# Microeconomics

Posted: October 17th, 2013

Microeconomics

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Microeconomics

Technology could be used for different applications in the production processes as well as the management of the organization. Technology could be used to lower the costs of operations when applied in the production process. It could be used in place of workers. This is essential as it reduces wastage in the production process, which is a prominent source of losses in production processes. The use of new machinery that can use precise amounts of material for the production process would ensure quick realization of improvements in the production process. Hence, the short-run results would spread out into the long run until more improvements in the production process are needed. A reduction in amounts wasted in the production process is realizable instantly (Browning, & Zupan, 1999).

 No of Workers No of Ovens Quantity of Loaves of Bread Produced Cost of Ovens Cost of Workers Per Week 0 2 0 500 0 1 2 50 450 2 2 125 1125 3 2 210 1890 4 2 300 2700 5 2 410 3690 6 2 550 4950 7 2 625 5625 8 2 660 5940 9 2 700 6300 10 2 730 6570 Total Costs 5,000 39,240 Marginal Product Average Product of Labor

Total costs for the ovens are 5,000 whereas the total costs for the workers are 39,240. The averages for the two items are 500 and 3,924 respectively.

The workers are described as the variables. This is because the production process depends on the number of causal laborers in order to execute the various production process functions.

Marginal product of labor is defined as the change in the total output, per the unit change in the labor: MPL = 50/450= 0.11
Average Product of Labor is defined as an appropriate measurement tool for evaluating the productivity or output of the workers in production processes. A higher value of the APL is an indication of the high level of production. However, this does not result in high profits as profits are determined by external factors such as market saturation and demand for the products.

APL= Product Output/ No of workers= 39240/730= 53.75

There is significance of changes between Marginal product of labor and the average product labor. The marginal product of labor indicates the changes in terms of the output and the labor while maintaining other factors of production constant. A rise in the marginal product of labor leads to a subsequent reduction in the marginal costs of production, whereas a reduction in the marginal product of labor would result in a subsequent decrease in the marginal costs of production (Jehle, & Reny, 2001).

An increase of labor in the short run would result in a higher output, which would eventually result in production surpluses. It would result in a subsequent shock to the short run bread market which might be attributed to an increase in the aggregate supply the bread in the market. It would result in a shift in the demand curve from the left to the right of the supply curve. In essence, this results in an increase in the production process but a decline in the price of the commodity. This is attributable to the presence of surplus products in the market; hence, an entity reduces product prices to ensure adequate sales and avoid making losses from stagnant or declining sales. This is evident as high supply of bread and low demands from the prompts the entity to cut prices to remain relevant within the market (Jehle, & Reny, 2001).

The marginal costs are mainly the cost of labor, which is a determinant for the level of output. The marginal costs such as the costs of labor determine if an entity can attain economies of scale in its production thus achieving eventual profitability.

The marginal and total costs intersect at

Average total costs=44,240/10=4,424

Average fixed costs=5000/10=500

Average variable costs=39240/10=3,924

Marginal cost is lower than the average variable cost. This is because the average variable costs are on an increase given the higher rate of production. Thus, an increase in the number of laborers translates to a subsequent increase in the number of goods produced. An increase in the total goods produced translates to an increase in the number of laborers in the production process who have helped the attainment of such goals. Bread making is an unpredictable business given that all elements used in the production process vary with the level of output (Jehle, & Reny, 2001).

The average total costs and average variable costs are related to each other because they focus on the costs of production. Because the costs are classified as all variable, they can be grouped as identical. The total costs are equal to the average total costs because they constitute of identical costs, which classified as variable costs. Expansion of the business would translate to higher levels of output. This in essence means that the entity would be able to produce more bread on lower levels of costs such as labor and costs of maintaining the ovens. An entity in the process of increasing its output experiences a reduction in the long run average cost. However, in production the entity reaches a level of saturation whereby the entity reaches a point of saturation resulting to increase in the long run average cost (Bhaduri, 1999).

A constant return to the scales essentially translates to changes in output, resulting in subsequent changes in the factors of production, and related inputs of production. Hence, an increase in output increases by the same proportion of changes, resulting in constant returns to scale.

Optimal production and optimal pricing are usually achieved in a perfect competition and short-term production process. This is achieved when the entity produces what is considered as profit maximizing quantity of products, which equate the marginal revenues and costs. Such is only viable in the short-term production process. There is a need for evaluation of market trends to understand the effects of such on a long-term production period.

References

Bhaduri, S. C. (1999). Microeconomic theory. Calcutta: New Central Book Agency.

Browning, E. K., & Zupan, M. A. (1999). Microeconomic theory & applications. Reading Mass: Addison Wesley Pub.

Jehle, G. A., & Reny, P. J. (2001). Advanced microeconomic theory. Boston: Addison-Wesley.

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