Analysis of the Arabian Construction Companys Costs - Essay Example

Analysis of the firm’s costs Implicit costs are also called imputed and they are costs of inputs owned by the firm and are sued in production. Arabian Construction Company (ACC) implicit costs incurred are those for the payment for the premises it owns and are used for production, depreciation of its capital equipment is the other implicit cost. Implicit costs are calculated by finding the value of its opportunity cost which is another cost incurred by ACC due to its foregone investments. Other costs incurred by ACC are explicit costs due to the purchase of inputs externally for production and outlay cost as recorded in the firm’s books of accounts are also incurred by ACC.

The costs above are categorized as variable or fixed depending on whether they change with the level of output or not(Lychak, Tara & Alvin, pg.43). The firm’s cost curves are as indicated above. The marginal cost curve rises steadily with the quantity meeting both the average cost curve and the average variable cost curves at their optimum. As indicated above, both the average cost and average variable cost curves of the ACC rise on either side from their optimum points as the quantity rises.

The explanation on how the AC and MC curves are derived from the TC curve is illustrated and the unique relationship that exists between the MC and AC curves is as shown. For example, when AC is falling MC is below AC and vice versa. MC is equal to AC at the point of their meeting (Lychak, Tara, and Alvin, pg.47). ACC tries to minimize costs by cutting down on some of its expenditure. The expenditure on unnecessary variable costs is cut down to ensure efficiency. Analysis of the firm’s market structure Arabian Construction Company is operating in a perfectly competitive market, which has many buyers and sellers.

The forces of demand and supply therefore determine the prices of the products offered by the company. Among the competitors of ACC, we have the Larsen & Toubro, which carries out large-scale construction projects and designs. The other is the DLF, which deals in the development of housing and retailing in property as well. The company has developed over 70 million square units of housing projects up to date. The firms in the construction industry do not deal on single products qualifying them to be in a perfect competition form of market.

The industry is free to enter and free to exit with very few legal formalities placed by the government governing company registration hence no barriers to entry into the market. Any firm which feels can withstand the fierce competition in the field can enter the market. The firms are also not forced to stay in the market hence they can always leave at their pleasure most so if they are not able to compete favorably (Etro & Federico, pg.132). The firms in this market are therefore neither price takers nor price makers; the forces of market, which are the forces of demand and supply, dictate the prices of their outputs.

Profits are therefore highly regulated. In this form of market economic profits are not there due to entry of many firms hence D=AR=MR as indicated. Works Cited Etro, Federico. Endogenous market structures and the macroeconomy. Berlin: Springer-Verlag, 2009. Print. Lychak, Tara, and Alvin Blake Brown. Production costs. Raleigh, N.C.?: N.C. Cooperative Extension Service, 1995. Print.