree of market power, the firm is expected to be an active entity in the market business.
However, under the market condition of competition the market power becomes
negligible. That is, the degree of competition in the market tends to remove or reduce the
discretionary power by moving for example, price nearer to cost. Under this situation, the
firm becomes a passive entity.

13. MARKET CONDUCT
• Market conduct is defined as the pattern of behaviour that firms follow in adopting
or adjusting to the market situation in which they themselves operate in order to
achieve the well specified/established goal or goals. Given the market conditions
and the goal attainable, the firm is expected to act along or jointly to decide about
the price levels of other products, the types of products and their quantities,
product design and quality standards and advertisement programmes. Also the
firm has the prerogative to devise ways for interactions, cross-adaptation and
coordination among the competing group of business operators in the market. All
these constitute the element of market conduct.

14. MARKET PERFORMANCE
• This shows the outcome of the assessment of the activities undertaken by the firm in pursuit of their
goal .it could be positive or negative, reflecting in high flow profitability, high low rate of growth of
the firm, increase/decrease in the capital turnover, increase/decrease in the employment among
others are some variables on the basis of which one can judge the market performance of the
individual firms depending on their respective goals .Or the society as a whole the performance of
an industry may be judged on the basis of its contribution to the increase in the welfare of the
masses. This is not easily measurable. We may therefore take the stand that if the industry has
generated satisfactory level of output at reasonably low cost one could then say that it has
contributed to the improvement of the social welfare. We may also look at the performance of the
industry through its ability to generate employment in the economy.

15. QUESTIONS
• Distinguish between firm and industry with examples
• Explain the following concepts in Industrial Economics
• Market
• Market Structure
• Market Power
• Market Conduct
• Market Performance