Question 4

a) Define Industrial Economics.

Industrial economics can be defined as the application of micro-economic theories in the

study of firms, markets, and industries in other to design, explain, and evaluate public
policies towards business. ……………………………………..2mks
OR:
Industrial Economics is the study of the operation and performance of imperfectly competitive
markets and the behavior of firms in these markets. It is the field of economics concerned with
markets and firms where the applicability and explanatory power of the theory of perfect
competition is questionable because for some reason there is insufficient competition.

b) State four areas in which Industrial Economics differs from Microeconomic Theory.
Any four of the following:
1. Microeconomics is a formal, deductive and abstract discipline. Industrial economics on
the other hand is less formal, more inductive in nature.
2. Microeconomics by and large assumes profit maximization as the goal of the firm and
tells us to maximize this goal subject to given constraints. It is passive in approach.
Industrial economics does not believe in the single goal of profit maximization. It searches
the goals of the firm from the revealed facts. It concentrates on the constraints which
impede the achievement of the goals and tries to remove them. It is an active discipline in
this sense.
3. Microeconomics, being abstract, does not go into operational details of production,
distribution and other aspect of the firms and industries. Industrial economics does go into
the depth of such details.
4. Further, the conclusion derived from the microeconomics may not be testable
empirically and therefore we may not assess their predictive efficiency. Industrial
economics is free from such limitation because of its emphasis on empiricism.
5. Public policy implications are taken care of in industrial economics but microeconomics
may shun them if necessary. It is true that the theory of the firm (i.e. microeconomics)
provides the main theoretical basis for the study of industrial economics, but several
important influences outside of microeconomics have given a totally different character to
industrial economics. In the light of such influences the conventional theory of the firm is
bound to be revised as is done in industrial economics.
c) Allocative efficiency requires firms to sell at a price which equals marginal cost. Since
the monopolist firm sells at a price higher than marginal cost, government intervention is
required so as to bring the monopolist price as close as possible to marginal cost, to protect
consumers from exorbitant price.
Similarly, productive efficiency requires that firms produce at the minimum point
of their long run AC curves to get maximum output at minimum costs. Since the
monopolist produces on the downward sloping side of the LRAC curve, maximum
output is not produced as the monopolist restricts output to create artificial scarcity
in order to keep the price higher than marginal cost.