Industrial Economics

By Rajpal  INTRODUCTION in the USSR, the branch of economic science that studies industry as an integrated system of interrelated branches, sectors, and enterprises, or associations. Industrial economics took shape with the advent of large-scale socialist industry, which constitutes its field of inquiry. Industrial economics studies the various manifestations of the objective economic laws of socialism in industry and devises economic management systems and techniques designed to increase efficiency and improve the quality of performance in all the branches and units of industrial production. Industrial economics includes the economics of individual branches (including the coal, oil refining, natural gas, chemical, and food sectors, light industry, power generation, metallurgy, and machine building); each of these subdivisions of economics examines the economic designation of products, material and technical base, and personnel makeup of the particular branch, as well as interbranch relations and branch differences with respect to fixed capital stock, circulating productive capital, makeup of production costs, and types of enterprises (including differences in size, level of specialization, location, and organization of labor and production). The complexity of production activities of modern industrial enterprises has given rise to a separate scientific discipline known as enterprise economics (”the organization, planning, and management of the enterprise”). Enterprise economics explores the problems pertaining to the economic operations of the enterprise, or association, and to the state’s guidance of its activity, and it studies rational methods of combining all elements of the production process toward their optimum utilization. Industrial economics is related to several allied fields of knowledge—namely, national economic planning, statistics, labor economics, economic geography, finance and credit, and pricing—as well as to the technical and mathematical sciences. Research studies of industrial economics are undertaken in the academic institutions, in the scientific institutions of the various branches, in the institutions of higher education throughout the country, and in various subdivisions of the institutes of the Academy of Sciences of the USSR and of the Union republics. Each of the branch research institutes is engaged in research on the economics of a given branch of industry. Various technical institutions of higher education have departments of industrial economics and departments of economics of individual branches of industry; these departments investigate problems related to the economics, planning, organization, and management of industrial production. Research studies are chiefly concerned with economic efficiency of production, the rational use of natural resources as industry’s raw-material base, and the optimization of planning and operational decisions and techniques for improving the management of industrial production and of its branches, associations, and enterprises. The major press organs that publish industrial economics research studies are the journals Voprosy ekonomiki, Planovoe khoziaistvo, Ekonomika i organizatsüa promyshlennogo proiz-vodstva, Ekonomicheskie nauki, and the collection of abstracts Ekonomika promyshlennosti. All the central scientific and technical journals of the various branches of industry have special sections devoted to the industrial economics of the given branch.

Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία (oikonomia, "management of a household, administration") from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".^[1] Political economy was the earlier name for the subject, but economists in the latter 19th century suggested 'economics' as a shorter term for 'economic science' that also avoided a narrow political-interest connotation and as similar in form to 'mathematics', 'ethics', and so forth.^[2]

A focus of the subject is how economic agents behave or interact and how economies work. Consistent with this, a primary textbook distinction is between microeconomics and macroeconomics. Microeconomics examines the behavior of basic elements in the economy, including individual agents (such as households and firms or as buyers and sellers) and markets, and their interactions. Macroeconomics analyzes the entire economy and issues affecting it, including unemployment, inflation, economic growth, and monetary and fiscal policy.

Other broad distinctions include those between positive economics (describing "what is") and normative economics (advocating "what ought to be"); between economic theory and applied economics; between rational and behavioral economics; and between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus").^[3]

Economic analysis may be applied throughout society, as in business, finance, health care, and government, but also to such diverse subjects as crime,^[4] education,^[5] the family, law, politics, religion,^[6] social institutions, war,^[7] and science.^[8] At the turn of the 21st century, the expanding domain of economics in the social sciences has been described as economic imperialism.

Definitions

There are a variety of modern definitions of economics. Some of the differences may reflect evolving views of the subject or different views among economists.^[10] The philosopher Adam Smith (1776) defined what was then called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as:

a branch of the science of a statesman or legislator [with the twofold objectives of providing] a plentiful revenue or subsistence for the people ... [and] to supply the state or commonwealth with a revenue for the publick services.^[11]

J.-B. Say (1803), distinguishing the subject from its public-policy uses, defines it as the science of production, distribution, and consumption of wealth.^[12] On the satirical side, Thomas Carlyle (1849) coined 'the dismal science' as an epithet for classical economics, in this context, commonly linked to the pessimistic analysis of Malthus (1798).^[13] John Stuart Mill (1844) defines the subject in a social context as:

The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.^[14]

Alfred Marshall provides a still widely-cited definition in his textbook Principles of Economics (1890) that extends analysis beyond wealth and from the societal to the microeconomic level:

Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man.^[15]

Lionel Robbins (1932) developed implications of what has been termed "[p]erhaps the most commonly accepted current definition of the subject":^[16]

Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.^[17]

Robbins describes the definition as not classificatory in "pick[ing] out certain kinds of behaviour" but rather analytical in "focus[ing] attention on a particular aspect of behaviour, the form imposed by the influence of scarcity."^[18]

Some subsequent comments criticized the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, however, such comments abated as the economic theory of maximizing behavior and rational-choice modeling expanded the domain of the subject to areas previously treated in other fields.^[19] There are other criticisms as well, such as in scarcity not accounting for the macroeconomics of high unemployment.^[20]

Gary Becker, a contributor to the expansion of economics into new areas, describes the approach he favors as "combin[ing the] assumptions of maximizing behavior, stable preferences, and market equilibrium, used relentlessly and unflinchingly."^[21] One commentary characterizes the remark as making economics an approach rather than a subject matter but with great specificity as to the "choice process and the type of social interaction that [such] analysis involves." The same source reviews a range of definitions included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the texts treat. Among economists more generally, it argues that a particular definition presented may reflect the direction toward which the author believes economics is evolving, or should evolve.

Scope of Economies

Economies of scope are conceptually similar to economies of scale. Whereas 'economies of scale' for a firm primarily refers to reductions in average cost (cost per unit) associated with increasing the scale of production for a single product type, 'economies of scope' refers to lowering average cost for a firm in producing two or more products. The term and concept development are due to Panzar and Willig (1977, 1981).^[1] Here, economies of scope make product diversification efficient if they are based on the common and recurrent use of proprietary know-how or on an indivisible physical asset.^[2] For example as the number of products promoted is increased, more people can be reached per dollar spent. At some point, additional advertising expenditure on new products may start to be less effective (an example of diseconomies of scope). Related examples and distribution of different types of products, product bundling, product lining, and family branding.

If a sales force is selling several products they can often do so more efficiently than if they are selling only one product. The cost of their travel time is distributed over a greater revenue base, so cost efficiency improves. There can also be synergies between products such that offering a complete range of products gives the consumer a more desirable product offering than a single product would. Economies of scope can also operate through distribution efficiencies. It can be more efficient to ship a range of products to any given location than to ship a single type of product to that location.

Further economies of scope occur when there are cost-savings arising from by-products in the production process. An example would be the benefits of heating from energy production having a positive effect on agricultural yields.

A company which sells many product lines, sells the same product in many countries, or sells many product lines in many countries will benefit from reduced risk levels as a result of its economies of scope. If one of its product lines falls out of fashion or one country has an economic slowdown, the company will, most likely, be able to continue trading.

Not all economists agree on the importance of economies of scope. Some argue that it only applies to certain industries, and then only rarely.

Natural monopolies

While in the single-output case, economies of scale are a sufficient condition for the verification of a natural monopoly, in the multi-output case, they are neither necessary nor sufficient. Economies of scope are, however, a necessary condition.

As a matter of simplification, it is generally accepted that, should economies of scale and of scope both apply, as well as sunk costs or other entry barriers, then markets may have monopoly features.

 

Microeconomics

Economists study trade, production and consumption decisions, such as those that occur in a traditional marketplace.

In Virtual Markets, buyer and seller are not present and trade via intermediates and electronic information. Pictured: São Paulo Stock Exchange.

Markets

Microeconomics is the study of economics analysing individual players of a market and the structure of such markets. It deals with, as its irreducible base unit, private, public and domestic players. Microeconomics studies how these players interact with each other through individual markets (assuming that there is a scarcity of tradable units and government regulation. A market might deal with a product (such as apples, aluminium and mobile phones), or with services of a factor of production, (brick laying, book printing, food packaging). Microeconomics theory considers the aggregates (the sum of) of quantity demanded by buyers and quantity supplied by sellers, studying each possible price per unit (i.e. supply and demand). It studies the complex interaction between market players both through buying and selling. Theory holds that markets may reach equilibrium between "quantity demanded" and "quantity supplied" (supply and demand) over time.

Microeconomics also examines various market structures. Perfect competition describes a market structure such that no participants are large enough to have the market power to set the price of a homogeneous product. Another way of putting this is to say a perfectly competitive market exists when every participant is a "price taker", and no participant influences the price of the product it buys or sells. Imperfect competition refers to market structures where the conditions of perfect competition do not exist. Forms of imperfect competition include: monopoly (in which there is only one seller of a good), duopoly (in which there are only two sellers of a good), oligopoly (in which there are few sellers of a good), monopolistic competition (in which there are many sellers producing highly differentiated goods), monopsony (in which there is only one buyer of a good), and oligopsony (in which there are few buyers of a good). Unlike perfect competition, imperfect competition invariably means market power is unequally distributed. Firms under imperfect competition have the potential to be "price makers", which means that, by holding a disproportionately high share of market power, they can influence the prices of their products.

Microeconomics studies individual markets by simplifying the economic system by assuming that activity in the market being analysed does not affect other markets. This method of analysis is known as partial-equilibrium analysis (supply and demand). This method aggregates (the sum of all activity) in only one market. General-equilibrium theory studies various markets and their behaviour. It aggregates (the sum of all activity) across all markets. This method studies both changes in markets and their interactions leading towards equilibrium.^[23]

Production, cost, and efficiency

Main articles: Production theory basics, Opportunity cost, Economic efficiency, and Production-possibility frontier

In microeconomics, production is the conversion of inputs into outputs. It is an economic process that uses inputs to create a commodity for exchange or direct use. Production is a flow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption (food, haircuts, etc.) vs. investment goods (new tractors, buildings, roads, etc.), public goods (national defense, small-pox vaccinations, etc.) or private goods (new computers, bananas, etc.), and "guns" vs. "butter".

Opportunity cost refers to the economic cost of production: the value of the next best opportunity foregone. Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing "the basic relationship between scarcity and choice.".^[24] The opportunity cost of an activity is an element in ensuring that scarce resources are used efficiently, such that the cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgone, leisure, or anything else that provides the alternative benefit (utility).^[25]

Inputs used in the production process include such primary factors of production as labour services, capital (durable produced goods used in production, such as an existing factory), and land (including natural resources). Other inputs may include intermediate goods used in production of final goods, such as the steel in a new car.

Economic efficiency describes how well a system generates desired output with a given set of inputs and available technology. Efficiency is improved if more output is generated without changing inputs, or in other words, the amount of "waste" is reduced. A widely-accepted general standard is Pareto efficiency, which is reached when no further change can make someone better off without making someone else worse off.

An example PPF with illustrative points marked

The production-possibility frontier (PPF) is an expository figure for representing scarcity, cost, and efficiency. In the simplest case an economy can produce just two goods (say "guns" and "butter"). The PPF is a table or graph (as at the right) showing the different quantity combinations of the two goods producible with a given technology and total factor inputs, which limit feasible total output. Each point on the curve shows potential total output for the economy, which is the maximum feasible output of one good, given a feasible output quantity of the other good.

Scarcity is represented in the figure by people being willing but unable in the aggregate to consume beyond the PPF (such as at X) and by the negative slope of the curve.^[26] If production of one good increases along the curve, production of the other good decreases, an inverse relationship. This is because increasing output of one good requires transferring inputs to it from production of the other good, decreasing the latter. The slope of the curve at a point on it gives the trade-off between the two goods. It measures what an additional unit of one good costs in units forgone of the other good, an example of a real opportunity cost. Thus, if one more Gun costs 100 units of butter, the opportunity cost of one Gun is 100 Butter. Along the PPF, scarcity implies that choosing more of one good in the aggregate entails doing with less of the other good. Still, in a market economy, movement along the curve may indicate that the choice of the increased output is anticipated to be worth the cost to the agents.

By construction, each point on the curve shows productive efficiency in maximizing output for given total inputs. A point inside the curve (as at A), is feasible but represents production inefficiency (wasteful use of inputs), in that output of one or both goods could increase by moving in a northeast direction to a point on the curve. Examples cited of such inefficiency include high unemployment during a business-cycle recession or economic organization of a country that discourages full use of resources. Being on the curve might still not fully satisfy allocative efficiency (also called Pareto efficiency) if it does not produce a mix of goods that consumers prefer over other points.

Much applied economics in public policy is concerned with determining how the efficiency of an economy can be improved. Recognizing the reality of scarcity and then figuring out how to organize society for the most efficient use of resources has been described as the "essence of economics", where the subject "makes its unique contribution."