Business Cost Structures - Essay Example

BUSINESS ECONOMICS (Student Name) (Course No.) (Lecturer) (University) (Date) Business Economics Business entities use different methods to determine the amount of production at each stage while manufacturing a product. It is on this background that idea of cost structure exists. Defined as a way in which a business finds out the cost of producing a product while taking into account the amount of proceeds associated with the product sale. An effective business planning should take into consideration long-term investments (Agarwal, 2013, 255). In addition, the main objective of resource cost structure is to ensure a reduction in the expenditures through rationalizing business advantages and resources. Business cost structures differ depending on the motive of its implementation. In cost-driven structures, there is encouragement of investing lesser cost at every production step of a given product to distribution channels. In these structures, the product price is a factor of the expenditure, meaning that the higher the expenses involved in the production process, the higher the price of that commodity (Agarwal, 2013, 257). However, this type of pricing may lead to drawbacks of that particular product. Value driven structures center its production based on the value of the product and personalization elements. The most evident example includes the use of client-producer model to ensure a good relationship and availability of exclusive services from the producer. As a pricing tool in economics, cost structures highlights the areas within the production stages and costs associated with them (Velupillai, 2006, 362). Consequently, some business organizations use such information to identify the stage, which requires a reduction in the cost of production. As a result, most businesses embrace the concept of resource cost structure to manage their businesses. Cost structure takes into account the fixed cost, variable cost, and economies of scale. Fixed cost always remains constant within the production process regardless of the amount of goods produced while variable cost is proportionate to the amount of goods produced. Economies of scale relate to all benefits accrued to the company as output volume increases. Cost structure does not only focus on the business financial utilization, but also considers the use and management of various resources used in the production process. It is important to note all the raw materials required to produce a given product and their acquisition cost. Before the final product, monitoring all the stages and noting the costs at those stages helps to quantify the amount the business invest in every stage. Refinement of the expenses involved in the production process helps to ensure greater efficiency and quality products resulting in increased profit margin for the business (Petri, 2004, 101). Businesses combine various factors of production to increase their profitability. These assets include the land, labor, capital, and enterprise. Land provides raw materials like the oil while the capital embraces all the machinery. Labor includes people who are able to work, and enterprise or entrepreneurship combines all these factors of production. Considering an example of a company that is to invest in Information Technology (IT) as a consultant firm, different resources will help ensure efficient and well-organized way of offering services. Costs for these resources will determine the overall cost of the project (Werner, 2005, 237). Elements of land as a resource will include a place for setting up the business; labor encompasses all the individuals the business is to employ in order to help run some of the activities within the business. Capital is the initial amount and machinery involved in starting a business and it includes the computers and offices. Finally, entrepreneurship focuses on combining all these resources to increase the profit margin. Prices of commodities determine the amount of commodities purchased by the buyers and sales of that specific product. The price creates a balance between consumption and production of a product called equilibrium. According to the law of demand, the demanded quantity is a factor of price for that product. As a result, an alteration in the price of a commodity will always result in a drastic change in the quantity demanded. This is the demand price elasticity, which is negative whenever there is a decreasing demand and increasing price. The optimum size of supply and demand only occurs when the two aspects are in equilibrium (Werner, 2005, 236). Economists use the term as an efficient allocation. However, it is not easy to reach the optimum size unless it is through a theory. Various factors tend to influence the relationship between the supply and demand of a product. Market size relates to the availability of potential customers to purchase the product. If the market size decreases, the demand reduces due to fewer potential customers to purchase that product. This will also affect the amount supplied by the producer. In order to reduce losses incurred due to low sales return, the business may resort to supply fewer commodities that match their market size leading to a balanced supply and demand. While determining the market size of a given product, the supplier must ensure the enthusiasm and the customers’ ability to purchase their product. This is important since the integration of the two defines the demand. Availability of alternatives may influence demand for a given product. Substitutes are products, which can perform similar functions. These substitutes have a negative impact on demand for the competing products. Whenever there are substitute products, the demand always reduces especially if the price of the substitute product is lower than that of the product in question. In supply, substitutes relate to a single producer manufacturing two similar products. Such producers always tend to reduce the supply of one product in order to increase the production of the other. This is usually applicable especially when the producer is testing the market for two related products within similar institution. Future expectation in the reduction of the commodities produced or increase in the price will lead to increment in the demand of a commodity. Most consumers prefer purchasing their products at relatively lower prices; therefore, if there is an expectation in the increase of that particular product, the consumers will rush to purchase such commodities before the increment. Producers, on the other hand, may decide to hoard the product through reducing the amount of supply in the market. This is mainly done to increase the demand and price for that product. Technology has an impact on both the supply and demand of a product. Efficiency of each product depends on the technology involved in the production process. Consumers tend to like commodities, which are up to the current standards depending on the technology involved in the production process. Technology has no direct impact on demand, but it reduces the amount income available since it usually results in losing jobs by some workers to pave the way for the incoming technology (Petri, 2004, 107). The smaller the employment rate, the lower the demand for certain products by the customers. With the increasing technology, the producers are also able to supply more commodities are a result reduced human effort. Technology makes production easier, and quicker thus resulting in increased supply of a given product. In economics, demand and supply are the most fundamental components of market determinants of which the price is a reflection. While determining the markets economies, demand and supply are some of the forces underlying the allocation of resources (Velupillai, 2006, 368). Considering both the factors, they must all react to a time dimension. Demand reacts very fast to the change in the price of a commodity within a short time as compared to supply. Thus, it is significant to determine whether the change in either demand or supply will be permanent of temporary. Fig. 1: Demand Curve Fig 2: Supply Curve There are numerous decision-making tools within business management requiring integration of all operating costs. Economic theory focuses on the relationship between the volume and the total variable cost (Dwivedi, 2001, 289). Economic theory employs various concepts, which relies on economic models such as ceteris peribus in which the assumption helps in appreciating the existing relationship two different variables. There are several types of economic theories. An example includes the labor theory value that focuses on the economic value of a product. It mainly involves a high level of sociality among the laborers to ensure production of a commodity that attracts the attention of the buyers. Economic theory leads to the provision of normative standards that expresses the value of the product through the application of moral beliefs and deciding later whether the results are ‘good’ or ‘bad’. Through such assumptions, elimination of the factors influencing the demand is easier (Werner, 2005, 231). In addition, economic theory results in the minimization of the production cost since it helps in determining the optimum production point. The economic theory model is relevant to every firm while determining the impact of change in the price and other factors of demand and supply of a product. Economic theory also ensures efficient and optimized resource allocation in order to ensure appropriate use of resources. Nonetheless, there are several limitations associated with the use of economic theory in the business while making decisions. Since the theory bases much of arguments on the static assumptions, the outcome may not be true because these theories are not real in the actual markets (Werner, 2005, 231). Another shortcoming of the theory is an assumption that there is full employment in an economy which is generally not true as globally there is no economy such a scenario like full employment. Generalization of individual behavior may be another factor, which might not be true as assumed the economic theory. Generally, it is important to consider government interventions while devising a theory in order to reduce the shortcomings resulting from the assumptions of the theory. Business entities, especially those in the production industries, must consider formulating resource cost structure to ensure efficient cost-benefit analysis and reduction in the cost of production. With these factors in place, the business will enjoy sustainable profit margins within their businesses. References Agarwal, H. S., 2013, Principles of economics. Cranbrook, Kent: Global Professional Pub. Dwivedi, D. N. 2001, Macroeconomics: Theory and policy. New Delhi: Tata McGraw Hill. Petri, F. 2004. General equilibrium, capital, and macroeconomics: A key to recent controversies in equilibrium theory. Cheltenham, UK: E. Elgar. Velupillai, K. V. 2006. Algorithmic Foundations of Computable General Equilibrium Theory. Applied Mathematics and Computation, 179(1), 360–369. Werner, R. 2005. New paradigm in macroeconomics: Solving the riddle of Japanese macroeconomic performance. Houndmills, Basingstoke: Palgrave Macmillan. Read More