Developments in Production Economics †Free Samples to Students

Question: Discuss about the Developments in Production Economics. Answer: Introduction This part discusses Amazon online market to understand the interaction of demand and supply. Amazon is a virtual market that trades commodities across different world economies. The visited market was an online market, where a firm known as Amazon uses this platform to trade goods. The market consists of an assortment of goods ranging from clothing to books to electronics. This market has suppliers from various categories, who display their goods in the online market. The consumers of these goods are individuals from across the world, which makes orders through the internet. The online market brings together buyers and sellers who are operate in the local economy as well as in the global economy. This particular market is highly responsive to the forces of demand and supply. This is to mean that when the demand is high, and the supply is low, there is an increase in price, and on the other hand, when supply increase there is a decrease in price. In this particular market, the demand and supply forces control the prices of commodities. The online market consists of sellers who deal with goods similar to those dealt with by Amazon. The equilibrium on commodity prices is therefore largely determined by the market forces. For instance, when the supply of a particular commodity at Amazon e.g. a television is high, and the price of the same commodity is high, its demand drops, making it be a dead stock in the market. This forces the supplier to reduce its price so that the consumers can access the commodity. A significant reduction on price attracts the consumer in a way that the demand for the TV rises. The increase in demand results to an increase in the price of the product in a way that the supply equals demand. The point where supply equals demand is referred to as equilibrium. Based on the above explanations of the online market that was visited it is right to say that the firms operate in a perfect competition market structure due to the presence of a high number of sellers and a high number of buyers. This means that none of them can influence the prices, but rely on the market forces of demand and supply to set the prices. Also due to the presence of other online traders other than Amazon, there is a reduction of the market share of each firm. These firms sell similar commodities and the buyers who buy in this market have complete information about the commodities. This makes the firms in the market to be price takers. Role of government The online market is very different from the typical market as the online market is a virtual market that engages buyers and sellers from across the globe. Due to this reason, the market relies on the efforts of several governments to ensure that trading takes place. Some of the contributions by these governments include, security, whereby firms can ship ordered goods to the customer in any country safely, political stability, which enables firms to do business with clients in various countries without fear of war breakouts. The government also provides the Infrastructure, which enables firms to transport goods with ease and therefore offers the goods at an affordable price. The other thing that the government offers to the market is licensing and regulatory policies that regulate the activities of the business as well as shield the customer and firms from unethical business dealings. The above-provided information shows how firms in a perfect completion market structure operate. The online market exhibited on this paper relies on the forces of demand and supply to be able to set the price. This shows that the firms in this market are price takers. Moreover, it is also evident that the role of government is crucial in this market. Large companies are organizations that have more than 200 employees and produce in large scale. Small-medium businesses are organizations that have less than 200 employees and produce relatively in large scale. Small businesses are enterprise than have less than 19 employees and produce in small scale. It is assumed that large organizations have been in the industry for longer time than small and medium companies. Large companies are able to avail the same products with the small businesses at relatively lower prices in the market. Large companies are able to produce many units compared to small business. The following report will discuss the micro economic issue that underlies this phenomenon that enable large organizations to sell same at lower price per unit compared to small companies. The analysis will involve use of micro economic theory and model to explain the phenomenon. Background of the Study Large companies involved in large production are selling of their commodities at relatively low prices. These organizations are produce in masses and serve a large market. First, large organizations have big machineries in their production departments. They have invested in machineries that are able to produce in large capacities. Secondly, large organizations have many employees. These organizations are able to train, retain and motivate employees. Employees in large organizations have high skills in the companies production and operations (Beattie, Taylor, Watts, 2009). Large companies are also able to attract highly skilled managers and experts in the field that they operate in. Large organizations have these abilities because of their capability to compensate employees. Thirdly, large organizations do transport their products in large quantities. These companies are able to ship raw materials and finished goods in large quantities. The companies are able to get supplies to their premises through negotiated terms with suppliers. Transporting products in large quantities enable the businesses to use train, ship and large trailers. The companies are also able to get the best suppliers of raw material because they purchase in bulk. Fourth, large companies are been in existence for long period of time. Companies take time to grow to be large businesses. This period give them experience in the industry that they operate in. They are able to understand the production techniques and marketing of the products that they produce and sell. This first move in the industry gives the companies capability to produce in large scale. Lastly, large organizations have financial resources to invest in production processes and marketing. These companies are able to attract investors to their portfolio who finance the company if need be. From the background study of the large companies, it shows that they operate in large scale. They purchase raw materials in large quantities and sell in high volumes. Large companies are able to charge low prices in the market. These low prices are competitive and attract consumers to buy their products. These low prices also affect the small businesses ability to enter and perform in the industry due to low or no profits being realized. Units Fixed costs Variable costs Total costs 1 10000 20 1200000 2 10000 40 1400000 3 10000 60 1600000 4 1000 80 1800000 5 10000 100 10000000 6 10000 120 12000000 7 10000 140 14000000 8 10000 160 16000000 Table 1 production costs showing fixed, variable and total costs Table 2 Transportation costs showing fixed, variable and total costs Units Fixed costs Variable costs Total costs 1 100 2 200 2 100 4 400 3 100 6 600 4 100 8 800 5 100 10 1000 6 100 12 1200 7 100 14 1400 8 100 16 1600 The phenomenon outlined in this report is a micro economic issue that allows organizations to benefit by producing and operating in large scale (Fuss, 2014). This tool is known as economics of scale. A firm is able to enjoy low cat of production when producing in large scale. Fixed costs associated with the production process are distributed to the large number of unit hence lowering costs per unit. Economics of scales gives firs cost advantage as a result of their size, scales of operations or output. Economics of scale is cause by increased efficiency over time. The economical tool requires firms to operate in large scale in order to redistribute fixed costs to per unit produced. Economics of scale is addressed by production theory. Production theory involves production decisions involved in converting inputs to finished outputs. The study involves making decisions on how much to produce, how to produce it and the right combination to produce. The decisions are aimed at maximizing output while minimizing resource input (Grubbstrm, Hinterhuber, 2009). The decisions outline the optimal production combinations that will maximize units of output. These decisions also involve combination of factors of production in the production process. Factors of production include labour, capital, land and entrepreneurships. These factors of production are required for a production process to take place. They are the input to the production system. Therefore, the production theory outlines decisions in production to ensure optimization is achieved in a company. Production involves several costs that are used to make decisions on the optimal production point. These costs are as follows; Fixed cost: These are costs in the production process that do not change with change of units being produced. They are constant throughout the production period. Where the firm produces 10 units or 100units, the fixed costs does not change. Fixed costs include machinery, salaries of supervisors and managers and rent. Variable costs: These are costs that increase with an additional increase of units produced. They are associated with units produced by the firm. Variable costs are not constant and can be attributed to each product produced. They include workers wages, electricity bills, fuel and water. Total costs: These are combination of fixed costs and variable costs. They are the total cost that the company has incurred in producing each unit. Average cost: These are total costs divided by the number of units produced. This cost shows the average cost used to produce each unit. This is the average cost of both fixed cost and variable costs of a unit. This cost is used to distribute fixed costs to the number of units produced. Marginal cost: This is the cost that the firm incurs with an additional unit produced. This cost show the amount that the firm use to produce an additional unit. Long term and short run: Short run is the period in the production process where there are both fixed and variable costs. Long run is the period of a firms production where there are no fixed costs. This period of time everything can change that can result to changes in fixed costs. Economics of scale is achieve when a firm average costs are at minimum. At the start of the production activities, the costs of the production both the fixed and variable costs are at the highest point. The average cost of producing a single product is also highest at this point. The average cost reduces with time. In the long run, the average cost reduces to it minimum allowing the company to operate at optimal condition (Lines, 2008). Pa Q a shows the average cost at the beginning of the production cycle. P b Q b , shows the average costs at minimal at is attained after some times. This point the company enjoys the economics of scale. Therefore, economics of scale is achieved when the firms total average cost is at minimum. At this point the firm benefits from low cost and is able to use this situation to attain competitive edge. Operating at economics of scale has several advantages; first, the firm is able to sell it outputs at competitive prices in the market. The average cost per unit is low and the company is able to make profit selling at relatively low prices in the market. This attracts more customers to purchase companys products (Parkin, 2014). Second, the firm is able to use this situation to create barriers to market entry. Low prices discriminate competitors in the market. New entrants are unable to make profits leading to closure or exit from the market. Low prices in the market discourage new entrants from entering the market. This barrier help the firm survive in the market and increase its market share by dominating. Third, the firm is able to compensate it employees higher than its competitors. This enables the company to attract highly skilled labour to work in the company. This improves the companys products. Lastly, the company is able to increase its profits. This is as a result of compe titive prices and dominance created by the company. Limitation of the economics of scale tool The microeconomic tool cannot be sustained in the long run. In the long run the fixed costs change due to changes in technology or production processes. This necessities the firm to change and acquire new capital for production purposes (Singh, 2013). At this period, the company loses it economics of scale that it had latter attained. There are a lot of government interventions that limit the companies from utilizing this micro economic tool. The governments impose taxes and price regulations to protect infant businesses. This hinders the firms ability to benefit from the economics of scale that it attains. Conclusion From this report of large companies selling at low prices than small business, a concept of economics of scale emerges. The concept analysis how some companies are able to sell at relatively low prices and gain profits in the market. The concept also analysis how large organizations can use their capability to attain and benefit from economics f scale. Economics of scale enables companies to attain competitive prices and exercise market discrimination by using their size, output and level of operations. Therefore, organizations should aim attaining economics of scales in order to maximize profits and avoid being discriminated in the market. References Beattie, B., Taylor, C., Watts, M. (2009). The economics of production (1st ed.). Malabar, Fla.: Krieger Pub. Fuss, M. (2014). Production Economics (1st ed.). Elsevier Science. Grubbstrm, R., Hinterhuber, H. (2009). Developments in Production Economics. International Journal Of Production Economics, 121(2), 299-300. https://dx.doi.org/10.1016/j.ijpe.2009.08.001 Lines, T. (2008). Markets, prices and market power. International Journal Of Green Economics, 2(3), 295. https://dx.doi.org/10.1504/ijge.2008.021424 Parkin, M. (2014). Economics (1st ed.). Boston: Pearson. Singh, S. (2013). Micro economics (1st ed.). New Delhi: APH Pub. Corp. Yang, X., Liu, W. (2009). Inframarginal economics (1st ed.). Singapore: World Scientific Pub., Co.