Relevant Costs and Contribution Analysis

We are now onto Chapter 5 and 6 dealing with Production, Managerial Costs and Estimation. This is the real nuts and bolts of how firms produce and create profits in the market. We will discuss; what is the best solution for society and what the firm prefers which is not always the same outcome? This will highlight the foundation of how all 4 Market Structures are formed and why they are formed this way which will move us very quickly into Week 4, which we are soon to study. Dr. Steve

PS I try to add a lot of videos to aid with the text because some of you may be visual learners and it is best that you view the videos first, prior to reading the text. We will also begin graphical solutions from here on it. Remember, I left Bing videos up even if the direct video doesn't open is because I found that Bing offers a list of many different videos rather than one on each topic for you to peruse. 

As for expectations you are expected to learn from applying your assignments in Week 3, first it is towards you creating a Production Analysis with the addition of labor in Question 1, as well as an introduction to Cost Analysis. What is second, is what you are expected to learn in Question 2 is to create a Marginal Costs (MC) and a Marginal Revenue (MR) and then creating an equation where MR = MC. The importance of meeting this criterion is that this represents the point where a firm’s profits are maximized and costs are minimized which represents the theories of Perfect Competition and Imperfect Competition. This lesson is probably the most important lesson you will gain from taking our course. 

Also, these same topics are also examined in both discussions. 

Remember, Week 2 we discussed Chapter 3 and 4 dealing primarily with the demand curve. We were examining all elements of demand from utility to Elasticity of Demand and Elasticity and how it will affect the Total Revenue of a firm and finally, we discussed how firms can forecast demand knowing the demand equation of the product of service at hand. If you will remember firms that have an inelastic demand curve like de Beers does which is a diamond merchant can therefore raise prices knowing that it will increase sales. However, if the firm is like Wal Mart, and has a more elastic demand, then it will tend to reduce prices and increase sales as more people enter the store to make purchases. These are opposite strategies the first is called price skimming and the second market penetration. Apple applies both strategies which makes is a real contender with a higher price with its initial offering and about 3 - 6 months later it will reduce its price close to a half of the original price to add more buyers who are patiently waiting for the price to go down.  Chapter 5 Production and Cost Analysis in chapter 5 we will discuss both inputs of Kapital and Labor. Notice I didn't use Capital because most texts use the K instead which came from "Das Kapital" by Karl Marx. So a firm using both inputs will create an output wich is referred to as Marginal Physical Product (MPP) using the ideal combinations of both. The production curve of producing product is similar to the sales curve in many businesses so they relate well with each other. The production function as Kapital and Labor is added goes up fast and then begins to level off. Costs are the other side of production. Yes the firms primary objective is to make a profit so production is necessary for that to happen. So in production expenses are created to meet the companies demand by consumers.  Chapter 6 Managerial Cost Analysis and Estimation in chapter we will discuss how costs effect production too.

On the costs side we will review the costs necessary both fixed and variable costs to meet the production needs. A function is created with production product rising over time similar to the Sales curve and leveling off. However, the MPP begins to drop and head to zero over time. So as the MPP rises the Marginal Cost (MC) curve falls, but as the MPP being to fall, the MC curve rises. By visually looking at a graph you will see all these opposite events happening.  If you will review a supply curve you will also notice how the supply curve is always upward sloping for most firms, except firms such as Natural Monopolies such as your power company where fixed costs are at a premium. Therefore, it is the MC curve that is created into the Supply Curve you see for a firm which you learn as prices go up firms can produce more products. Getting back to power company example, it needs to apply more units of electricity to more households and firms to reduce its price so that is what natural monopolies do, they need to be monopolies to reduce prices to as many users as possible because its MC or supply curve is not upwards but is downwards sloping.

If any of the links don’t open you can always cut and paste and put into your browser or use the link below to add any economic topic to find a video that will give you your answer. Use the bing addition of video surf owned by MSFT.pro

Production and Costs in the Short Run