Microeconomics: Production, Costs and Profits

Table of Contents

Economic cost
Law of diminishing returns
Marginal decision rule on the use of human capital and technology
Benefits to the United States
Advantages and disadvantages of being large
References

Economic cost

Costs are defined as opportunities foregone when a decision is made; therefore, opportunity costs are costs of any action considered in form of greatest opportunity forgone (Willamette.edu, 2010). It is surrender value associated with the second greatest choice presented to the individual or firm which has selected amongst several commonly exclusive alternatives and this is the main concept in economics (Willamette.edu, 2010).

This is because it actually expresses the fundamental association between choice and scarcity; thus, this concept plays a critical role in making sure that limited resources are efficiently used. As such, opportunity cost is not limited to financial or monetary cost as it also includes lost time, actual cost of quantity produced, pleasure and other gain that offer utility (Willamette.edu, 2010). Costs can be either implicit cost derived from alternative utilization of resource or explicit costs for the utilized resource (Willamette.edu, 2010).

Amongst the company implicit costs, normal profits are the most vital costs which the firm should meet; these are the revenues that the entrepreneur expects to receive if connected to several other employments or activities. Therefore, if the entrepreneur does not achieve these costs one may be forced to shut down the firm (Willamette.edu, 2010). Economic profit also referred as pure profit is the surplus of income over the total costs incurred by the firm; that is implicit plus explicit costs (Willamette.edu, 2010). Pure profit and accounting profit differs in that accounting profit just takes care of out-of-pocket costs that are explicit in nature (Willamette.edu, 2010).

A company making losses in short-run should make a decision on whether to carry on with operation or shutdown based on the principles of economics; the rule for the shutdown states that “in the short run a firm should continue to operate if price exceeds average variable costs” (Willamette.edu, 2010). Thus, for a company to carry on with production in the short-run it should receive adequate income to cover the variable costs at least.

The underlying principle for this rule is simple; by closing the business the company cuts on the variable costs, but the company will continue meeting its fixed costs. Since fixed cost should be paid even if the company operates, these costs must not be regarded in making decision on whether to shutdown or produce in the short-run (Willamette.edu, 2010). Thus, a firm continues to operate in the short-run even when it is making losses because it has to cover fixed costs and some variable costs and if it decide to cease operation it will still incur the unavoidable cost such as rent, depreciation plus it will not be receiving anything to offset its costs (Willamette.edu, 2010).

Law of diminishing returns

The law of diminishing returns indicates the unavoidable event that states if inputs that are variable are increased past a particular point the marginal or incremental output produced or return received begins to decrease (Webbooks.com, 2010). Beginning with a low level of production, companies regularly gain from increased efficiency, though the benefits squander and production tends to be less effective when firm capacity is over-utilized (Amoseb.com, 2011).

This law applies purely in the short-run; it is as a result of existence of a number of fixed resources as well as the necessity to overuse the fixed resource (Webbooks.com, 2010). This law can be functional to nearly everything in economics for example;

Consumption of chocolate: after consuming a bar of chocolate I am satisfied. The total utility or marginal utility after taking a bar of chocolate is relatively very high. But after taking more bars of chocolate, the satisfaction of every added bar of chocolate will not be more than the enjoyment or satisfaction gained from taking the previous one, possibly because I begin to feel satisfied or full. This table highlights this relationship perfectly.

Bars of chocolate consumed	Chocolate marginal utility	Chocolate total utility
0	0	0
1	60	60
2	10	70
3	6	76
4	4	80
5	2	82

The table above indicates that the total utility rate will rise at the same time as marginal utility reduces with every added chocolate bar. The first bar of chocolate offers utility of 60 though the subsequent four bars of chocolate jointly raising the total utility by 22 extra units.

Marginal decision rule on the use of human capital and technology

The principles of economics states that net gain is capitalized on attaining the point which marginal cost equates to marginal benefits (Vargas, 2001). In case marginal benefit of extra unit of any action surpasses marginal cost, the level of output should be raised; on the other hand, if marginal cost exceeds marginal benefits, the level of output must be decreased (Vargas, 2001).

For instance, Maquiladoras industry uses a sophisticated technology and it thus needs skilled labour which has resulted to upgrading of the direct line employees to fit the advanced technologies (Vargas, 2001).

The technological development of this industry was not achievable without the right skills and professional personnel; the skilled human capital comes largely from the industry by way of training and growth at all stages. Normally, the training embraces in-house training programs in addition to paying a visit to the firm producing facilities in other countries (Vargas, 2001). Maquiladoras also support programs at the regional technical centres and schools of trade to make sure employees’ skills meet the industry demand. Thus, the industry tries to maximize the net benefit by equipping the workers with the right skills which will match the existing technology leading to higher production (Vargas, 2001).

Benefits to the United States

The industry has turned out to be most significant to the U.S. business strategy in attaining competitively priced products in the global marketplace. Texas bordering cities have harvested significant gains from this industry while custom and transportation services have prospered on the side of the U.S. border because this industry has facilitated huge trade flows via the entry border ports (Vargas, 2001).

The firms in this industry normally maintain delivery services and managerial offices on the side of the U.S., inspiring the real estate industry of Texas bordering cities. The industry also generate jobs for U.S. cities in accounting, finance and legal professions as well as the car rental, hotel, restaurant sectors benefit from the Maquiladoras since business employees and visitors normally eat and stay on the side of the U.S. (Vargas, 2001).

Advantages and disadvantages of being large

Large size countries may have a benefit in democracy; this is because it reduces the possibility of having special-interest groups which would act in harmony to oppress the citizens’ rights (Economist.com, 2003). Large nations can afford comparatively smaller sized government although they frequently don’t but have the advantage of collecting much tax from a large population (Moffatt, 2011). Armies, embassies and infrastructures are expected to cost less per capita in more populated nations and defence is specifically inexpensive for such countries (Economist.com, 2003).

Larger countries also have huge internal markets, allocating more expertise and “returns to scale”; they can also reallocate resources regionally thereby offering assurance in case one region of the nation is struck by recession plus distributing income to the poor regions of the country (Economist.com, 2003). On the other hand, large nations are expected to consist of diverse populace whose differ in demands and preferences, which the administration might find difficult to manage. A research on the U.S. local government proposes that Americans are prepared to tolerate higher cost of school districts and small municipalities with substitute for staying in society with small variation in race, and income. This means that individuals prefer to stay in homogeneous nations (Economist.com, 2003).