Supply production costs and profits

Brief summary of economic costs

Economic costs may be fixed or variable. Fixed costs refer to those costs that a firm cannot control and are usually not linked to the quantity of goods produced. In other words, they are not proportional to quantity; a graphical representation of total fixed costs versus quantity is a horizontal straight line since the costs do not increase with time.

Examples here include machinery, cost of purchasing a location or fixtures. When the total fixed costs in a firm are divided by quantity produced then this becomes Average Fixed Cost (AFC) which is what is used for calculations.

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Variable costs on the other hand refer to those kinds of costs that can be changed with time and they are usually proportional to volume of production. Examples include rent, electricity bills, telephone bills and many others. When a graph of total variable costs is plotted against quantity of production, this usually results in an upward sloping curve.

Average variable cost (AVC) refers to the ratio of total cost divided by the quantity of goods produced. The total cost of a firm is a sum of total fixed costs and total variable costs. The same applies to average total costs which is a sum total AFC and AVC. Marginal cost on the other hand refers to the difference in total costs when quantity of goods produced is altered by one unit (Rittenberg and Tregarthen, 2009).

In the short run, a firm may choose to operate even when there is still a loss if it has been established that the price of the goods being sold is less than average total costs but greater than average variable costs. The seller will go through an economic loss because his marginal revenue (the difference in revenue when quantity of goods is increased by one unit) will be equal to his marginal cost.

However, this state should not cause him to close down because he is still in a position to pay all the variable expenses and some of his fixed expenses. If he were to close in the short run, he would be left with the fixed expenses which he would still have to pay when he decides to resume. The fixed costs always exist whether or not he is producing goods.

Diminishing returns

When firms want to experience increase in revenue, they will often increase the variable expenses to be used in production. However, at some point, this continual increase in input will not result in an increased rate of output.

In other words, if a firm has reached diminishing returns then the extent to which the output will increase when variable costs or input increases is minimal or lower (Professional Education Organization International, 2002).

In my personal experience, I once saw an advertisement in my neighborhood about some t-shirts. The t-shirts looked great and I immediately went out and bought them. I even promised the saleslady that I would keep coming back for more. However, after some time, I saw two people with the same t-shirt and same design, then I saw six and before long, almost everyone in town owned one such t-shirt.

I wanted to know how everyone had heard about it and a few people told me that this was from an advertisement; a similar one to the one I had seen. This company kept on advertising even when the public was well aware of their products. Friends and family could see the t-shirt on someone they knew regardless of the advertisement.

This company was therefore wasting valuable resources in advertising yet the product had already become popular. In this regard, it had reached a point of diminishing returns because their investment in advertising did not in any way affect the revenues that they were collecting.

Maquiladoras

Maquiladoras had to apply the marginal decision rule when it comes to the decision between capital intensive or labor intensive factors. At first, when utilizing labor intensive strategies, the industry had a ready pool of unskilled labor supply. Therefore an increase in the number of laborers would result in heightened production.

However, after reaching the diminishing return point, they soon found that increased unskilled labor would not always result in greater capacity utilization and this was the reason why they opted for capital intensive technologies. When they went for this option and realized that they were out of technicians so they needed to train existing workers or potential students (Vargas, 2001).

Maquiladoras benefit the US economy by offering a ready market for some of the US’s industrial goods. It has been stated that almost all of the components needed in these industries are imported and over three quarters of those supplies come from the US. Essentially, this illustrates that the US is growing economically owing to contributions being made by these kinds of returns.

Studies have illustrated that in the nineteen nineties, the number of miscellaneous plastics and rubber supply industries have grown tremendously. Texas cities such as Mc Allen and Brownsville are known for these increases. The latter cities had thirteen and eleven injection molding companies.

Therefore, maquiladoras are growing industries in the US by offering them a source market for components. Also, these structures have boosted transportation services within the US since commodities to be exchanged between the two countries are very many owing to the maquiladoras.

This has also streamlined the immigration and custom services in the US. Real estate has also prospered in Texas owing to the distribution and administration offices set up by the Maquiladoras in the US. Hotels and restaurant chains in Texas have grown tremendously in the US.

Advantages and disadvantages of large countries

Large countries have a large consumer markets so self sufficiency in trade is quite plausible. Furthermore, its populations actually pay less in terms of taxes because those costs are spread over a large pool of people.

This implies that infrastructural requirements are quite easy to meet owing to ease with which they collect their taxes. It is also easy for such countries to cushion themselves against any major disasters since they have the prerogative of resource distribution.

They can improve their defense systems and can choose to have leaner governments. On the flipside though, large countries have the problem of heterogeneity. When populations are not homogenous then individuals will place excessive demands on their governments and most will not be met. Additionally, they are more prone to dictatorships than smaller countries (Economic Focus, 2003).

As countries get bigger, they are likely to benefit from all these advantages only until a certain point. When they reach the diminishing returns, they often become heterogeneous.

Diversity may increase to a point where the benefits of getting large will be offset by the varied demands of the governed. This diversity can be witnessed through variable incomes, different ethnicities and races. India has long grappled with the wide gap between its poorest people and it’s richest.

Consequently, the high population’s market benefits have been neutralized by the divergent opinions on what the government can do for its people. In this regard, an optimal size is necessary in order to take advantage of the pros and cons of both extremes. This has been witnessed in many countries around the world.

References

Rittenberg Libby and T. Tregarthen. (2009). Chapter 8: Production and Costs. Sections 1-4 Principles of Microeconomics. FlatworldKnowledge.com. Retrieved November 15, 2010 from: click here

Professional Education Organization International. (2002). Chapter 3: Production Costs, Retrieved November 15, 2010 from: http://www.peoi.org/Courses/mic/mic3.html

Vargas, L. (2001). “Maquiladoras: Impact on Texas Border Cities,” in The Border Economy, Federal Reserve Bank of Dallas. Retrieved on November 15, 2010 from: http://www.dallasfed.org/research/border/tbe_vargas.html

Economic Focus. (2003). “When Small is Beautiful” The Economist. Retrieved November 15, 2010 from: http://www.economist.com/node/2300223

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