Got a tricky question? Receive an answer from students like you! Try us!

Foundations of Microeconomics Consumers and Firms - Essay Example

Only on StudentShare
College
Essay
Miscellaneous
Pages 3 (753 words)

Summary

I have recently analyzed the operations of your firm in regards to its loss and whether the firm should continue to produce or shutdown. Though the firm is currently losing money due to its fixed costs, it is my recommendation that the firm continue to produce.

Extract of sample
Foundations of Microeconomics Consumers and Firms


The output of the plant is 300,000 units per day at a cost of $30 per unit. The total revenue per day is 300,000 * $30 = $9,000,000. According to Parkin (2005), "A firm shuts down if the price falls below the minimum of average variable cost. The shutdown point is the output and price at which the firm just covers its total variable cost" (p.244).
As we can see, the total revenue exceeds the variable costs and it would be recommended to continue to produce. If sales continue to stagnate and drop, there will come a point at which shutdown will be advisable. When sales have reduced to the 250,000 unit level, it will be necessary to begin layoffs. The revenue at that point would be 250,000 * $30 = $7,500,000 and equal to the variable cost. To avoid shutdown, labor costs would need to be reduced.
The relationship between a change in price and the change in demand is known as elasticity. If a change in price results in no change in demand, this is known as perfectly inelastic demand (Parkin 2005 p. 84). This would be seen in the market for necessities such as electricity or heating fuel. If the ratio of price change is equal to the change in demand, this is known as unit elastic demand (Parkin 2005 p.84). With some items, such as food, an increase in price only results in a small change in demand. Consumers will cut back, but not eliminate, the product. This is known as inelastic demand (Parkin 2005 p.84). ...
Download paper
Not exactly what you need?

Related Essays

Perfectly competitive markets
No seller has a bargaining power over another because the products sold in perfectly competitive markets are assumed to be homogenous in nature. Lastly, the motives of the seller participants is maximization of profit, hence they sell where marginal revenues equal the marginal cost.…
6 pages (1506 words)