Microeconomics the Most Common Way of Deciding

Microeconomics

The most common way of deciding between these two options is through capital budgeting. If the two decisions are mutually exclusive, a net present value analysis will determine which of these options is better for the store in the long run. This type of analysis involves calculating the incremental cash flows that derive from the decision, and then discounting them back to the present day. The up front cash flows should also be included in the calculation. Between two mutually exclusive options, the one with the higher NPV -- as long as it is positive -- is the option that should be selected.

However, in the course of conducting such a calculation, it will become apparent that these two tactics solve different problems. The confusion probably lies in the fact that the root issue is the same. If increasing capacity is the solution (and both of these options increase capacity), then the store needs to determine which of the issues (the workers or the equipment) is the source of the backlog. This speaks to fundamental principles of production -- one can increase capacity by reducing workflow backlogs, but increasing capacity in other areas that are not subject to backlog is unlikely to achieve any real measure of success, because the backlog will still be a constraint on capacity.

Thus, if the machine is the problem, hiring too much labor without the capital upgrade will not result in a significant increase in capacity. The store will not be able to turn out fries and burgers any faster with double the staff working on the same equipment, and this must be taken into consideration when calculating the incremental cash flows. The additional capital will increase the capacity of the store's equipment, and once that occurs it be found that the current staff size is insufficient to use this equipment to its maximum capacity. At this point, the company can hire new staff, knowing that this will result in capacity improvements and therefore deliver to the company a more efficient workflow during peak times.

2. The marginal decision rule holds that a firm should "expand product if and only if the price is greater than the marginal cost" (Baker, 2000). Vargas (2001) outlines the case of maquiladoras and their influence on the American economy. One of the key issues that she discusses is the production mix. She cites as example the plastic injection industry, which thrives in Texas border cities like El Paso and McAllen. These plants support the maquiladoras located across the border in Mexico.

These plants highlight the relevance of the marginal decision rule and the issue of the mix of the factors of production. Firms produce goods if they can sell them at a profit. This means that in order to justify expanded production, firms need to find ways to lower the cost of production, to keep the marginal cost of an additional unit lower than the price. While it appears that Mexican maquiladoras do not have the ability to product injection plastics, American companies can. The rest of the assembly is done in Mexico, taking advantage of the low cost of Mexican labor. As the result of this mix of the factors of production, companies utilizing the maquiladora system can lower their marginal cost of production without compromising on the quality of the good that they are producing, since the higher-end components can still be sourced from the United States.

3. Generic drug companies are so successful because the cost of manufacturing most drugs is quite low. The reason that prescription drugs are so expensive is because the FDA gives drug developers extensive patent protections. The drug makers then leverage these protections to charge monopoly rents on their drugs. When the patent protections lapse, then the market becomes competitive. Drugs, which by their nature rely on specific formulations of active ingredients, are difficult to differentiate. As such, competition for drugs often becomes based on price. Generic drug makers are often able to manufacture at very low costs, and then sell at low prices. Consumers who rely on pharmaceuticals are typically price sensitive, so generic drugs hold a strong attraction for people, especially since they are often just as effective as the branded version.

There are several potential challenges for generic drug makers. One such challenge would be an extension of patent protections for new drugs. Most drugs have a shelf life as a product, before new products are introduced that treat the same ailment. Thus, for generics the key to making money is to exploit the gap between the time the patents are removed on a drug and the time that drug becomes obsolete. Extending the period of patent protection would reduce the profit zone for generics, putting pressure on their makers.

Another area where the regulators could ruin the generic industry is to insist that generics go through the same extensive approval process that the branded drugs must go through under the NDA (New Drug Application). The approval process for generics is streamlined, and that helps to hold down the cost of bringing generics to market. For firms operating on a cost leadership strategy, the streamlined approval process is a necessity. Without it, fewer generic drugs would be profitable and all drugs would make less money.

4. In short run perfect competition, price and production are set by the market at the equilibrium point. A firm's production levels are set with this equilibrium point in mind -- it can sell everything it makes at the equilibrium price with no discounting necessary. Under short-run perfect competition, the profit a firm earns is the difference between total revenue and total cost. Variable costs should be the same for all firms in the industry, the same with prices, so the only firm-specific factor affecting profit is the firm's fixed costs.

In the long-run, new firms will enter the industry if the existing players are earning profit. This will shift the supply curve to the right, and that in turn will cause prices to be lowered, until finally there are no more profits in the industry. At this point the industry is said to have reached the point of equilibrium. The costs faced by the firm may not change, but the profits will. In the long run, firms in a state of perfect competition cannot earn a profit, considering the assumption of perfect competition is a lack of entry barriers.