Economics Discussions Production Costs Postal Service (USPS)

Economics Discussions

Production Costs

Postal Service (USPS) operates at a loss but its closest competitors -- UPS and FedEx -- both operate at a profit. Suggest how fixed costs have contributed to the situation of the USPS. Provide support for your response.

I would suspect that the fixed costs of contributing to employee's retirement funds (Risk Analysis Research Center, 2009, p. 4) and also their restriction from closing local offices (Slentz and McCann, 2009, p. 12) contributes to higher fixed cost at USPS than FedEx because FedEx is not unionized and while UPS is unionized, and thus experiences a fixed cost that is incurred to the level of union contracts, those contracts are more negotiable for UPS than USPS, and nonexistent or fluid for FedEx. Furthermore while union contracts probably affect the rate of closure for physical facilities for UPS, this would probably be more negotiable than for USPS and FedEx especially if FedEx operates totally under 'right to work' management structures. The fixed cost USPS inherits from its special status as an 'off-budget' but still in some ways regulated recipient of federal transfers mandates it upholds these precedents from an era without UPS or FedEx.

2. You are the owner of a manufacturer of widgets. You experience additional demand for the product that you don't want to ignore. Propose three methods to take advantage of the demand using your existing facility while minimizing costs. Analyze the advantages and disadvantages of each method. Provide support for your response.

The first method would be to run the plant at overtime. If there is a union contract, this may not be possible; likewise, if that produces more than the demand, then this may result in excess inventory. The second method would be to add shifts to the existing plant, which may result in excess inventory if not forecast precisely, and may also be prohibited by union contract if that is a factor. The third method would be to purchase bulk product at wholesale and sell that at retail to the demand. This would not involve running plant at overtime or on second shift, and may very well minimize cost. Without either adding production, or purchasing additional inventory outside the plant, the final way would be to 'produce twice as much using the same input costs.' If we could do that, we would do that all the time, and increases in demand would not be a problem, we could just magically create more using the existing plant, which we could have done before, but decided not to for some reason.

Sunk Costs and Perfect Competition

3. Suggest a case in which a sunk cost would be useful to a company. Provide support for your response.

Sunk cost is useful to a company any time that is required for a new venture, to generate operating revenue in the future. An entrepreneur could hire twenty waitresses, but without electricity, none of them could serve a single plate. Electricity is a sunk cost that has to be incurred regardless of how many units of labor are deployed. A company that sold Web design would have to have access to the Internet whether or not it sold a single unit that day. Any necessary cost that does not directly generate sales but is necessary to the operating investment that generates revenue, constitutes sunk cost but without it no sales take place.

4. Give your opinion on how the model of perfect competition has been useful for economists. Provide support for your response.

The model of perfect competition has been useful for economists in the real world in many ways, by allowing us to recognize efficiencies that would otherwise have gone uncaptured. Economic theory usually does not predict specific outcomes, as demonstrated by Solow's Residual (the increase in productivity growth not explained by capital or human capital formation, see Investopedia 2012) or the ongoing revision of national income and product accounts as actual information becomes available over the years after GDP and other macroeconomic indicators are announced every quarter. But without some model of perfect competition to compare to the actual world around us which is in reality governed by economies of scale; information asymmetries; restrictions to movement of labor and capital, and laws and regulations protecting the general public from very real harm in countless recorded incidents, the model of perfect competition provides an abstract benchmark that identifies very real consumer and producer surplus where those may have gone unidentified, which provide opportunity for greater output from limited natural resources.