Try try as he might, Steve Jobs and Apple can barely launch their hottest new product, the iPhone, before the Chinese have copied it and put a knockoff on the market as quickly as you can say “can you hear me now?” But what is Apple doing making a cell phone anyway? Isn’t the mobile phone market pretty much dominated by a few big name companies already? How will apple ever survive in a market with such well established firms as Nokia, Samsung, and Motorola?
The answer is through product differentiation. The iPhone is truly an innovative little gadget. More than an MP3 player, more than a cell phone, the iPhone has features that differentiate it from most products available from the established firms in the mobile phone market. Like any firm, Apple advertises its iPod through commercials and other media in order to inform consumers about what makes its product special. What message does the following advertisement send about the iPhone?
The problem with monopolies, as our AP students have learned, is that a monopolistic firm, left to its own accord, will most likely choose to produce at an output level that is much lower and provide their product at a price that is much higher than would result from a purely competitive industry. A monopolist will produce where its price is greater than its marginal cost, indicating an under-allocation of resources towards the product. By restricting output and raising its price, the monopolist is assured maximum profits, but at the cost to society of less overall consumer surplus or welfare.
Unfortunately, in some industries, because of the wide range of output over which economies of scale are experienced, it sometimes makes the most sense for only one firm to participate. Such markets are called “natural monopolies” and some examples are cable television, utilities, natural gas, and other industries that have large economies of scale. (click graph to see full-sized)Continue Reading »
Last week in AP Economics we introduced the concept of Economies of Scale. The graph below was created and added to our Wiki page by student Kevin Chiu to illustrate the concept, as well as two other concepts: constant returns to scale and diseconomies of scale. Notice that the section of a firms long-run average total cost curve over which ATC is decreasing is identified as the period over which the firm is experiencing economies of scale.
The idea is that as firms open new plants during these early stages of production, they increase their efficiency in production, thus experience a decline in their average costs. Click the “read the rest of this entry” link below to learn how the Chinese automotive market is struggling with economies of scale in their attempt to compete with each other and foreign car manufacturers…
Here’s a great slide show and narrative about the manufacturing industry in the industrial city of Shenzen. After viewing the slideshow, discuss some of the questions below.
Discussion Questions:
What does the narrator mean when he says “Shenzhen is more or less an invented city?”
Why does the word “scale” come to the narrator’s mind as he explores Shenzhen? What key concept from our economics class includes the world “scale”? How does the growth of Shenzhen relate to this concept?
What is exported from Shenzhen to the US? What is being sent back to Shenzhen from the US? What does this suggest about the Chinese/US balance of trade? Why do you think this is happening?
Where do Shenzhen’s factory workers come from? Why do you think young women make up such a large percentage of factories’ workforces? Are the wages paid factory workers in Shenzhen “fair” wages? Why or why not?
Is manufacturing in Shenzhen labor intensive or capital intensive? What’s the difference?
What’s the significance of the last line about how Liam Casey, whose office overlooks the headquarters of the Shenzen communist party, has never “met anybody who was in there”. What does this say about communism in China today?
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does the growth of Shenzhen relate to this concept?
