COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS
3rd YEAR ECONOMICS STUDENTS
YEAR 2015 E.C
COURSE TITLE: Economics of Endustry

COURSE CODE: Econ3012

GRUOP MEMBERS

NAME ID NO

1. MOHAMMED JEMAL.........................................................................SSR/0696/13
2. DESTAW DENEKEW..........................................................................SSR/0311/13
3. MENUR MOHAMED............................................................................SSR/0646/13
4. YASMIN ENDRIS................................................................................SSR/0990/13
5. SEBLE WENDEMAGEGN..................................................................SSR/0810/13
6. MEKBIB MESFIN.................................................................................SSAD/215/13
7. CHILOT MULACHEW............................................................................SSAD/088/13
8. YECHALE KASSA.................................................................................SSAD/352/13
9. WORKU DERBEW ................................................................................SSAD/346/13

submitted to Mr. Bisrat G.

Submission date:19/04/2015 E.C

Table of contents

1
 page
Introduction……………………………………………………………………...................…….3
1.The concept of economic efficiency, technical efficiency and
allocative (price) efficiency of a firm………………………………………........….4
2.Determinants of technical efficiency of a firm……………………….......……5
3.The effect of government regulation on allocative (price)
efficiency of a firm…………………………………………………………........….......…….6
4.The effect of concentration………………………………………………......….......…….6
i. The effect of concentration on profits of the firm………….…........…..6
ii. The effect of concentration on technical efficiency of the firm..7
iii. The effect of concentration on growth of the firm…………….......…..7
iv. The effect of concentration on technological change………...…....…...8
5.The role of industries in economic development…………………….............……..8
Summary……………………………………………………………….........................
…...11
References……………………………………………………………...................…....
…..12

Introduction

2
1.Explain the concept of economic efficiency, technical efficiency and
allocative or price efficiency of a firm?
Efficiency can be categorized into technical, allocative, or the combination of the two
(i.e. total economic efficiency) based on the scope of efficiency targeted.
 The term economic efficiency refers to the use of resources to maximize the
production of goods and services. In absolute terms, the situation can be called
economically efficient if: (1) no one can be made better-off without making
someone else worse-off, (2) no additional output can be obtained
 without increasing the amount of input, and (3) production proceeds at the lowest
possible perunit cost. Economic efficiency is a measure of how well a market or
the firms within it are performing. Economic efficiency is when all goods and
factors of production in an economy are distributed or allocated to their most
valuable uses and waste is eliminated or minimized. Economic efficiency is
when every scarce resource in an economy is used and distributed among

3
 producers and consumers in a way that produces the most economic output and
benefit to consumers. Economic efficiency can involve efficient production
decisions within firms and industries, efficient consumption decisions by
individual consumers, and efficient distribution of consumer and producer goods
across individual consumers and firms. Economic efficiency implies an economic
state in which every resource is optimally allocated to serve each individual or
entity in the best way while minimizing waste and inefficiency. When an
economy is economically efficient, any changes made to assist one entity would
harm another. In terms of production, goods are produced at their lowest possible
cost, as are the variable inputs of production.
 Technical efficiency is the ability of a firm to produce as much output as possible
with a specified level of inputs, given the existing technology. It can also be a
situation wherein it is impossible, with current technical knowledge, to increase
output from given inputs or produce a given output using less than one input
without using more of another input. Technical efficiency means producing
maximum output with given inputs, or equivalently, using minimum inputs to
produce a given output . Production function for a fully efficient firm and
analyzed technical efficiency for a production firm as the ratio of the output of
any given firm to that of a fully efficient firm. Technical efficiency reflects firm-
specific technical knowledge and effort, the will, skills, and determination of
employees and management, and the effects of work stoppages, managerial skills,
material bottlenecks, worker efforts and other disruptions to production.
 Allocative efficiency represents an optimal distribution of goods and services to
consumers in an economy and an optimal goods and services to consumers in an
economic and an optimal distribution of financial capital to firms or projects
among investors. Under allocative efficiency, all goods, services, and capital are
allotted and distributed to their very best use under allocative efficiency.
Allocative efficiency deals with the minimizing of the cost of production with a
proper combination of inputs for a given level of output and a set of input prices,
assuming that the entity examined is working at full technical efficiency.
Allocational efficiency, also known as allocative efficiency, is a characteristic of
an efficient market where capitalist a characteristic of an efficient market where
capital is assigned in a way that is most beneficial to the parties involved.
2.Mention and discuss at least two potential determinants of technical
efficiency of a firm?
A various determinants of technical efficiency, including firm-specific characteristics
such as age, size, labor-capital mix and foreign ownership status (i.e. whether or not the
firm is owned by a foreign entity). In what follows, we describe the expected effect of
each of these variables on a firm’s technical efficiency

4
 A. Firm size: There is a positive relationship between firm size and firm efficiency.
Large firms are likely to be more efficient because of greater market power, better
access to important resources and economies of scale effects. However, small
firms can be efficient since they are more exposed to competition than larger firms
and have a strong incentive to address their own weaknesses in order to survive. It
is also possible that, for some firms, an increase in size may lead to temporary
coordination problems within the firm, resulting in lower efficiency. Therefore, the
relationship between firm size and firm efficiency is not necessarily
straightforward.
B. Firm age: The relationship between firm age and firm efficiency are mixed,that
the relationship is positive, since firms become more efficient as their stock of
experience grows and they identify and reject previously used inefficient
production methods. However, the possibility that older firms may be less efficient
if they fail to upgrade to new production technology and adapt to changing market
conditions. The link between age and efficiency may depend on the nature of the
industry. For example, a positive relationship between efficiency and age of firms
in the textile sector, but fail to identify any effect of firm age on efficiency in the
food, wood, and metal sectors.
C. Labor-capital mix: Developing countries may have a comparative advantage in
labor intensive products due to the availability of labor and the relative scarcity of
available capital and infrastructure. Consequently, firms using a high labor-capital
mix (i.e. a higher labor-capital ratio) are likely to be more efficient. Consequently,
in the comparatively volatile economies of developing countries, a firm with a
high labor-capital mix is more likely to be operating close to its efficient level.
D. Foreign ownership: Foreign owners can help improve the efficiency of domestic
firms by giving them access to foreign technology, management talent, and an
established distribution network. On the other hand, foreign ownership may also
be associated with lower efficiency due to co-ordination problems and high cost of
learning about a different market. We use an indicator variable to represent the
foreign ownership of a domestic firm. The indicator variable takes the value of 1 if
the firm is owned by a foreign entity and takes the value of 0 otherwise.
3.Discuss the effect of government regulation on allocative efficiency of a
firm?
 The effects of regulations, input subsidies, their interactions and technical efficiency
on cost efficiency and shows how a firm's cost efficiency relates to society's cost
efficiency. Additionally, it finds that the incentive regulation to reduces capital-
labor allocative distortion, the federal labor protection regulation increases
nonlabor-labor allocative distortion and cost inefficiency, the incentive regulation
increases cost efficiency, and the bus useful-life regulation increases cost

5
 inefficiency through increasing technical inefficiency. Together, the capital-labor
allocative distortion from the subsidies and reinforce the nonlabor-labor allocative
distortion from subsidies.
4.Discuss the effect of concentration on the following indicators of firm
market performance?
I. The effect of concentration on profits the firm
 Concentration would have adverse effects if it bred market power—the ability to
charge prices in excess of costs—thereby increasing industry profits at consumers’
expense. In theory, industrial concentration can facilitate the exercise of market
power if the members of the industry agree to cooperate rather than compete, or if
the industry’s dominant firm takes the lead in setting prices that rivals follow. And,
indeed, the evidence generated by hundreds of econometric studies suggests that
concentrated industries are more the evidence generated by hundreds of
econometric studies suggests that concentrated industries are more profitable than
unconcentrated ones. But that evidence begs the question. It does not tell us
whether profits are higher in concentrated industries because of market power
effects or because the firms in those industries use resources more efficiently (i.e.,
have lower costs.
 We test two potential hypotheses regarding the effects of major customer
concentration on firm profitability. Under the collaboration hypothesis, customer
power facilitates collaboration, and both the supplier firm and its major customers
obtain benefits. Under the competition hypothesis, customer power results in rent
extraction, and the major customers benefit at the expense of the supplier firm. We
document that major customer concentration is negatively associated with the
supplier firm’s profitability but positively associated with the major customers’
profitability. We demonstrate that these effects weaken as the supplier firm’s own
power grows over its relationship with major customers, supporting the
competition hypothesis. We carefully reconcile our results with prior studies’
findings that focus only on the supplier firm’s profitability and identify their
research design and interpretation problems. We obtain similar inferences in a
setting of major customers’ horizontal mergers and when we use an alternative
measure of major customer power.
II. The effect of concentration on technical efficiency of the firm?
 Technical efficiency is the ability of an enterprise to produce the maximum
output using a set of input or minimizing the use of input in producing a
certain level of output.
III. The effect of concentration on growth of the firm?
 Firms grow in order to achieve their objectives including increasing sales,
maximizing profits or increasing market share. There are two different streams
of thoughts to explain the causal relationship between the two variables.
According to one view, a firm with market power, as a consequence of

6
 concentration, may prefer to maintain its high rate of profit by restricting the
output and charging high price. If it grows, it has to sacrifice some profit
margin, and lower price which may not be in its interest. Moreover, there will
be all kinds of restrictions imposed by the government to stop further growth of
such firm. Thus, we expect that higher the monopoly power of the firm lesser
may be its growth. The few firms in the concentrated industry may be dominant
enough to restrict the growth of the other firms and to stop the entry of new
ones because of the various barriers to entry at their disposal. There is, thus,
very little prospective for the growth of the firms in a concentrated industry and
so for the overall growth of the industry itself. The second view about the
concentration and growth of the firm and hence of the market, is a positive one.
In order to maximize the long-term profit, firms may like to grow overtime even
under market concentration. They may prefer to create excess capacity to meet
the future growing demand and to discourage new entry in the market. They
may have some short-term sacrifice of profit in order to stimulate long-term
benefits.
IV. The effect of concentration on technological change?
 A technological change is an increase in the efficiency of a product or process
that results in an increase in output, without an increase in input. A few firms
who enjoy monopoly power in a concentrated industry will be large enough.
They will be having stability ,financial resources and ability to initiate the
processes and gain the benefits from them. There is no conclusive empirical
evidence to prove such proposition. It may not be the concentration but the
other attributes of market structure like size of firm, product differentiation
possibilities etc., which may be having collinearity with concentration and thus
causing a spurious positive correlation between concentration and
technological change.
5.Write the role of industries in economic development?
1. Modernisation of Industry:
 Industrial development is necessary for modernisation of agriculture. In
developing countries agriculture is traditional and backward. The cost of
production is high and productivity is low. We need tractors, threshers, pump
sets and harvesters to modernise agriculture. To increase productivity, we need
chemical fertilizers, pesticides and we decides etc. These are all industrial
products. Without industrial development, these goods cannot be produced.
Agricultural products like jute, cotton, sugarcane etc. are raw materials. To
prepare finished products like flex, textiles and sugar etc. we need
industrialisation. So industrial development is necessary for modernisation of
agriculture.
2. Development of Science and Technology:
 Industrial development encourages the development of science and technology.
The industrial enterprises conduct research and develop new products. Ethanol
in the form of biofuel is an example of industrial development. Industry

7
 conducts research on its wastes and develops by products like biodiesel from
Jatropha seeds. Due to industrialisation, we have made progress in atomic
science, satellite communication and missiles etc.
3. Capital Formation:
 Acute deficiency of capital is the main problem of economy. In agricultural
sector, the surplus is small. Its mobilisation is also very difficult. In large scale
industries, the surplus is very high. By using external and internal economies,
industry can get higher profit. These profits can be reinvested for expansion
and development. So industrialisation helps in capital formation.
4. Industrialisation and Urbanisation:
 Urbanisation succeeds industrialisation. Industrialisation in a particular
region brings growth of transport and communication. Schools, colleges,
technical institutions, banking and health facilities are established near
industrial base. Many ancillary units have been established after setting up of
big industry.
5. Self-reliance in Defence Production:
 To achieve self-reliance in defence production, industrialisation is necessary.
During war and emergency dependence on foreign countries for war weapons
may prove fatal. Self-reliance in capital goods and industrial infra-structure is
also necessary. Atomic explosion at Pokhran (Rajasthan) and Agni Missile are
examples of industrial growth.
6. Importance in International Trade:
 Industrialisation plays an important role in the promotion of trade. The
advanced nations gain in trade than countries who are industrially backward.
The underdeveloped countries export primary products and import industrial
products. Agricultural products command lower prices and their demand is
generally elastic. While industrial products command higher values & their
demand is inelastic. This causes trade gap. To meet the deficit in balance of
payments we have to produce import substitute products or go for export
promotion through industrial development.
7. Use of Natural Resources:
 Due to lack of capital and technology, these resources have not been tapped.
Resources should be properly utilized to transform them into finished
industrial products. Hence industrialisation plays important role for proper
utilisation of resources.
8. Alleviation of Poverty and Unemployment:
 Poverty and unemployment can be eradicated quickly through rapid
industrialisation. It has occurred in industrially advanced countries like Japan.
The slow growth of industrial sector is responsible for widespread poverty and
mass unemployment. So with fast growth of industrial sector, surplus labour
from villages can be put into use in industry.
9. Main Sector of Economic Development:
 Industry is viewed as leading sector to economic development. We can have
economies of scale by applying advanced technology and division of labour and

8
 scientific management. So production and employment will increase rapidly.
This will bring economic growth and capital formation.
10. Fast Growth of National and Per Capita Income:
 Industrial development helps in the rapid growth of national and per capita
income. The history of economic development of advanced countries shows
that there is a close relation between the level of industrial development and
the level of national and per capita income. For instance, the share of
industrial sector to national income and per capita income.
11. Sign of Higher Standard of Living and Social Change:
 A country cannot produce goods and services of high quality in order to attain
decent living standard without the progress of industrial sector.

Summary
This assignment deal with the efficiency of a firm, the effect of government
regulation,the effect of concentration and the role of industries in economic
development. The efficiency of firm is a powerful means of evaluating performance of
firms, and the performance of markets and whole economics. The government
regulation has been designed to promote business entry and expansion reduce fixed
costs, increase access to efficient technology and reduce demand side constraints in
emerging markets. Overall this policies are designed to achieve the dual goal of
protecting society. While keeping compliance costs low.

The effect of concentration on market performance, it affects the profits in the way of
market conduct activity and it affects all of the others. The economic development of any

9
country is decided mainly by the industrial development of that country. Industrial role
are the main feature of modern civilization and they provide as the necessary materials
and employment opportunities.

References
 Alvarez, R., and Crespi, G. (2003) “Determinants of Technical Efficiency in Small
Firms,” Small Business Economics, 20, 233-244.
 Badunenko, O. and Stephan, A. (2004) “The Potential Determinants of German
Firms’ Technical Efficiency: An Application Using Industry Level Data,” mimeo,
Department of Economics, European University Viadrina.
 Oczkowski, E., and Sharma, K. (2005) “Determinants of Efficiency in Least
Developed Countries: Further Evidence from Nepalese Manufacturing Firms,”
Journal of Development Studies, 41(4), 617 – 630.
 Bekele, T., & Belay, K. (2007). Technical efficiency of the Ethiopia grain mill
products manufacturing industry. Journal of Rural Development, 29(6), 45–65.
 Lakner, S., Brenes-Muñoz, T., & Brümmer, B. (2017). Technical efficiency in
Chilean agribusiness industry: A metafrontier approach. Agribusiness, 33(3),
302–323.
 Lee, J. D., & Heshmati, A. (2009). Introduction productivity, efficiency, and
economic growth in the Asia-Pacific region. In J. D. Lee & A. Heshmati (Eds.),
Productivity, efficiency, and economic growth in the Asia-Pacific region.
Contributions to economics. Physica-Verlag HD. 1.

10