Question

im trying to make sense of this quote

Fixed costs have several implications. They contribute to imperfectly competitive market structures and therefore to non-competitive pricing. But they also restrict the number and variety of products that it is feasible or desirable to supply. Fixed costs, therefore, force an economy to choose from the large set of all conceivable products. The principal criterion for product choice in a market system is profitability. Products that survive are those that are capable of generating revenues sufficient to cover the fixed and variable costs.

Answer 1

Explanation:

Lets first understand the perfectly competitive market:

We know that at the equilibrium, P = MC = AC (ATC = AVC+AFC). But for an equilibrium quantity we use, P = MC. We do not consider Fixed cost. Now, Since firms are the price taker, so they can not increase their price arbitrarily. So in that case, if fixed cost is high then the firm will always incur a loss in the long-run as well as in the short-run. Profitability of firm depends upon the ATC.

Hence leads to imperfectly competitive market structure. An example is "Natual Monopoly". IN this condition fixed costs are large enough that only one firm can operate in that market. If other firms try to enter the market then both firms incur the loss. Like water supply market in your area.