Topic 2_ Foundations Of Economics - Costs And Decisions

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Ashford University *

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Economics

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Jan 9, 2024

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Objectives: 1. Explain the production costs of the firm. 2. Use and apply marginal analysis in the firm's decision-making. 3. Explain how firms make an investment, shutdown, or exit decisions. Input and output views of the healthcare-then healthcare system of the United States from an economic point of view and introduces tools of economic analysis. It looks at the healthcare system from two perspectives Input and Output Views of the Healthcare system have two perspectives The first perspective called the input view, emphasizes healthcare's contribution to the public's well-being. The second perspective called the output view, emphasizes the goods and services the healthcare sector produces Meaning of Input and Output an input is a good or service used in the production of another good or service, and an output is the good or service that emerges from a production process. Products (which include both goods and services) are commonly both inputs and output Example of Input and Output For example, a surgical tool is an input into surgery and an output of a surgical tool company. Similarly, the surgery itself can be considered an output of the surgical team or an input into the health of the patient. Topic 2 Dq1 Explain a situation you have observed (or read about) in which a firm made a decision considering irrelevant costs or did not consider relevant costs. What was the outcome of the decision, and what could have been done differently? When making lengthy trips from Tennessee to Michigan, the trucking company owned by my uncle was looking for a more affordable way to heat its vehicles. To keep the engine fluids from freezing during the winter and to warm the inside of the truck so the drivers could sleep, truck drivers had to keep the engines running. The business considered adding small generators that could handle both tasks and were mounted on the back of each truck. 2-3 miles would be saved by the extra miles per gallon. That added up to a significant sum of money throughout a 6- to 7-day trip. The business took out a loan to pay for the generator installation because they thought this was a wise investment. The relevant cost of interest, however, was overlooked by the company. On the loans for the generators at the time, the company was paying 18% interest. The company would have been better off not installing the generators because doing so would have cost them more money in the long run than just leaving the engine running all night. Poor decisions like this eventually led to the company's demise in 2013. The one lesson of economics is to consider both the present and long-term effects of a choice( Froeb, et.al., 2018 ). In this case, the trucking company decided to install generators without taking into account all relevant costs. Alternatively, the trucking company could have raised prices to cover some, if not all, of the costs of the wasted gasoline. The company should have looked for less expensive alternatives, such as lower interest rates or less expensive generators. Making the right choice often depends on taking into account the appropriate costs. Reference:

Froeb, L., McCann, B.T., Shor, M., & Ward. M.R. (2018). MindTap for Managerial economics: A problem-solving approach (5th ed.). Cengage Learning. ISBN-13: 9781337106580 Topic 2 Dq2 Explain why pricing and production are extent decisions and not decisions that should be tackled with break-even analysis. Does the same apply to investment decisions? Provide a rationale to support your response. Decisions based on extent are different from those based on break-even analysis because they place more emphasis on a product's cost and quantity to produce. Fixed costs are factored into the break-even analysis equation to determine how much product to produce at a given price so that revenue equals the sum of all variable and fixed costs. Due to the inevitability of fixed costs in the short term, extent decisions see fixed costs as irrelevant to the decision ( Froeb, et.al., 2018 ). Decisions about scope are centered on relevant costs and benefits. All investment decisions involve exchanging current costs for future benefits ( Froeb, et.al., 2018 ), which distinguishes them from both extent decisions and break-even analysis. The primary consideration when making an investment decision is which is greater: the current cost or the future benefit. Let's examine a fictitious coffee manufacturer as an example. The decision regarding the extent would take into account how much coffee should be produced to satisfy demand and at what price to sell it. To determine the total amount of coffee that must be sold at a specific price for total cost to equal total revenue, a break-even analysis would take into account all costs (fixed and variable) related to coffee production. An investment decision would consider the cost of producing coffee and try to determine the best way to use capital to maximize future benefits while minimizing immediate expenses. In business, all three choices should be applied in various circumstances. Every businessperson should be aware of the advantages of each decision type and when to use them. As stated by the authors of our course book "You will never get confused if you begin with the decision you are considering”( Froeb, et.al., 2018 ). Reference: Froeb, L., McCann, B.T., Shor, M., & Ward. M.R. (2018). MindTap for Managerial economics: A problem-solving approach (5th ed.). Cengage Learning. ISBN-13: 9781337106580 Responses The costs incurred to acquire the factors of production—such as labor, land, and capital—necessary for a product's production are referred to as the cost of production in economics. In the process of creating a product or providing a service, businesses may incur a variety of production-related costs. Fixed costs are outlays that remain constant regardless of the volume of output. This indicates that even when there is no production or the company has reached its maximum production capacity, the costs are unaffected. Costs that fluctuate according to changes in the volume of production are known as variable costs. In other words, they change with the production volume, rising with higher volume and falling with lower volume. The price of creating one additional unit of output is known as the marginal cost. It demonstrates the rise in overall costs brought on by the production of an additional product unit. Changes in variable costs have a greater impact on marginal cost than changes in fixed costs because fixed costs are constant regardless of any increase in output. Identifying the fixed costs is the first step in calculating the cost of producing a product. Finding the variable costs incurred during the production process is the next step. The average cost per unit is then calculated by adding the fixed and variable costs and dividing the total cost by the quantity produced.

Reference: Froeb, L., McCann, B.T., Shor, M., & Ward. M.R. (2018). MindTap for Managerial economics: A problem-solving approach (5th ed.). Cengage Learning. ISBN-13: 9781337106580

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