The firm’s output price is $25.00 per unit. This is against the average variable cost of $22.0 per unit. This means that if the firm has no fixed costs it can operate at a profit of $3.00 per unit. However, adding the $1,000,000.00 fixed cost, the total costs exceed the total revenues and the firm operates at a loss of $3.00 per unit.
Using the second assumption of $3,000,000.00 fixed costs the firm’s average variable cost is unaffected. However the total costs of production comes to $7,400,000.00 hence making huge losses. Under this assumption the total cost per unit comes to $37.00 hence making a loss of $12.00 per unit. Under the first assumption the firm should shut down once the fixed costs reach $1,000,000.00. This is because the firm shifts from making profit to incurring losses.
Fixed cost is the cost that remains unchanged at the various levels of output. An organization’s management should be able to analyze the fixed costs properly so as to set a required markup that will ensure that the total revenue exceeds both the fixed and the variable cost (John, 2006).
This is the only way that a firm can ensure that it breaks even or even better, record profits. The other importance of analyzing the costs of a firm is to be able to track, monitor and set the desired level of productivity that will ensure that it makes the targeted profit margins (Peter & Curwen, 1990).
Under the assumption of $1,000,000.00 fixed costs, the firm can operate at a loss in the short run. However, some employees may need to be laid off to ensure that it breaks even. Under the first assumption a total of 5,000 workers need to be laid off so that the firm can break even. In the second assumption a total of 30,000 workers need to be laid off so that the firm can break even.
The decision of lying off workers so as to achieve the targeted profit margins is usually carried out where the management ascertains that there is production idle capacity (David, 1974).
This means that the same number of workers can increase productivity to achieve more output than the current one or fewer workers can increase their productivity to achieve the same level of output. The management therefore ought to determine the level of idle capacity and match it with the desired output so as to make sure that workers are well able to achieve the new levels of output.
In both of these cases, lying off the workers means that their productivity needs to increase so as to maintain the 200,000 units of output per day. Under the first assumption, the productivity needs to go up to 4.44 units per worker per day. This is not a huge change in the number of workers and the firm need not close down since the workers can increase their productivity.
However under the second assumption where the number of workers that need to be laid off comes to 30,000, the firm might not be able to increase the required workers’ productivity since it is too much to ask. The levels of productivity need to be realistic because if workers are asked to deliver more than they can objectively do, their motivation may go down resulting in even less production levels.
Under this assumption, the new productivity comes to 10 units per worker per day. This is more that a 100% increase in productivity and the firm may need to shut down immediately since it would not be realistic to ask the workers to increase their productivity by more than 100%.
Discussion Board
Perfect Competition
Perfect competition markets exist where there are many providers of a certain commodity such that there is no single seller who can dictate the conditions such as setting of prices (Peter & Curwen, 1990). This paper will discuss the perfect competition in the clothing market in London.
The buyers in this market include the young adults, the old people, the sporty, and the buyers who look for official clothes. The sellers around London in this market are numerous. They include the Selfridge, the Harrods, the Bon Marche, Merc clothing, and the TopShop among others.
The conditions set in the model match the real world conditions in that the conditions of the perfect market are well reflected in the clothing market explained above. There is ease of entry and exit as the market has experienced a recent entry of more suppliers and a few have exited the market as well. This is one of the main characteristics of a perfect competition market model (David, 1974).
In London, the clothing market is characterized by sellers being the price takers. This is because the competition compels other players to attract customers through offering them cheaper deals. This has resulted in price competition as buyers visit outlets that have cheaper prices when shopping for clothes.
The clothes in the market are however not standardized. This is because there are varieties of clothes such as designer clothes, sportswear, official, ladies, and babies’ clothes among others. Different buyers therefore visit different shops according to their needs. The government activity in this market is minimal. There is no evidence of government regulation and the prices have always been set by market forces of demand and supply.
References
David, L. (1974). Introduction to Microeconomics. New York: Basic Books.
John, P. B. (2006). Microeconomics: Optimization, Experiments, and Behaviour. New York: Oxford University Press.
Peter, E., & Curwen, P. (1990). Principles of Microeconomics. London: Unwin Hyman.