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Hey Daniel,
Thanks for reaching out with your concerns. It's understandable to feel apprehensive about
potential increases in business costs, but there are strategic steps you can take to navigate
these changes effectively.
When considering the increase in wages and the decrease in machine prices, it's crucial to
factor in the concept of factor substitution. With rising wages, labor becomes relatively
more expensive compared to capital (machinery). In response, investing more in technology
and automation becomes advantageous to reduce reliance on labor. By integrating
labor-saving technologies, efficiency can improve, costs decrease in the long run, and
competitiveness in the market can be maintained. The downward slope of the demand
curve for labor, or any input, reflects firms' efforts to replace expensive inputs like labor
with cheaper alternatives, showcasing their drive to conserve on costly resources (Greenlaw
et al., 2022b).
Now, let's explore why some competitors with larger operations might be more profitable
despite higher expenses. This phenomenon can be explained by economies of scale. As
businesses expand, they often benefit from economies of scale, leading to lower average
costs per unit of output. Larger firms can produce goods at a lower cost per unit compared
to smaller ones. Additionally, they may wield greater bargaining power with suppliers and
access more efficient production processes, enabling them to achieve higher profitability
despite making larger initial investments in labor and equipment.
In summary, to manage your costs in the long run, consider investing in labor-saving
technologies to mitigate the impact of rising wages. Additionally, evaluate opportunities to
achieve economies of scale by expanding your operations strategically. By leveraging these
microeconomic principles, you can position your business for sustainable growth and
profitability in the competitive market.
Feel free to reach out if you have any further questions or need additional guidance.
Best regards,
Nia T.
References
1.
Greenlaw, S. A., Shapiro, D., & MacDonald, D. (2022, December 14).
7.5 Costs in the
long run - Principles of Economics 3E | OpenStax
.
https://openstax.org/books/principles-economics-3e/pages/7-5-costs-in-the-long-run
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Refer to Scenario 7.4 below to answer the question(s) that follow.
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Question 1 options:
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MPL initially increases and eventually declines as more units of Labor are added.
From the producer's perspective, The optimal level of labor is the one when MPL = Market Wage and MPL is still Increasing.
If MPL increases for any given amount of labor, it will lead to a shift up of the Demand for Labor.
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