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Businesses in the Long-run - Essay Example

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Businesses in the long-run usually tend to operate under variable costs as a result of the inconsistency of the factors of production. Long-run involves making future plans for production when expansion of production in the short-run is limited, for example by the inflexibility of the fixed assets such as the size of the industry…
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Businesses in the Long-run
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Download file to see previous pages The original industry size can not hold the increased output. However, the size of the expanded industry has to be optimum to ensure that the business is able to avoid diseconomies of scale (Roncaglia 2006 p 582). There are many factors that may affect the effectiveness of a business in the long-run. For example, technological advancement may either improve the operations hence increased output and reduced cost of production, or it may lead to the obsolescence of the existing technology leading to an extra cost for the business.
A business may experience falling long-run costs through changing the factors of production. There is an optimum level whereby the prices are expected to be maintained, or gradually begin to rise as the factors of production continue to be varied. However, there are situations when the long-run costs may continue falling even after this point is reached, which indicates the capacity of the industry to satisfy the market with greater variation of the inputs. This essay is a critique of why businesses might experience falling long-run costs as well as the effects of this on the competitive process and the structure of industries. It also critiques the reasons why long-run costs might begin to rise, and how a business can try to avoid the rise, to maintain competitiveness in the market.
Businesses usually experience falling long-run costs after engaging in ...
This occurs due to the fact that if a particular production system can produce more units when more inputs are applied, it would not be utilized maximally if only a few inputs are applied in the system (Roncaglia 2006 p 582). For example, if a sisal processing plant can produce 300 units of finished product from 700 units of raw materials and operates in an environment whereby the source of raw materials can only supply 400 units, it might benefit in the long-run if it moves to other regions where the raw materials are abundant. This would lead to a fall in the long-run cost since the same plant that was initially used to produce few products for a lower profit will be used to produce a larger quantity of output within the same premises for greater profits. This means that in the long-run, a firm is able to increase its efficiency through increasing the inputs. On the other hand, when inputs are variable, the firm will only maintain the inputs that can reduce the cost of production to improve profitability.
Market expansion is significant in leading to a fall in the long-run costs of a business. This is because as new industries are established in a particular region, the prevailing industries are likely to expand to match the emerging industries. Development of industries concentrated in a particular region attracts professionals in the appropriate fields of production; hence it becomes easy for organizations to access skilled labor thereby increasing productivity. The more an industry employs skilled workforce, the more the costs of production decrease. On the other hand, suppliers for raw materials are likely to lower their cost as a result of many suppliers competing ...Download file to see next pagesRead More
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