MGM Phase 3 Individual Assignment - A+ original paper with citations from an A+ tutor!

RUNNING HEAD: PHASE 3 INDIVIDUAL ASSIGNMENT 6

TITLE PAGE

Quantity of Workers	Quantity of Ovens	Quantity of Loaves of Bread Produced	Cost of Ovens	Cost of Workers Per  Week	Total Cost
0	2	0	500	0	500
1	2	50	500	450	950
2	2	125	500	900	1400
3	2	210	500	1350	1850
4	2	300	500	1800	2300
5	2	410	500	2250	2750
6	2	550	500	2700	3200
7	2	625	500	3150	3650
8	2	660	500	3600	4100
9	2	700	500	4050	4550
10	2	730	500	4500	5000

Average Total Cost	Marginal product of labor	Average product of labor	Marginal Cost	Average Variable Cost	Average Fixed Cost
---	---	---	---	---	---
950	50	50	19	9	10
700	75	62.5	11.2	7.2	4
616.67	85	70	8.80	6.43	2.38
575	90	75	7.67	6	1.67
550	110	82	6.71	5.49	1.22
533.33	140	91.67	5.82	4.91	0.91
521.42	75	89.29	5.84	5.04	0.8
512.5	35	82.5	6.21	5.45	0.76
505.55	40	77.78	6.5	5.79	0.71
500	30	73	6.85	6.16	0.68

Cost in dollars

Quantity of output

Legend:

Blue: Marginal Cost

Orange: Average Fixed Cost

Black: Average Variable Cost

Analysis of the firm

A technological change is an enhancement to the production process, making the process of producing a product (bread in this instance) faster, cheaper, and easier. The benefit of a technical change is that the input of factors of productions is more efficiently used, thus a higher productivity ratio and lower cost.

Technological change can be experienced in many ways. A new machine that uses a brand new state-of-the-art technology to produce a product is a technological change, while a slight change to an old machine that streamlines multiple activities in a procedure is also a technological change. Overall, technological change is an increase in the knowledge of the creation of the product that allows a new line of higher-quality products, and sometimes new products.

Technological change for the firm is healthy and beneficial. A technological change will usually shift the firm supply curve outwards, thus having a larger profit margin. However, the greatest impact of a technological change is the impact on the average total cost of a firm. The average total cost of a firm is computed by adding the average fixed cost and average variable cost. A technological change can help decrease either, or both, components and overall decrease the average total cost. For example, if the technology decreases the cost of machinery, the fixed costs go down. If the technology allows for the need of workers to go down, variable costs go down.

Analyzing the table of information, the firm has the capability to produce at an optimal point. However, it is not optimal for the firm to keep increasing its workers. Even though there is a great demand for bread, the productivity of each additional labor decreases when more labor is hired. This is due to the phenomenon known as the diminishing marginal returns. As more labor is hired, the marginal return (marginal product of labor) of each additional worker goes up initially, and then it goes down. For the production of bread, hiring more workers initially would cause specialization, and productivity would go up. Eventually, at a point adding another worker would cause productivity to go down, for reasons such as:

1) Too many workers at one station; spills, accidents, etc.

2) Too many workers but too less equipment for them to man

3) Specialization has fully occurred

A cost analysis of the bread firm will show an optimal level of production for the bread firm. The marginal cost of a firm is the additional cost of producing one more unit of a product. The marginal cost of the firm goes down initially, but starts go up after 600th unit (approximately). The average variable cost is the variable costs divided by quantity of output. The average variable cost goes down initially, and then starts going up later on. Due to diminishing marginal returns, producing more output requires more input, and more input becomes more costly as the quantity increases. The decrease-increase trend is present in ATC as well, which decreases initially and then decreases. Since AFC only decreases, the AVC component must increase at some point for ATC to go up.

Expansion of the business would affect the economics of scale greatly. Currently, the firm is experiencing economies of scale, meaning as output goes down, and its average total cost is decreasing. As the bread factory expands and opens factories in new locations, the firm would move along the LRAC curve and start to experience constant returns to scale, where increasing the output does not change, a comfortable place for the firm. As the firm continues to expand however, it will start to experience diseconomies of scale. For example, inefficient managing of the firm can cause average costs to go up, and increases in commuting cost for the firm’s trucks (across the nation as opposed to in a city) will also increase average cost. Therefore, it is important for the firm to establish a healthy point of output where it is not experiencing diseconomies of scale.

References

Economies of scale and scope. (2008, October 20). The Economist. Retrieved June 10, 2014, from http://www.economist.com/node/12446567

Cost curves

50 125 210 300 410 550 625 660 700 730 19 11.2 8.8000000000000007 7.67 6.71 5.82 5.84 6.21 6.5 6.85 50 125 210 300 410 550 625 660 700 730 9 7.2 6.43 6 5.49 4.91 5.04 5.45 5.79 6.16 50 125 210 300 410 550 625 660 700 730 10 4 2.38 1.67 1.22 0.91 0.8 0.76 0.71 0.68