Page 136 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 9: Cost Concepts

create centres of technical and managerial excellence. These involve social benefi ts, and Notes
only a benighted, Western-trained economist to the right Genghis Khan could use private

profit calculus to evaluate the contribution of our PSEs. Fair enough. Let us not look at

profitability, that base capitalist concept. Instead, let us look at costs, which even Enver
Hoxha would have desired to minimise.
Fact Number 3

PSEs as a whole are worse off even in terms of cost per rupee of sales. Chart C shows that

PSEs suffer from an almost eight-point disadvantage in terms of fixed costs as a percentage
of sales; the non-petroleum PSEs are worse off to the tune of almost 20 points.
10

8

6

4

2

0
91-92 92-93 93-94 94-95
PSE PSE without petroleum Private Sector
Chart B: Net Profit as % of Sales

45
40
35
30

25
20
15
10

5
0
91-92 92-93 93-94 94-95
PSE PSE without petroleum Private Sector
Chart C: Fixed Cost as % of Sales
Thanks to higher fixed costs (over-staffing, greater interest costs, etc.), PSEs fare poorly in

average total costs. They are at least 5 points off compared to the private sector companies
and over 9 points off if one excludes the petroleum monopolies. How long can most of
these fi rms survive competition in such a state? Isn’t it a crime not to take a decision one
way or the other? You decide.
Question

What is the reason of U-shaped average cost curve in this case?
Source: Business India, 97

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