Microeconomics: Production, Costs and Profits Coursework

Introduction

It is of importance first and foremost to define what economic and accounting costs are before attempting to differentiate the two. Many sources define these two terms. According to the definition given by Amosweb in Monopoly and Perfect Competition, an economic cost is “the highest valued alternatively foregone in the pursuit of an activity”. It then goes ahead to equate it to an Opportunity Cost, (another term for economic costs) which is also defined in the same site as ‘The best alternative that is foregone because a particular cost of action is pursued’.

The Business Dictionary defines it as ‘The sacrifice in performing an activity or when following a specific course of action’. From these definitions, we can deduce that an economic cost entails a certain alternative that is foregone or forfeited in the pursuit of a particular thing or action. Had that action not been done, the aforementioned forfeited alternative would have been the most valued for the person in question.

On the other hand, an accounting cost is defined in the Economic Glossary as ‘The actual outlays or expenses incurred in production that shows up a firm’s accounting statements or records’. The Business Dictionary defines it as ‘The monetary value of economic resources used in performing an activity.

Economic costs are therefore different from accounting costs such that in most cases, they never reflect as accounting costs. This is because they are a value of forfeited production. With this regard, they are of more importance to economists who are more interested in this as compared to the accounting costs. It is also of importance to note that accounting costs are not associated with economic costs/opportunity costs.

Rittenberg Libby and T. Tregarthen (2009) state that “the short run time framework for a firm is that period during which some of its resources and thus costs are fixed”. It is for this reason, that its resources are fixed, that a firm may still operate even though a loss is being incurred.

Capital Intensive Versus Labor Intensive Methods of Production:

The Capital intensive versus the Labor-intensive methods of production solely depends on the capital-labor ratio. Production is said to be capital intensive when the capital-labor ratio is high. This is when the capital being used is relatively high in comparison to the labor input. Equally, when the labor used is higher than the amount of capital input, then the capital-labor ratio is low hence a labor-intensive method of production in the given firm.

The marginal decision rule states that an agent of economics consumes or produces goods that will provide zero marginal profit or utility. This owes to the fact that more is usually better up to that point where more no longer attracts from the benefits of the economic agent’s previous consumption levels. This article shows the relationship between capital and labor. It is clear through the Maquiladoras projects that labor is an important factor in the economic world. The fact that the Maquiladoras have provided so many job opportunities and income to Mexico and other related cities can be owed to the fact that there is readily available labor in the surroundings.

From the definitions therefore of capital-intensive and labor-intensive methods, it will be correct to say that the method of production visible in the Maquiladoras is the Labour-intensive method of production. This is owed to the fact that labor input is higher than the capital input in the productions. This article, therefore, applies the marginal decision rule by distinctly showing the capital-labor ratio in a given output.

The Maquiladoras have also boosted the U.S economy in various ways. This has been through the creation of job opportunities, the improvement of infrastructure along the U.S Mexico border, and the earning of revenue to the U.S through various projects related to the Maquiladoras. Many of the civilians leaving near/around the U.S border have got job opportunities through this project. Such gives a boost economically to the U.S economy.

Characteristics of a Perfectly Competitive Firm:

The type of firm plays a major role in how the firm makes a profit. It is important to note that there are two types of firms namely the Monopoly firms and Competitive firms. A monopoly firm has total control over the market. This is to say that the firm has no competition whatsoever in its market. On the other hand, the Competitive firm is that kind of firm built on competition. It is not the only firm in that given market hence does not enjoy a full monopoly of the market. The difference in these two firms will also influence/affect the profits made by each.

It is important to note that no economic profit is guaranteed to be made by any given firm. This is to say that it is not a guarantee that a specific firm will make more/higher profit than the other. However, a monopoly firm is in most cases likely to make more economic profit in comparison to the competitive firm this is owed to the fact that the monopoly firm can control the market price since it is the only firm in that given market of produce.

The competitive firm on the other hand does not influence the market price and will therefore have to sell its goods according to the market price stipulated for it. Therefore, the profit made by the competitive firm is largely influenced by the other competing firms and the stipulated market price at large. Therefore, the type of firm largely influences the profit made thereof.

The profits therefore of a perfectly competitive firm, in the long run, end up being re-invested in the production of the goods produced by that firm.

Comparison Between a Perfectly Competitive Firm to a Monopoly:

The economic profit due to a perfectly competitive firm is simply normal in comparison to the monopoly firm. This is because the market price of the competitive firms is so close to the cost of production that the competitive firm ends up making very little profit which is what is referred to as the normal profit. On the other hand, the fact that the monopoly firm controls the market price, can either regulate the prices up or down as it deems fit. In most cases, therefore, the market price of the monopoly will be way above the cost of production. The monopoly hence ends up making very large profits. In the long run therefore the profits of the monopoly end up being higher than that made by the competitive firms.

The competitive firm is also discouraged by the fact that whenever the market price goes up or is high, the market is then flooded by other competitive firms. This acts as a general ‘regulator’ of the amount of profit earned by the competitive firm. In conclusion, therefore, the monopoly firm earns more profit in the long run in comparison to the competitive firm.

References

Amosweb. “Monopoly and Perfect Competition”. n.d. Web.

Economic Definition of accounting cost. (2007, 2008).Economic Glossary. Web.

Rittenberg L., & Tregarthen, T. (2009). Principles of Microeconomics. LinkedIn: Flat World Knowledge, Inc.