Profit There Are Two Important

¶ … Profit

There are two important things to consider. The first is whether the new investment pays for itself (Investopedia, 2012). Managers should not undertake activities that decrease the profits of the organization, so the manager needs to understand which of these options will increase profit more. If both will decrease profit, then neither option should be undertaken. If both will increase the restaurant's profit, and the options are deemed to be operationally mutually exclusive, then the one that increases profit more should be undertaken. The biggest worry here is that the investment does not pay off with increased sales. If sales do not increase as the result of removing the bottleneck, then the restaurant should not make any investment. Adding more capacity is only useful if there is market to fill it. If there is no additional market to be won with the additional capacity, then all any capacity addition will do is reduce the organization's productivity.

The second thing that the manager needs to take into consideration is with respect to operations management -- which solution actually addresses the bottleneck. The choice is between adding new equipment and adding more workers. At present, one or both of these will be the source of the bottleneck. Thus, the manager needs to consider whether the workers have down time at present or the equipment has down time. If the workers have down time, then more equipment needs to be added. If the equipment has down time, then more workers need to be added. The organization's operational considerations need to be taken into account. If both have down time, then there is no bottleneck and therefore no benefit to adding capacity, since there is already unused capacity.

2. The marginal decision rule states that a company should expand production if the price is greater than the marginal cost (Whitehouse, 2011). The assumption is that this additional production will be sold -- that there is unmet demand for the product. Arguably, a more logical view is that the marginal price should be higher than the marginal cost, since the price of a good may decline with increased production, in order to stimulate additional demand, since the good is probably already in a state of equilibrium.

The factors of production are related to the marginal decision rule because they affect the marginal cost. Expanding production, for example, means that marginal costs must be taken into consideration. Firms must understand their marginal costs in terms of being labor-intensive or capital-intensive products. Maquiladoras have thrived because they are typically for labor intensive production, because the lower cost of Mexican labor lowers the marginal cost of production. This is especially true if the decision is whether or not to build a new plant. With a new plant decision, the marginal cost associated with output from a new labor-intensive maquiladora plant and the marginal cost associated with output from a new capital-intensive plant in the United States is an important consideration.

Maquiladoras benefit the U.S. economy because they lower the cost of production for a number of manufactured goods. This lowers the retail cost of these goods to American consumers and allows for American shareholders to enjoy higher profits. The benefits stem from the theory of comparative advantage. The maquiladoras provide an opportunity for Mexico to specialize in labor-intensive production and the U.S. To specialize in capital-intensive production. With both nations specializing in the type of production in which they have comparative advantage, both nations benefit by having a higher amount of aggregate production and trade.

3. Generic drug companies have been successful because they specialize as cost leaders. Their systems are built around the idea of low cost production in high volumes, whereas branded pharmaceutical companies are developed around a model of research and development, and monopoly profits to pay for those R&D costs. Generic drug makers therefore are competing in the market according to the skills in which they specialize. They specialize in efficient production and distribution of drugs, rather than in developing new drugs.

A generic drug maker can go out of business simply on the basis of not executing their business plan well. However, generic producers have built their business plans around the FDA's current set of regulations. A change in those regulations could have an adverse effect on generic drug makers. For example, if the monopoly protections that come from a new drug approval are extended out further, that would reduce the ability of the generic producer to make money on any given drug. This is especially the case of the drug in question becomes obsolete during the time period prior to the generic having access to that market. In such a situation, the generic maker would not have access to that product during its useful economic life. Such extensions of monopoly protections would have to be across board, since most generic producers make hundreds or even thousands of individual drugs.

4. In conditions of perfect competition, it is conceivable that a firm can earn a profit in the short run. In the short run, a change in the market could result in one or more firms earning a profit. However, these profits will signal to other firms to enter the market. When these other firms enter the market, the profit will no longer exist. This is why it is said that there are no long-run profits in a state of perfect competition.

Margins costs in a state of perfect competition are at a point of marginal prices in the long run. If there is a change in the costs, a firm might be able to temporarily exploit this for a profit, but with perfect information consumers will not stand for this. If there is collusion among sellers, the marginal price might not be the same as the marginal cost, but over the long run this will simply reduce demand and the new equilibrium point will have it that is still no difference between price and cost in a state of perfect competition.