Importance of the Concept of an Industry in Economics

The concept of an industry is very important for economic analysis. It is also important to the businessman, government, to those involved in the collection and processing in the collection and processing of economic data and to all research investigators.

In economics analysis the concept of an industry is very important in the study of competition. Firstly, it reduces the complex interrelationships of all firms of an economy to manageable dimensions. In a broad sense each firm is competing with any other firm in the economy. This might lead one to think that a general equilibrium approach in which the behavior of each firm would be depicted by an equation is more appropriate for the study of the economic reality. The general equilibrium approach and its current applications (input-output analysis and aggregate economic models) are designed to deal with a different range of problems then the partial equilibrium approach. The aggregate econometric models (and the input-output models) are relevant for the study of the prediction of aggregate magnitudes such as total output of any economy, total employment, consumption, investment, etc. The study of the behavior of firm makes it necessary to demarcate areas of close interaction of firms in order to gain some insight into their decision-making process. The concept of an industry has been developed to include the firms which are some form of close relationship with one another.

Secondly, the concept of industrial economics is the study of firms, industries, organizations and markets. It look at all sizes of firms from small shops to multinational organizations such as utility shops or Ali Express (online seller). It includes all types of production industries, such as electric generation plant, car production, restu, online business websites .etc. It has both “micro” aspect and “macro” aspects.

When analyzing decision making at the levels of the individual firm and industry, Industrial Economics helps us to understand the following such issues:-

• Achieving industrial development.
•  Information related to the natural resources, industrial climate, supplies of factors of production etc.
• Industrial efficiency – determined by production function
• Diversification.
• Industrial Finance.
• Industrial location.
• The determinants of profitability (govt. Policies, advertisement, size of a firm, market concentration etc.)
• Organizational form and its motivates.
• Theory of demand – consumer behavior.
• Theory of production – production behavior.
• Cost analysis – relation b/w cost and quantity of output.
• Profit analysis – most common objective
• Analyzing of pricing theory – different market condition, price discrimination.

Industrial economics also gives insight into how firms organize their activities, as well as considering their motivation. There is also an international dimension-firms have the option to source inputs overseas. As such while industrial economics more frequently uses skills and knowledge from micro course, macroeconomics concepts are sometimes employed.

One of the key issues in industrial economics is assessing whether a market is competitive. Competitive markets are normally good for consumers so most industrial economics courses include analysis of how to measure the extent of competition in markets.

Industrial Economics uses theoretical models to understand firm and regulatory decision making, and so we should expect to use diagrams and maybe some basic mathematical models, including game theory. In addition, researchers often develop empirical statistical models to identify relationships between variables of interest. Instance: to understand the relationship between product price, advertising, and profits.

Industrial Economists are also highly employable. There is an entire industry of consultancies and government agencies (such as the Office of Fair Trading (OFT) and the Competition Commission (CC)) concerned with competition policy. There is an equally large set of consultancies and regulators which are concerned with the economics of regulation.

In economics, industrial organization or industrial economy is a field that builds on the theory of the firm by examining the structure of firms and markets. Industrial organization adds real-world complications to the perfectly competitive model, complications such as transaction costs, limited information, and barriers to entry of new firms that may be associated with imperfect competition. It analyzes determinants of firm and market organization and behavior as between competition and monopoly, including from government actions. There are different approaches to the subject. One approach is descriptive in providing an overview of industrial organization, such as measures of competition and the size-concentration of firms in an industry. A second approach uses microeconomic models to explain internal firm organization and market strategy, which includes internal research and development along with issues of internal reorganization and renewal. A third aspect is oriented to public policy as to economic regulation, antitrust law, and, more generally, the economic governance of law in defining property rights, enforcing contracts, and providing organizational infrastructure.  

The extensive use of game theory in industrial economics has led to the export of this tool to other branches of microeconomics, such as economic sand corporate finance. Industrial organization has also had significant practical impacts on antitrust law and competition policy.