Question

contrast Alfred Marshall's distinctions between: (a) supplementary and prime costs; (b) immediate present, short run, and long run; (c) increasing and decreasing cost industries; and (d) internal and external economies

Answer 1

a)Supplementary and Prime cost-

Supplementary cost is the cost incurred by a firm as a whole which includes componenets such as administration cost,interest,taxes,maintenance, depreciation and cost of obsolete goods.They are unavoidable cost which must be incurred when a firm is running.

Whereas, Prime cost the cost which is spent on raw materials and labor cost such as salary,wages and various benefits paid to employees and these cost can be controlled to a certain extent as firm is able to change fator of production.

b) Immediate present,short-run and long-run

Immediate present is a time period which is very short for firms to change any process or conditions in a industry to change output so supply remains fixed.

Short-run refers to a time period in which supply can be increased by scale of operation such as production process and labor.fixed capital does not change and the firm can only make changes in the amount of labor and other inputs.In short-run, fixed costs are stated as sunk costs because once they are paid,they cannot be recovered.

Long-run refers to the period where the firm can make decisions regarding the fixed costs and the firms can take decisionson not only the labor but also what production process and scale of operation are being used which means that all the factors are variable and can be changed. In long-run, sunk costs can be avoided by not employing fixed costs atall.

c) Increasing and decreasing cost industries-

Increasing cost industries states that in some industries such as aviation, in the long-run, an increase in scale of production will increase the costs because all the producers are using the same input which increases the demand but the supply remains is less and low availability of inputs make them costly.

Decreasing cost industries is exactly opposit and it states that with increase in scale of operation,the cost of some industries decreases as there exists a large number of sellers which increases the supply and which will result in decrease in prices of inputs and cost decreases.

d) Internal and External economies-

Internal economies happens due to changes in a firm's internal environment and where a firm reduces it's administrative costs, uses large scale capital-intensive techniques in the production process which results in a lower cost per unit of input which offers competitve advantage to firm against it's competitors.

External Economies implies that as the size of an industry grows larger,the cost of doing business with the industry falls.An industry comprises of various firms and they all experience the benefits collectively as they get more clustured. Example a firm setup a unit at a particular place and as the area develops and starts generating huge profit,other firms will move to that area to setup their own unit and related businesses will get together. Example-Hollywood