Economics 1: Micro and Macro Theory and Application Outcome 1

Introduction

The Group of Eight always have huge global market share of soft drinks in resent year, and among the group, a few leading corporations, such as Coca-cola and PEPSL occupied major of soft drink market in the world. It can be judged as oligopoly market.

The aim of this report is analyze the elements are able to effect corporation costs and the characteristic and structure of soft drink market, with relevant graphs.

The development of report

The characteristic of costs and their influences

Costs in short run can be classified at fixed costs and variable costs. Fixed costs do not vary with the level of output. Opposite to fixed costs, variable costs do change with the level of output. The total cost includes both fixed costs and variable costs. That means its calculation formula can be reached as:

Total cost = Fixed cost + Variable cost

Average Cost is obtained by dividing Total Cost by the Number of Units Produced. If the number of units is known , average cost can be calculated as:

Average Cost = (Total Cost)/(Number of Unit)

Marginal Cost is the addition to Total Cost resulting from increasing total output by one more unit. Its calculation formula is:

Marginal Cost = Δ Total Cost / Δ Output

Here is a line graph about total cost, average cost and marginal cost.

Cost

O Quantity

As can be seen that marginal cost is a bending curve in the diagram, it decreases at first and increases afterwards. It is attributed to diminishing marginal cost. When a productive factor in a product increase but other factors remain stable, it will make output increase, and can better neutralize the cost of product. Referring to marginal cost’s formula, changes in both cost and output will cause the figure of marginal cost decrease. But after exceeding a certain value, every time of invests of this productive factor will cut down the growth quantity of output. And the curve will tend to be flatness. After that, increasing productive factor will make cost grow-up, and in other hand, it have no more contribution in output. So the figure of marginal cost will rise again.

Total cost depicted a fluctuate line with both rising-up stages at the left and the right. Since increasing productive factor started to counteract production cost, it will tend to be growing slowly in the middle of diagram. Then it will rise sharply again when marginal cost start to increase.

Average cost’s curve is another bending curve smoother than that of marginal cost. It slowly reach its bottom when quantity of product increasing but total cost remaining slight change. Then it rises up with total cost.

The analysis of oligopoly market features and its price behaviors

Oligopoly is a type of market structure characterized by an industry that is composed of only a few large firms such as oil companies and firms in detergents industries .

To identify the oligopoly, a few following characteristics must be concerned: There are few sellers and provide similar or homogeneous product in oligopoly market. The oligopolies have their ability to set price. Each of sellers have perfect knowledge to others, and for maximizing profit, major of them will choose to be interdependent. Because of some factors like technology or policy, it is difficult for new seller to enter this kind of market.

Price

P G

O Quantity demand

Q

Line graph above shows the relationship between price and quantity demand in oligopoly. G is the current stable point with price P and demand quantity Q. There is a special phenomenon existing that every seller is willing to follow price reducing rather than price increasing. When a seller chooses to increase the price, others still hold the price advantage, he will lost large quantity demand more than his expectation. If this seller try to reduce price, the growth of quantity demand will not have dramatically