ECO550 Week 4 Discussion 1 and 2
"Production Economics" Please respond to the following:
From the scenario for Katrina’s Candies, determine the relevant costs for the expansion decision, and distinguish between the short run and the long run costs. Recommend the key decision-making criteria that Katrina’s Candies should use for expansion decisions in the short run and in the long run. Provide rationale for your response.
Given that Katrina’s candies is under the process of deciding for expansion and for that it is necessary that the company should do its cost analysis. The costs that the company must consider at this stage include explicit costs of production of candies. Explicit costs are costs in the form of employee wages, benefits given to them and performance bonuses that are all paid in cash (Grant, 2004). Hence, explicit costs involve outlay of cash by the company. It’s not that the company will not have to pay any implicit cost which basically is the cost associated with hiring of more workers when they cannot positively affect the production process. However, the company will be incurring more explicit costs then implicit costs.
Other costs that the company must consider before expanding include fixed and variable costs that make up the total cost of production for a company. Fixed costs are costs that cannot be avoided by the company. Even if the company stops production, it will still be incurring costs like rent of the place or the electricity bill of the factory which will be incurred no matter what happens. Such costs cannot be eliminated but can be reduced by means of increase in production. With an increase in production, the fixed cost gets divided on per unit produced. Variable costs on the other hand can be increased or decreased accordingly.
The company must also take into consideration short run and long run costs of expanding and realize that in the long run, expansion will be beneficial for the company or not. An important point here is that the company must not integrate the cost of lost opportunity known as opportunity cost since it involves no cash inflow or outflow and is just conceptual comparison. It is necessary that the company should eliminate opportunity cost from its profit formula to make sure it is not adding additional entries in it.
An important concept in the estimation of cost is the average cost of production. This enables the company to judge the cost it will incur per unit if it expands and will enable to company to decide accordingly. It will also enable the company to make sure it is producing as much units as would decrease the average cost of production. Another important thing is the determination of marginal returns and the implication of law of diminishing marginal returns. This basically refers to the concept of maintaining costs in the short run. According to this rule, the cost of production decreases with an increase in worker productivity but this goes up to an extent. After that, increasing one more worker starts affecting productivity negatively and efficiency declines.
Addition of more workers will not always result in increase in productivity. After some time, productivity will start declining given that the space owned by the company and the tools will remain the same. More workers will just cluster around the work site thus hindering the work of other workers too. Reference:
Grant, P. (2004). The law of escalating marginal sacrifice (1st ed.). Dallas: University Press of America
"Production Decisions" Please respond to the following:
From the e-Activity, recommend whether the company in question should or should not continue to produce the good or service. Provide a rationale for your response.
The company I have chosen for this question is Amazon. Amazon is the world’s largest retail website which does not occur in physical form but is available on...
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