Summary of Economics of Strategy Book Essay

The Marginal Cost graph intersects the Average Total Cost graph and the Average Variable Cost graphs at their minimum points. As long as the cost of producing one additional unit remains less than average total cost, the average total cost continues to fall. When marginal cost finally exceeds average total cost, average total cost begins to rise in response. The same effect applies to the relationship between marginal cost and average variable cost.

The average costs of production of Sony’s new product is the total costs (the addition of fixed and variable costs) divided by the output which is the quantity of goods or services that are produced during the production run.

Mass production is inflexible because it is difficult to alter a design or production process after a production line is implemented. Also, all products produced on one production line will be identical or very similar, and introducing variety to satisfy individual tastes is not easy. However, some variety can be achieved by applying different finishes and decorations at the end of the production line if necessary.

CH 3. 2. Appalachian Coal Mining believes that it can increase labor productivity and, therefore, net revenue by reducing air pollution in its mines. It estimates that the marginal cost function for reducing pollution by installing additional capital equipment is MC = 40P where P represents a reduction of one unit of pollution in the mines. It also feels that for every unit of pollution reduction the marginal increase in revenue (MR) is MR = 1,000 - 10P

On the contrary, "economies of scale" determines the technical optimum bases on the lowest average cost per output as demonstrated in the diagram below. Furthermore, "diminishing returns" emerges because when more and more variable factors are added to a given quantity of fixed factors, all the fixed factors are utilized so marginal product increases. However, when there is a further increase in variable factors, there is relatively too much variable factors, many variable factors will lay idle and many tasks that is better done with capital goods are now being done manually so efficiency declines.

(Long-Run Costs) Suppose the firm has only three possible scales of production as shown below:

Enlarging the operation scale is a indispensable way for manufactures when developing a company. Once fixed cost was determined, the more units produced, the more efficient that production becomes. Marginal costing is a very effective way of measuring whether economies of scale are saving the business capital. It perfectly avoids manipulation of short-term profit, overcoming the shortcoming of the full cost method, making significant contribution to short term production decisions. The following example will present this merit clearly:

-Economies of scale are very important for a low-value product, which is more difficult for new entrants to compete with existing manufacturers

Larger firms tend to have lower cost compared to smaller firms, due to the fact that they are able to gain from economies of scale, but it is possible for larger firms to experience diseconomies of scale. As firms increase their production scale they tend to lower their production cost and move to the long run, this can be represented using the diagram

The proportionate saving in costs gained by an increased level of production is with a higher output , it comes with a cheaper overall cost

Increasing returns are the natural outcome of decreasing output costs and have external and internal factors which influence economies of scale (Ossa, n.d.). Economies of scale are influenced externally by industry size, rather than firm size and include

Ans: Marginal cost (MC) is the extra total cost resulting from 1 extra unit of output. Average total cost resultiong is the sum of ever decling average fixed cost (AFC) and average variable cost (AVC). Average total cost stands for (AC). In the short run the costs are generally represented by a U- shaped curve that is always intersected at its minimum point by the rising MC curve.

Thus, they require very less time or labor hours to generate the same amount of any output which ay were earlier producing by using even more labor hours. Managers which are involved in the management and scheduling of a production process also get familiar with a process and are thus in better position to use a resources at air disposal in better manner as well as scheduling a production process more efficiently thus leading to more output for a same amount of

No economies of scale – With zero economies of scale, firms cannot depend on the fact that higher production will lead to falling average cost. Hence, there is increasing marginal cost with the production of higher output and there is no benefit from increasing sale.

Average cost is the production cost per each unit of output. This can be calculated by dividing the total costs of the business by the number of units