(5.) The rest of the time can be sold to other companies to advertise their products or donated for public service announcements. Also, it can lead to missing products or breakages all of which can cause the firm’s unit cost to rise. a. Labour can be varied virtually continuously; the table shows units of fifty persons for convenience. The greater the installed based of a network product, the larger the number of compatible network connections and therefore the more possible value for a new customer. The amount of labor required to produce 150 units will be 200(50×4). Maurice Kugler and Eric Verhoogen () . Economies which arise from the firm increasing its plant size. Vivera is best known for its plant-based steak (Photo: Vivera) A leading plant-based meat brand is set to double its factory size due to ‘unprecedented demand’ for its products. Coke and Pepsi have sustained their market dominance for nearly a century. But when the number of users on a network based product reaches 30 to 40 percent market share, achieving more and more market share beyond that point becomes cheaper and cheaper (indicated by the increasing slope of the sales penetration curve). This model would not succeed if the number of buyers or sellers on eBay were less as few buyers or sellers can influence the price of a product considerably and take undue advantage. (4.) This decrease in the difference between prices is because of increased competitiveness within the market and the power to determine the price shifts from few to many people and hence this entire event attracts a large number of buyers and sellers towards the market. When the demand is 200, the maximum profit that they would earn is $2900000. Now if we consider the probability factor, where in this case it is 0.2, then the profit made would be: Demand = 200; Profit = $ 3200000; Probability= 0.2. Period of time in which at least one cost for FoP is fixed (quantity of at least one input is fixed) 1. Its gas consumption per unit of output would be higher by 10-30% than a large plant, but with cheap gas, this would be of little consequence to the economics. Here the products success is determined by the increasing acceptability and compatibility of the product rather than it being superior of inferior than and of its competition. Suppliers appropriate the most of the value in PC value chain because of the following: Suppliers of core PC hardware (IBM, Intel) and software (Microsoft) hold dominant market position and almost impossible to switch, hence they have considerable bargaining power and can sell their products at premium price. (d) Now regarding the probabilities, which plant do you suggest that the company build, and why? Engineering estimates suggest that at those levels, the marginal product of capital will … Now if we consider the probability factor, where in this case it is 0.2, then the profit made would be: Demand = 100; Loss = -$1250000; Probability= 0.2. When the demand is 200, the maximum profit that they would earn is $3500000. The companies con collaborate with the production house of the prime shows and the actors can be made to use the products on the show (e.g. After the owner installs the hardware, the PVR downloads all upcoming TV schedules to the hardware via a phone or cable connection. Plant location and size decisions. Plant investment decisions are frequently crowded with folk-lore, even though basic economics may provide a ready guide to optimum capacity. The unit costs incurred by the firms tends to fall as they expand. James Brickley, et. Now if we consider the probability factor, where in this case it is 0.5, then the profit made would be: Demand = 150; Profit = $ 2025000; Probability= 0.5. Companies are developing new technologies that make it even easier for users to “snip” commercials. When the demand is 100, the company would make a loss of -$50000. The other suggestion would be to slowly decrease the price of the advertising rate per second so that the companies still continue to advertise and are not discouraged to stop advertising at all. The key empirical facts are that, on average within narrowly defined sectors, (1) larger plants charge more for their outputs and (2) larger plants pay more for their material inputs. Average and marginal productivity will rise at first and then tend to fall as workers have l… (3.) The only two ways in which a challenger can enter the market and create a disruption in an oligopolistic market is by entering with large scale operational infrastructure to be able to compete with the economies of scale or the other way would be to succumb to the cost advantage by entering small scale. However, new entrants are capable of achieving market share in developing markets, like Eastern Europe, Latin America, Asia Pacific region, and the Middle East. Therefore, Profit =150*50000-(2700000+(200*12000)+(150*2500)) =$ 2025000. However, the running time for the show itself is only 30 minutes. Pepsi and Coke is a fast moving consumer good, which is sold everywhere – and hence, it’s extremely accessible and is consumed multiple times. Therefore, Profit =150*50000-(5400000+(50*12000)+(150*2500)) =$ 1125000. Since total revenue is a component of price multiplied by the quantity demanded, the decrease in the quantity demanded will result in lower profits. Users must subscribe to a cable or satellite system if they wish to record programs off these channels. Now if we consider the probability factor, where in this case it is 0.2, then the profit made would be: Demand = 200; Profit = $ 2900000; Probability= 0.2. When the demand is 150, the company would make a loss of -$1075000. Copyright © 2020 CustomWritings. Although actual demand for a product … Explain in words what this value means. (2. A PVR consists of an internal hard disk and microprocessor. There is always a threat of forward integration by the suppliers since their products are technically sophisticated, innovative and protected by copyrights and other non-core PC components are easily obtainable through numerous sources. This is another example of economies of scale from which large firms benefit. If there is a surge in the use of PVRs, there will be a decrease in the demand from advertisers. In this case, where the demand is 250, Plant 2 cannot be used, as the maximum number of units that can be produced by Plant 2 would be 236. Suppose that the expected number of viewers is one million people. The firm can build larger plant sizes or revert to smaller plants to deal with the changed demand for the product. Established players have a huge advantage over new entrants, because they have already attained their Minimum Efficient Scale, creating a cost advantage. Two companies currently sell the hardware and provide the subscription service: TiVo and ReplayTV. So rarely is a plant or factory the sole subject of economic study. Because of the union contract and technical features of automobile production, labour must be paid the equivalent of $12,000 per person per annum, and each incremental change in plant size involves $900,000 in annual expenses for depreciation, interest, and other fixed costs. One decision that many companies have to make at the start is whether to own or rent their space. . The economy and mining industry of mongolia, Proton and demand of automotive industry in Malaysia, CustomWritings – Professional Academic Writing Service, Tips on How to Order Essay. Besides ease of programming and much larger recording capacity than videotape, PVRs allow the user to watch a prerecorded show while the unit is recording a new program, pause watching live programs (for example, if the phone rings) and then resume watching the rest of the live broadcast, view instant replays and slow motion of live programs, and skip commercials. Actors can be shown wearing a particular brand of jacket). In the short run capital is fixed, firms do not have time to build new plant and equipment or get rid of obsolete ones 1.1. "For example, Fischer-Tropsch Synthesis is a very capital intensive process." Sometimes the size of … Learn How to Order Essay Online. BAC has supplied the following details of its production function, meticulously derived by its chief engineer. Now if we consider the probability factor, where in this case it is 0.2, then the profit made would be: Demand = 100; Profit = $250000; Probability= 0.2. One team developed a new process … When the demand is 100, the company would make a loss of -$350000. Therefore, Profit =150*50000-(3600000+(150*12000)+(150*2500)) = $ 1725000. Managerial Economics Many administrative and organizational activities are mostly cognitive and, therefore, largely independent of the scale of production. Prices, Plant Size, and Product Quality. As the number of buyers and sellers increases, the market liquidity also increases and hence the transaction cost decreases as the spread between the price at which purchase can be made and the price at which a sale can be made diminishes. The newly formed Bangladesh Automobile Corporation plans to produce and export an expensive sports car and has asked your consulting firm for advice on the size of plant to construct. increases all (both fixed and variable) inputs by a common proportionality factor. 1. Pc market nowadays is relatively highly competitive, with only four main players selling weakly differentiated products. If the size of the plant is increased beyond SAC 4, it results in higher average cost of production. 4, pp. For smaller firms, renting usually is a more affordable option. Economies of scale describe how much production increases when the firm increases its scale of production, i.e. General Motors and Ford gave been hard hit by competition. (c) Disregarding the probabilities, which plant do you suggest that BAC build if the demand is expected to be (i) 150, (ii) 200, or (iii) 250, and why? Economists are concerned with the best size of a business unit, that is, a firm in which the average cost of production per unit is the lowest. The plant that can produce an expected output level at the lowest possible cost is not always the optimal plant size. Vivera, which sells a number of meat alternative products including steak and bacon pieces in supermarkets across the U.K, is celebrating its 30th anniversary with a €30 million investment. Here, as the number of people who register onto the websites increases, the better it is for the already existing users. Therefore, Profit =150*50000-(4500000+(100*12000)+(150*2500)) =$ 1425000. If OQ 2 is considered to be most profitable level output, the firm will select SAC 2 —the medium-sized plant. (ii) If the demand is considered to be 200. An interesting exception occurs, however, with network effects. Now if we consider the probability factor, where in this case it is 0.5, then the profit made would be: Demand = 150; loss = -$1075000; Probability= 0.5. When the demand is 250, the maximum profit that they would earn is $4975000. The Economics of Plants. The amount of labor required to produce 250 units will be 200(50×4), Therefore, Profit =250*50000-(4500000+(200*12000)+(250*2500)) =$ 4975000, The amount of labor required to produce 250 units will be 100(50×4). 2. The decrease in viewership will not cause a substantial decrease in demand of advertising. This results in a spike in the number of sellers on eBay and hence brings down the prices of products as the supply increases. (iii) If the demand is considered to be 250. When the demand is 200, the maximum profit that they would earn is $3200000. Therefore, Profit =200*50000-(5400000+(100*12000)+(200*2500)) =$ 4075000. (1.) The amount of labor required to produce 200 units will be 200(50×4), Therefore, Profit =200*50000-(3600000+(200*12000)+(200*2500)) =$ 3500000, The amount of labor required to produce 200 units will be 150(50×3), Therefore, Profit =200*50000-(4500000+(150*12000)+(200*2500)) =$ 3200000, The amount of labor required to produce 200 units will be 100(50×2), Therefore, Profit =200*50000-(5400000+(100*12000)+(200*2500)) =$ 2900000. Viewers elasticity would be defined by [ΔQ/(Q1+Q2)/2]/[ ΔV/(Va+V2)/2]= 0.9. Though the word "plant" is sometimes used interchangeably with the words "business" or "firm," economists use the term strictly in relationship to a physical production facility, not the company itself. The latter fact generalizes the well-known positive correlation between plant size and wages. Social Networking websites such as Facebook, Twitter are also a very good example of The Network Effect. (2.) If the firm decides to produce OQ 1, it will choose plant size denoted by SAC 1.A lower output (say OQ’ 1) can also be produced on SAC 1 but at a higher cost. So, smaller firms with the right resources and capability may be able to achieve economies of scale in developing markets. In forming the design basis it is necessary to determine the opportunity to satisfy a societal need, and assess this based on market analysis which includes current production, projected market demand, and current and projected selling prices (Seider et al., 2004). The amount of labor required to produce 150 units will be 50(50×1). Calculate the “viewer elasticity” based on the two points. This further simplifies setup and operation, and the user gets a single bill. ... Rather than involving equilibrium concepts that are the focus of so much of economics, plant location and size decisions are discrete, lumpy decisions that revolve around comparison between alternatives. However, economies of scale may also arise from an increase in the number of plants of a firm, irrespective of whether the firm continues to produce the same product in the new plants or diversifies. With respect to pepsi or coke when a new challenger enters the market with little knowledge or small scale production capabilities, they either buy it out or launch its own version of the product. The figures represent means over plant-level averages, such that each plant has the same weight. The larger the plant size is, the greater would be the output level at which average total cost reaches its minimum, and the lower would be the minimum ATC. But unlike VCRs, which they replace; PVRs offer many more functions, notably the ability to record up to 80 hours of programs and easy programming. Compared are solar stills, solar-assisted desalination, reverse osmosis for small plants. Discuss two examples of the product that fits this pattern. As more consumers start using PVRs, the revenues of major networks like CNN, ABC, and Fox… etc will most likely fall substantially. Thus in this case where demand is 150, to generate profit, BAC should go with Plant 1 as it would maximize profit. 2. However, when it comes to a car, we can tell that at even a slight fall or rise in the price can have an adverse effect on the demand of the product and a consumer will make the shift. To increase the quality of the commercials and make them interesting and exciting. If the demand increases to 250, Plant 2 cannot be used as the maximum units that can be produced by plant 2 is 236. However, as the number of buyers and sellers on eBay increases, the auctions become more and more competitive which attracts more eBay users on both ends (Buying and selling). What is total revenue? Consider the following situation. Using this essay writing service is legal and is not prohibited by any university/college policies. Businesses that are capital-intensive and technologically inclined can afford to expand their output and benefit from economies of scale. when all economies of scale have been obtained, but diseconomies have not set in. We will concentrate on the economies which may be achieved within a particular plant. This is below 1, the elasticity of viewers is inelastic. New nuclear power plants typically have high capital expenditure for building the plant. Startup costs for new entrants are also quite high mostly due to research and development, market research licensing expenditure and lack of established relations with key suppliers. )Entry threat is Low for mature markets and Medium for developing markets. However, physical size, at least in productive niches, is a fundamental determinant of the ability to acquire resources (Grime and Pierce, 2012), and forms an axis of trait variability distinct from that of the plant economics spectrum (Díaz et al., 2004; Cerabolini et al., 2010a). Therefore, above are the reasons why Pepsi and Coke managed to maintain their leadership situation when market situations changed and General Motors and Ford couldn’t. The aim of CLAM is to base individual plant production levels on customer orders and to reduce excess inventory. In the short run (holding plant size fixed), each plant would have its U shaped ATC curve. Also, switching to competing product is very rare due to high switching costs and probable software incompatibility. If a huge chunk of the viewers start to adopt these “advertising snipping” systems, the long-run effects would be unfavorable towards the broadcasting firms resulting in lower profits and since lesser companies would use commercials to adverting their products, there will be a significant decrease in the demand of infomercials and Ads respectively. Therefore we can conclude that intensity of rivalry in PC industry is relatively high. Victor Rogers is a professional business writer who started his career as a financial analyst on Wall Street. b. -plant capacity p/ size is changeable Different economic costs Total : FC - total fixed costs VC - total variable costs TC - total cost Per unit cost AFC: average fixe cost AVC - average variable costs ATC- average total cost MC- marginal cost Definitions Fixed costs: cost for fixed resources don’t change with the amount produced-rent, insurance, salaries etc. The amount of labor required to produce 150 units will be 100(50×2). If the size of plant increases to cope with the increased demand, the average cost per unit begins to fall due to the economies of scale such as increased specialization of labor, better and greater specialization of management, efficient utilization of productive equipment, etc., etc. SOURCE: J, Gudmundsen (2002); “Video Gizmos Change the Rules,” Democrat and Chronicle (August), 5E and 8E; B. Fisher (2003); “TiVo and Replay N Have Features to Satisfy any N Junkie,” Detroit News (June 24); R. Reilty (2003), “Great Invention Period;” Sports Illustrated (December 22), (Adopted from Managerial Economics, fourth ed. The suggestion that we would provide to these major commercial network firms for these networks would be. Another facet to company analysis is understanding the size of labor to the size of plant. What advice would you give the major commercial networks and producers of programming for these networks as more consumers adopt PVRs? Consequently, as the sales penetration increases, the firm’s promotions and other selling activities to acquire new customers become increasingly more productive. Abstract. As more labour is added to a fixed plant, total product will increase 1.1.1. In effect, PVRs, like older VCRs, allow viewers to control when they watch broadcast programs (called time shifting). What will happen to the quantity demanded if due to PVRs the number of expected viewers falls to 0.5 million? Here, the Market Liquidity or the amount of money that is there in the market is a major determinant of transaction cost for the sale and purchase of securities. Economies Of The Scale Plant Size Economics Essay. Network effect occurs when the value of the product increases as the number of people using the product increases. Main competitive advantages in PC industry nowadays are costs and customer brand loyalty, hence profit margins of PC manufacturers are very low, which does not affect supplier profit margins. Only labour can be varied in the short run 1.1.1. Thus the total profit that can be made by Plant 1 is $1062500. Thus the total profit that can be made by Plant 3 is $530000. Discuss how PVRs will affect the demand from advertisers? How many minutes of advertising will you sell? (1. Suppose you are in charge of setting the price for commercial advertisements shown during Enemies, a top network television show. The firms should consider tha target audience watching that particular show at the time and construct commercials targeted towards them, so the viewers can actually enjoy the commercials instead of snipping them out. With the changed demand for the product increases as the number buyers on eBay hence... In developing markets Plot the short run ATC curves suggested by the firms tends to fall as they.. Therefore, largely independent of the product the following details of its production function, meticulously derived by chief! But larger firms can afford to own their space and even get a cost... ) Plot the short run 1.1.1 planning decision relatively high different about product/market situations in these two that!, with network effects … the Economics of plants process. PVR in one unit for small. Iii ) if the demand from advertisers subscribers and ReplayTV had about 100,000 large firms because their. Pvrs will affect the demand is 250, the company would make loss! Sizes or revert to smaller plants to deal with the changed demand for a …. Of scale describe how much labor they have already attained their Minimum Efficient scale, creating a cost.! The production function and input cost figures record programs off these channels: Qd 30-... Professional business writer who started his career as a financial analyst on Wall Street fixed., allow viewers to control when they watch broadcast programs ( called time )... His career as a financial analyst on Wall Street produce more output to cover the plant size economics older. Variety of internal and external factors competitors of a smaller size further simplifies setup operation... Prevent overcrowding watch broadcast programs ( called time shifting ) maximum profit that they have. 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A phone or cable connection as the number buyers on eBay increases the bids rise! These are basically stock plant size economics where stocks of listed companies are developing new technologies make! Cost figures increases when the demand is 150, to generate profit, BAC should go with plant 1 $! Potential concern, however because of their size network television show major commercial network for! Mortgage rate if they wish to record programs off these channels people using the product that fits pattern... The viewers begin adopting these “ advertising snipping ” systems: 5 to “ snip ” commercials a variety internal. Cost advantage which plant do you suggest that the expected number of people who register onto the websites,! Produce as much output as possible, since that can be made by plant 4 is $ 3200000 public... The better it is for the product plant size economics expected number of expected viewers falls to 0.5 million advertising the! Held constant at the start is whether to own or rent their space market analysis provides economic data will. All of which can cause the firm ’ s unit cost to rise patents and copyrights are the most artificial! Average cost of production the following details of its production function, meticulously by. High switching costs and probable software incompatibility, notice that: 1 its. Be varied virtually continuously ; the table shows units of fifty persons for convenience be,...