Marginal returns and profit optimization in restaurant production decisions

Production and Market Competition

Microeconomics Module 3 - Case Production, Costs, Profits Cost Profit in assignment, review reference material: Rittenberg Libby T. Tregarthen. (2009). Chapter 8: Production Costs. Sections 1-4 Principles Microeconomics.

Choice of factors of production

A firm's choice of factors of production to change will be determined by likely outcomes of the change. In the short run, a firm can only increase its variable cost. The required consideration in this case is marginal return. The needs to assess whether increasing a variable cost leads to; increasing marginal returns, diminishing marginal returns or negative marginal return. In the long run, a firm's production factors can all be changed. The firm will need to consider the marginal benefits and loses from capital or labor increments.

The considerations that the restaurant manager need to have is the likely change on its cost function. The manager should also be guided by the likely change in the marginal returns likely to be realized from a unit increase in labor. For the restaurant business considering adding a new grill and French fry machine would be advisable if there is spare capacity in the labor force and, the addition to this machinery will yield to increasing marginal returns. On the contrary, adding new machinery only where there is no spare labor force will yield underutilized capacity. This results to the firm having a higher average cost than marginal revenue.

Hiring too much labor with no increases in capital will in the short run increase a firm marginal benefit up to the point where the is no spare capacity to be utilized by added labor force. Should the restaurant employee to much labor force it will initially experience increasing marginal utility. This is the case where a unit increase in labor yields more than a unit increase in output. Additional increases to output will yield diminishing marginal returns. In this case, unit increase in labor yields less than a unit increase in output. Further increase in labor will result in negative marginal returns. This implies that a unit increase in labor adds no unit to output. The last scenario is the case of hiring to much labor. The restaurant employees will have no spare capacity to work with and will just be increasing the cost to the firm.

3. Competition

Generic Drug Company is highly attributed to their good knowledge of their competitors' products and their ability to produce a similar product. The employ higher degrees of efficiency to offer the market with homogenous products but priced cheaper.

The generic firm operations were made possible by scrapping of the restrictive Act in 1984. The generic firm as assumed to be a competitive firm. In their knowledge of the competitor, they replicate their competitor's production function incorporating it as their own. Te advantage that the generic drug companies have over the competitor is a production function of lower than market value cost.

Generic drug companies can be locked out of business through the same way they came to exist. Economically, branded drug firms can easily adopt the technology used by generic drug firms. This will provide the branded drug company the niche of running a business with higher efficiency with the advantage of branding.

4. Differences between short run and long run for perfectly competitive firm

A perfectly competitive firm is described as a firm that takes the price given by market and factors it in its production function. In a perfectly competitive market, firms have homogenous products for the same market. For Perfectly competitive market, there is no single firm that has control over the price but they can change what they will supply in the market.

In the short run, a perfectly competitive firm has control over the output it can supply in the market. At this juncture, the firm maximizes profits by increasing output to match up marginal cost with marginal benefit. In the short run, a perfectly competitive firm can earn some surplus since it total cost is not equal to total revenue with the latter being higher.

In the long run, a perfectly competitive firm can alter all its factor inputs. There is also a chance for new firms to enter the market. The existence of the economic profits in the short run acts as the attraction to entry of a competitor. The economic profit will be shared away by the competing firms leaving the firms operating earning normal profits. In the long run, a perfectly competitive firm marginal cost curve is equal to its marginal revenue curve which is also equal to the price ruling in the market.

Firms in a perfectly competitive market in the long run have no reason to change their output level since it is at this point only that they maximize profits.

A perfectly competitive firm may continue suffering losses of profits since it can offset most of its variable cost. In the short run period, a perfectly competitive firm has limited capacity to alter all it inputs. It is only in a position to change the variable inputs. In essence, the firms will not close down since it still has to pay most of the fixed factors cost. As a profit maximizing firm, it is rational for the firm to minimize losses, as opposed to shutting down operation. Towards this end, a perfectly competitive firm will opt to suffer the loss of profits as an option that will minimize its loss.