Week 4 Discussions

Discussion 1

Production Economics The economic environment is likely to affect short run production for the next 12 months. It influences the use of resources in companies and the economy in general. The economic environment is influenced by the interaction and integration of other macroeconomic parts (William, 2012). As a result of this the economic environment dictates the pace of economic growth, inflation, and national income. This variable is the most likely to affect production in the short run since it changes frequently and rapidly. When there is an adverse change in the economic environment, production is halted since the cost of acquiring resources rises. The raw materials become expensive and thus organizations have to work under tight budget. The interest rates of borrowing increases, thus the burden has to be passed to the consumers. The sales will ultimately reduce since nobody want to spend on expensive products in a tough economy. Therefore, the firm has to cut its production to evade excessive supply over demand. Indeed for the next 12 months there may be a drastic change in production. There several strategies to be implemented in order for the managers to avoid this economic environment draw back. The managers should make orders of raw materials earlier and when their prices are at lowest. This will protect them from inflationary prices of the raw materials. Low cost of raw materials will reduce the price of the products; hence increase the product’s demand. Effort should also be made to keep adequate stocks, in case of any economic emergencies. To maintain product, the managers can also vary some variable factors of production e.g. labour. This is necessary in order to reduce the cost of production, consequently the price of the product. For the case of stopping operations in the short run, I will pick a fictitious business such as mobile phone producing companies. Their operations may be in the short run due to several environmental factors. This company may be in an industry that is very competitive. Competition in the short run may affect its production. If the sales of the company have been reducing such that the business will be operating at loss, the production has to be stopped. The competitors may have an advantage in production through bulk purchases of raw materials hence benefit from huge discounts. This may make competitors’ products to be cheaper; hence loyalist customers may shift their allegiance to the competitors. This may be reinforced by political instability, hence making the business to be closed in the long run. There may be sabotage in a state or country in war. There is risk of looting and destruction of the business properties and premises. Production might be impossible as the loss may be catastrophic. The political environment also affects the economic environment. The cost of doing business may rise and inflation at peak. All these factors that surround the business may affect its operation in a negative way. The managers may have to decide to stop the operations in the short run or even closing down the business in the long run because the shareholders’ wealth maximization goal may be obstructed. Most stakeholders find such business risk and unattractive to invest (Robert, 2012).

Reference Robert, E. (2012). Economics: Principles & Applications. New York: Cengage Learning Press. William, B. (2012). Macroeconomics. Chicago: Cengage Learning Press.

Discussion 2

Pick a good or service. Distinguish between the short-run and the long-run production and cost function for that good or service. Discuss how price plays a role in short-run and the long-run decisions and how managers are likely to respond in each case.
Hot wing sales have been in high demand for several years. The chickens must be bred, raised then processed to prepare for sale. The machines used for processing are fixed. In order to increase production, the plants must increase labor, and increase output. An increase in chickens also means an increase to feed and care for them. As of late, demand continues to increase but supply has declined…thus raising the price to resellers. The chicken industry responded to losses by reducing supply and increasing its price in an effort to cover costs. Wing establishments can respond in two ways, either pay the increased prices and pass that on to consumers or sell different more affordable items.

Using the same good or service from above. Identify the fixed and variables costs are for the good or service. Based upon the costs identified, recommend whether to produce or not produce the good or service. Provide a rationale with your response.
The fixed costs associated with chicken production include the machines used for processing and the land or building to house the animals. The variables include the labor force needed for increased production as well as feed for the increased output. The popularity of chicken makes it a product in high demand and can require an increased price to offset the costs so it would be beneficial to produce.