Profit
Profit is an element of the difference between the cost of production and the revenue that is derived after the sale of the product;
Profit/loss = price of goods sold (minus) total cost of production and sales
To ensure that one’s profits are high, there are two options of doing it; one is to reduce the cost of production or to increase the revenue derived from the product. In a supply curve, the general trend is that when prices of a commodity are high, then production is high (Ruffin & Gregory, 1988).
Businesses Affected By Global Crisis
The United States of America is a major player as a consumer and producer in the world. The purchasing power of the Americans was reduced and thus the demand for exports and home produced goods reduced. This led to reduced gross domestic earnings of the world. Such companies include McDonald and General Motors.
Variable Costs, Fixed Cost and Profit
As discussed earlier; profit is an element of cost. The cost can be divided into two components; fixed cost and variable cost
Total cost = fixed cost + variable cost
Fixed cost is that cost that must be incurred whether production is taking place or not. An example of this includes rent, licenses, and loan repayments. In the cost of a product, there is a proportion of this.
Variable cost is a cost that is incurred if a certain production has taken place. For example, if production of good has consumed some materials and labor. This is a cost that a business can reduce through efficiency and continuously improving their processes; the higher the cost, the lower the profit (Shane, 2003).
Examples of companies that have high pension costs
Different companies have different pension schemes; Toyota limited and Hilton group of hotels are examples of international companies that give high pensions after retirement.
Technology
As a company develops its processes, there are new ways of doing things that are developed. This may be in terms of using computers or refining the processes to make them more efficient. The advantage of adopting these new technologies is to ensure that efficiency is attained in all production and marketing strategies. When efficiency has been attained, then production costs reduce. A reduced cost can give a business a competitive advantage and increase its profit margin.
Technology is efficient and fast than labor, and that is why companies are opting for machines than human capital. On the other hand, the machine can work for long periods and maintain their effectiveness, unlike human beings (Duening, Hisrich, Lechter, 2009).
Why Average Cost Curves are U-shaped
This is because they decrease with expertise and efficiency, but they reach a point that they cannot decrease again but increase instead. The bottom of the U shape is at the point that the business is producing at its lowest. Producing another quality reduces efficiency.
Law of Diminishing Returns
It means that marginal production of a factor of production reaches a point and it starts to deteriorate. For example, if a company has been employing people continuously, there will reach a point that by adding another person, the benefits that he brings to the company are reduced not like the benefits that were brought by others. It is also referred to as the law of increasing relative cost (Case & Fair, 1999).
Company’s two short-run options
A company has to meet some costs when it is operating; these costs are both variable and fixed costs. Depending with the way business is performing, there is two options either shut down or continues with business.
If a business is meeting its financial obligations when they fall due or there is hope that it will meet the obligations shortly depending with the way business is doing, then there is need to operate the business. The business is said to have taken a stay open option.
If a business is not meeting its financial obligations when they fall due, and there is no hope that it will meet them the best option is to stop the business, it will have taken the shut down option (Slavin, 2009).
Reference List
Case, E. & Fair, C. (1999). Principles of Economics (5th ed.). New York: Prentice-Hall
Duening, N., Hisrich, D., Lechter, A. (2009). Technology Entrepreneurship. New York: Academic Press
Ruffin, J.; Gregory, P. (1988). Principles of Economics (3rd ed.). Glenview, Illinois: Scott, Foresman
Shane, S. (2003). A General Theory of Entrepreneurship: the Individual-Opportunity Nexus. London: Edward Elgar
Slavin, L. (2009). Economics, 9th Ed. New York: McGraw-Hill