Showing posts with label perfect competition. Show all posts
Showing posts with label perfect competition. Show all posts
Sir Shannon Scott Williams
Microeconomics
Unit 3: Individual Project
Production and Perfect Competition
American InterContential University, Online
January 21th, 2011
Abstract
When it comes to production, units produced per day consist of many factors in order to create a good. Labor, electricity, training, repair, and other necessary cost are examples to these factors. In order for a facility to remain in production, revenue must be greater than the cost per day or else the business is at a loss, most likely end in shut down. In this paper, there is a given scenario where a plant is facing a loss in daily revenue due to exceeding cost. To determine whether or not the plant should shut down or continue production, readers will be able to understand the calculations to make these decisions.
In the given scenario there is a plant that employer’s 50,000 workers who produce 200,000 units per day. The cost of each daily wage per worker is $80. Units produced generates the plant $25 per unit. To operate under these conditions, there are other variable inputs totaling $400,000 per day. Another cost, fixed cost, which is unknown, it causing the plants total cost to exceed total revenue per day. To determine whether or not the plant should shut down, or continue to operate, you are to assume a fixed cost of $1 million and $3 million. The calculations provided will determine shut down or continuing production.
To begin with, you need to understand that if Total Revenue (TR) is greater than Total Costs (TC) then the plant can continue production. However, if TR is less than TC, then shut down production.
The first calculation is to discover the Total Revenue being generated per day. You know that the employees produce 200,000 units where each unit sells for $25. So multiply total units by sale price.
Total Revenue (TR) = 200,000 x $25 = $5,000,000 per day.
Next, determine the Total Cost; however you do not know what the total fixed cost, so base the determination on Total Variable Costs.
Total Variable Cost (TVC) is equal to the total number of workers (50,000) multiply by the daily wage of each worker ($80) plus other variable costs ($400,000).
Total Variable Cost (TVC) = (50,000 x $80) + $400,000 = $4,400,000
Based on these calculations for Total Revenue and Total Variable Costs, it is clear that the plant generates enough revenue to cover the various costs. Since the plant is able to cover its cost and continue production.
TR $5 million/per day > TVC $4,400,000/per day = Continue production
However the Fixed Costs are not implemented into this determination, so you need to assume on two different occasions that the fixed costs are $1 million per day and $3 million per day. This input will ultimately decide whether or not to shut down or continue production.
Let us assume first that the Fixed Cost is $1 million per day. The Total Variable Cost (TVC) will remain unchanged for this calculation, number of employees (50,000) multiply by daily wage ($80) then add various input costs ($400,000).
Total Variable Cost (TVC) = (50,000 x $80) + $400,000 = $4,400,000
Next the Average Variable Cost (AVC) which is equal to the Total Variable Cost ($4.4 million) divided by the total units of output per day (200,000).
Average Variable Cost (AVC) = $4,400,000 / 200,000 = 22
Next, the Average Total Cost (ATC) which are equal to the Total Variable Costs ($4.4 million) plus the Total Fixed Cost ($1 million), then divided by the units of output per day (200,000).
Average Total Cost (ATC) = ($4,400,000 + $1,000,000) / 200,000 = 27
Finally there is Worker Productivity (WP) which is equal to the total units of output per day (200,000) divided by the total number of employees (50,000).
Worker Productivity (WP) = 200,000 / 50,000 = 4
Assuming that the Total Fixed Cost is $3 million per day, you will use the same calculations as before to determine plant shutdown or continuing production.
Total Variable Cost (TVC) = (50,000 x $80) + $400,000 = $4,400,000
Average Variable Cost (AVC) = $4,400,000 / 200,000 = 22
Average Total Cost (ATC) = ($4,400,000 + $3,000,000) / 200,000 = 37
Worker Productivity (WP) = 200,000 / 50,000 = 4
Since you have assumed the Fixed Cost, you can now calculate Total Cost in which you take the TVC and add the Fixed Cost.
Assuming the Fixed Cost for $1 million:
Total Cost = TVC + Fixed Cost = $4,400,000 + $1,000,000 = $5,400,000
Assuming the Fixed Cost for $3 million:
Total Cost = TVC + Fixed Cost = $4,400,000 + $3,000,000 = $7,400,000
The result is a higher cost than revenue being generated; Profit or Loss details the result by taking the TR minus the TC.
Profit or Loss ($1million) = $5,000,000 - $5,400,000 = -$400,000 loss each day.
Profit or Loss ($3million) = $5,000,000 - $7,400,000 = -$2,400,000 loss each day.
The loss is due to the ATC being higher than the AVC. The plants units sell for $25 each. If the plant operates on TVC, it can generate profit based on the AVC ($22/unit), a $3 gain. However, if the Fixed Cost is added, this results an ATC increasing the price cost. At $1million Fixed Cost, the ATC per unit is $27, a $2 loss. At $3 million Fixed Cost, the ATC per unit is $37, a $10 loss.
Based on the assumption for a Fixed Cost of $1 million, these costs are exceeding daily revenue. The plant could shut down temporary or lay-off some of its employees to reach a break-even-price, whenever price equals minimum average, (Krugan, Wells, 2009, p. 340). Issuing a lay-off, you first need to calculate Profit or Loss then divide by daily wage to determine how many employees need to be laid off.
Lay-off = ($5,000,000 - $5,400,000) / $80 = -5000 employees
Since 5,000 employees are to be laid-off, this will change the daily production. Going back to the Worker Productivity formula, you calculate the change.
Worker Productivity = 200,000 / 45,000 = 4.44
As you can see the change in units produced is increased because the new work force has to make-up for laid-off employees. This isn’t much work to be made up, so this would be the best option for the plant under the conditions of a Fixed Cost for $1million.
Assuming the Fixed Cost for $3 million:
Total Cost = $4,400,000 + $3,000,000 = $7,400,000
In this assumption, the Total Cost highly exceeds Total Revenue and must face an immediate shut down.
TR < TC = $5,000,000 < $7,400,000 = Immediate shut down
A lay-off would not be an option due to the amount make-up work needed from employees. The new productivity is more than double the amount.
Lay-off = ($5,000,000 - $7,400,000) / $80 = -30,000 employees
Worker Productivity = 200,000 / 20,000 = 10
In conclusion, the scenario is an example of what many plants face whenever costs exceed revenue. As for this situation, the plant can operate for a short time with minor lay-offs only with a Fixed Cost of $1 million. It is unfortunate how the fate of the plant must cease production with the Fixed Cost for $3 million. From calculation to calculation, you should now be able to determine a similar situation if ever encountered.
References:
Armstrong, Kotler. (2009). Introduction to Marketing (9th Ed.).
Pearson Education, Inc, Upper Saddle River, New Jersey.
Sir Shannon Scott Williams
January 17th, 2010
ECON220
Unit 3: Discussion Board
Production And Perfect Competition
When I think of perfect competition, I think of something similar to a monopoly, however the difference is that a perfect competition is a market in which all other participating markets are price-takers, (Krugan, Wells, 2009, p. 330). In USA, the government tends to put limits on monopolies, but most obstacles for perfect competitions are left out, (Krugan, Wells, 2009, p. 331). Choosing a perfect competition should be the matter of what is the first line of a production (eg. steel used to make automobiles).
To my knowledge for the local area, there is a chicken farm named Kagel’s Chicken Farm. Factors that help support Kagel’s are that there are several different types of buyers and sellers for whole chickens, eggs, and fertilizer. Buyers would be slaughterhouses for live chickens, food stores for eggs, and those in need of fertilizer. Sellers, like Kagel’s, would be those limited to chicken farming.
Being that Kagel’s is a base supplier, this makes it a price-taker giving it the advantage to alter production without heavily affecting the market price for its products, also known as a standardized product. Kagel’s and other chicken farmers sell their products at market price, a base price that is offered in the marketplace. Perfect competitions, like Kagel’s, cannot change prices based on their production due to the ease of entry and exit for farming. Due to this, governments do place regulations for safety. The regulations include: all poultry establishments develop and implement a written sanitation standard operating procedures (SSOPs), requires all meat and poultry establishments to develop and implement a HACCP program, (Economic Research Service, 2009). Other regulations are more specific to slaughterhouse industries.
In conclusion, the perfect competitive market is narrowed down to the beginning of what a product could be. The competitors for perfect competition are limited to those willing to participate. In the case for Kagel’s, and others alike, their supply must weigh a certain amount before being sold. Kagel’s products are sold at market price. Consumers who wish to purchase products from Kagel’s are those of the slaughterhouse industry which supply uncooked or pre-cooked chickens to their consumers. Other consumers are food stores interested in the eggs which the chickens produce. Also, there are consumers for fertilizer which is produced from chicken manure. In order for Kagel’s to enter and remain in business, they must meet government safety standards. In the real world, Kagel’s has the advantages of their consumers due to the great demand from each industry. If one industry decrease demand for a product, Kagel’s still has the opportunity to deliver to another industry.
References:
Armstrong, Kotler. (2009). Introduction to Marketing (9th Ed.).
Pearson Education, Inc, Upper Saddle River, New Jersey.
Economic Research Services. (2009). “All poultry establishments develop and implement a written sanitation standard operating procedures (SSOPs), requires all meat and poultry establishments to develop and implement a HACCP program”. Ers.Usda.Gov
Retrieved 1.18.2011, from, http://www.ers.usda.gov/briefing/foodsafety/private.htm
Popular Posts
-
Sir Shannon Scott Williams Microeconomics Unit 2: Individual Project Microeconomics and Market Systems American InterContential Uni... -
Sir Shannon Scott Williams Microeconomics Unit 4: Individual Project Pure, Per Se and Natural Monopolies American InterContential Univ... -
Sir Shannon Scott Williams Microeconomics Unit 3: Individual Project Production and Perfect Competition American InterContential Univer... -
Sir Shannon Scott Williams January 24 th , 2010 ECON220 Unit 3: Discussion Board Pure, Per Se and Natural Monopolies Importin... -
Sir Shannon Scott Williams Microeconomics Unit 1: Individual Project Economic Concepts American InterContential University, Onlin... -
Sir Shannon Scott Williams January 10 th , 2010 ECON220 Unit 2: Discussion Board Microeconomics and Market Systems The winte... -
Sir Shannon Scott Williams December 30, 2010 ECON220 Unit 1: Discussion Board Economic Concepts A time ago, around 2008, I m... -
Sir Shannon Scott Williams January 17 th , 2010 ECON220 Unit 3: Discussion Board Production And Perfect Competition When I th... -
As an asset management contractor, fulfilling clients demands are very specific and technical due to the expectation. When clients ... -
Innovation is define by a product of means to which it introduces a breakthrough in performance, quality, price, and gener...
