Economics Term Paper Sample on Operations Decision

Operations Decision

Question 1

In order to assess the effectiveness of the market structure several factors have to be considered. First, the social marginal cost and the social marginal benefit should be analyzed. The social marginal cost represents the cost that accrues to the society as a result of consumption of a unit of a product of the low-calorie frozen microwavable food industry while the social marginal benefit is the benefit that accrues to the society due to the consumption of a unit of the low-calorie frozen microwavable food industry (Pindyck & Rubinfeld, 2005). An effective market only exists at the point where the social marginal cost equals the social marginal benefit. When the social marginal cost is higher than the social marginal benefit it implies that the consumers of the product are paying more for the product than the benefit they obtain from the product. Therefore, the price of the product should be reduced. However, when the social marginal benefit is greater than the social marginal cost implies that the benefits that accrue to the society due to consumption of the product is greater than the price that they pay for the product. The price should therefore be raised to match the marginal benefit (Pindyck & Rubinfeld, 2005).

Secondly, the effectiveness of the market structure can be assessed by examining the existence of deadweight loss to the society. A deadweight loss occurs when the producer or producers in a given market structure are capable of restricting output and charging a higher price to the society (Pindyck & Rubinfeld, 2005). This is a loss to the society since the restriction of quantity limits the consumers to maximize the utility of the product while the charging higher prices make the social marginal cost be higher than the social marginal benefit. The effectiveness of the market structure can also be assessed by determining the number of sellers in the market. The greater the number of sellers the more effective a market becomes. This is because as the number of sellers increases the ability of a single seller to have control of the market price is limited, thus the forces of demand and supply (Pindyck & Rubinfeld, 2005) can only determine the price of the commodity.

Question 2

The market structure of the low calorie frozen microwavable food industry changed from a perfectly competitive market to an imperfectly competitive market. This change can be attributed to two major factors. First, the firm that is now dominant in the industry had the capability to charge low prices for the products. This can be due to the ability of the firm to enjoy economies of scale, thus the firm’s long run average cost of the product is lower as compared to the other firms. The firm enjoys economies of scale of production of the good as it is able to produce the product in large quantities, thus the cost per unit of the product is minimized (Pirayoff, 2004). This implies that the company’s average cost is lower, thus capable of charging a lower price. This drives the competitors of the industry as the consumers will prefer to buy from the lower priced supplier. The competitors will not be able to charge the lower price as the price does not cover their long run average cost that is the breakeven point.

Secondly, the firm that has gained control over the market could have monopoly rights over a given ingredient for manufacturing of the product. The firm can therefore restrict the other firms from accessing the ingredient thus it will be the only firm in the market as they have control over a major ingredient for the production of the products (Pirayoff, 2004). This scenario can also be experienced when the firm is situated closer to the supplier of the major ingredient of the product than the other firms. The firm will therefore be able to reduce its transportation cost, thus reducing its total cost and long run average cost that will in turn make the firm be able to charge a lower price for its products therefore driving the competitors out of the market (Pirayoff, 2004).

Question 3

The cost function shows the cost of producing a certain amount of output given the prices of the inputs. The prices of the inputs are normally used to estimate the cost functions on the long run and short run basis (Perloff, 2004).  The total cost function is comprised of the fixed costs and variable costs. The fixed costs show the cost that will be incurred by the company regardless of the amount of products that will be produced. In the case of the low-calorie food company, the fixed costs, according to the cost function will be equal to 160,000,000.  The variable costs on the other hand, are the costs that are incurred depending on the amount of output. They are the costs attributable to the production of each output. The variable costs that would be incurred by the low-calorie food company in order to produce each product are represented by the variable cost function.

The marginal cost function, which is got by getting the first derivative of the total cost function, shows the costs that would be incurred by producing an extra unit of a certain commodity (Perloff, 2004). Therefore, the costs that would be incurred by the low-calorie food company in the production of an extra unit of their product are shown by the marginal cost function.

These cost functions are very important as they are used to make decisions on a short run and a long run basis. For the short run decision-making, the variable cost and the marginal cost are used. This is due to the fact that the fixed costs are assumed constant in the short run.  The marginal costs function is therefore used to determine the breakeven point. The low calorie food company can therefore use their marginal costs to determine their most profitable levels in the short run. On the other hand, in the long run the fixed costs are assumed that they will have the probability of changing due to factors such as the changes in technology (Perloff, 2004). This means that all the costs functions will be used in making the decision of the most profitable venture.

Question 4

There are several circumstances under which a company should discontinue its operations such as when the company has been making losses for a period of over five years or when there is an unsolvable dispute among the directors. One of the most common circumstances is when the company is making persistent losses. This means that the company is not even at the breakeven level. This is at the point whereby the price of the commodity does not even cover the average variable costs in the short run and the average total costs in the long run (Sloman & Sutcliffe, 2003). At this point, the management of the company should come up with a plan of action to deal with this situation.

One such action could be the management reviewing their product portfolio and the feasibility of their operations. A feasibility study should be done with respect to the costs, market and economic viability of the product. In this way, the management can find a way to save on costs, or even add the price of the product, in order for them to break even. Another action could be dissolving the company in order to form a business combination such as merging with one of its competitors that is performing well. In this way, the company will obtain the additional goodwill, expertise knowledge and capital (Sloman & Sutcliffe, 2003). This will enable them to expand their operations and even acquire any required capital to save on costs. In addition, the management can even decide to rebrand its products after forming the business combination.

Question 5

The firm can adopt a pricing policy in which it charges the price at the point where the marginal cost equals the marginal revenue. The first step is to determine the total revenue of the firm.

The market’s demand curve is:

Thus the firm’s inverse demand curve will be:

Thus the total revenue function will be:

But

Therefore the marginal revenue of the product will be:

Equate the marginal cost and marginal revenue to obtain the quantity and price.

Therefore the price of the product will be determined by substituting Q in the demand equation.

The pricing policy of equating the marginal revenue to the marginal cost is therefore beneficial to the company as the price is higher than in a competitive market.

Question 6

The firm can base its financial performance by analysis of the cost, revenue and profit that it makes throughout a financial year. However, profits are the best determinant of a firm’s performance. The profit of the firm will therefore be obtained to analyze its financial performance.

The total revenue from the perfectly competitive market is:

While the total cost is:

Thus the profits will be:

While the total revenue under the imperfectly competitive firm will be:

While the total cost will be:

Thus the profits will be:

As it can be observed, the firm’s financial performance has improved as the profits have increased after the firm changed from a perfectly competitive market to an imperfectly competitive market. The factors involved in profit making are the price, cost and quantity that help in determining the total cost and total revenue. The price and quantity influence the managerial decisions in determining the total revenue. The total revenue is the return that the firm obtains from its day-to-day operations. The management always aims to maximise on the revenues. The cost per output and the quantity are important factors that determine the total cost that represents the cost of production. The firm should therefore work towards minimizing the cost. In general, the management of the firm should work towards minimizing cost while maximizing the revenue (Sloman & Sutcliffe, 2003). Through this the firm’s profits will increase considerably.

Question 7

The firm can improve its profitability by increasing its geographical coverage and also better marketing of its products. The expansion of the geographical coverage of the business can be an instrumental method in which the firm can increase its profits as it enables the firm to earn more revenue at a lower cost (Arnold, 2001). This is also known as economies of scale. Furthermore, expansion into new geographical regions is a technique that can be adopted to spread the risks of the firm (Krugman & Obstfeld, 2000). The expansion of the business needs to be done in phases. First, the management needs to carry out a feasibility study to establish the viability of entering into new geographical regions (Arnold, 2001). After the viability of expansion has been approved, the company will begin expanding into regions by franchising their products. Through this the company will be able to shield itself against unexpected risks (Arnold, 2001). This will give the firm ample time to study the region’s market, and then finally make a decision to fully enter the market (Krugman & Obstfeld, 2000).

Secondly, the company can engage in marketing plans that seek to create awareness of the product. Create awareness of the existence of the product seeks to increase the revenue through increased sales. The marketing plan should be adopted by advertising the products in all media of communication. The advertisement should be engineered in a manner that gives the consumer the passion or eagerness to buy the product, that is, it should be an attention seeking advertisement (Sloman & Sutcliffe, 2003). Through this the firm’s demand for the product will progressively increase thus leading to increase in sales revenue.

References

Arnold, R. A. (2001). Economics (5th ed.). Cincinnati, Ohio: South-Western College Pub..

Krugman, P. R., & Obstfeld, M. (2000). International economics: theory and policy (5th ed.). Reading Mass.: Addison-Wesley.

Perloff, J. M. (2004). Microeconomics (3rd ed.). Boston: Pearson Addison Wesley.

Pindyck, R. S., & Rubinfeld, D. L. (2005). Microeconomics (6th ed.). Upper Saddle River, N.J.: Pearson Prentice Hall.

Pirayoff, R. (2004). Economics micro and macro. New York: Wiley.

Sloman, J., & Sutcliffe, M. (2003). Economics (5th ed.). Harlow, England: Prentice Hall/Financial Times.