plant size economics
Term plant Definition: The physical capital (building and equipment) at a particular location used for the production of goods and services.While the term plant is occasional used synonymously with the terms firm or business, when economists get down to specifics, which they are prone to do, the term plant is used ONLY for a specific production facility. Now if we consider the probability factor, where in this case it is 0.5, then the profit made would be: Demand = 150; Profit = $ 2025000; Probability= 0.5. Provide a graphic illustration of sales penetration curve pertaining to the network effect and explain your logic. As the number buyers on eBay increases the bids prices rise and hence it becomes more viable to sell on eBay. Two companies currently sell the hardware and provide the subscription service: TiVo and ReplayTV. In the short run (holding plant size fixed), each plant would have its U shaped ATC curve. If the demand increases to 200 or 250, Plant 1 cannot be used as the maximum units that can be produced by plant 1 is 185. The figures represent means over plant-level averages, such that each plant has the same weight. Fuel, operational, and maintenance costs are relatively small components of the total cost. This results in a spike in the number of sellers on eBay and hence brings down the prices of products as the supply increases. The larger the plant size is, the greater would be the output level at which average total cost reaches its minimum, and the lower would be the minimum ATC. In forming the design basis it is necessary to determine the opportunity to satisfy a societal need, and assess this based on market analysis which includes current production, projected market demand, and current and projected selling prices (Seider et al., 2004). Suppose you are in charge of setting the price for commercial advertisements shown during Enemies, a top network television show. Businesses that are capital-intensive and technologically inclined can afford to expand their output and benefit from economies of scale. What is different about product/market situations in these two cases that affect sustainability? So rarely is a plant or factory the sole subject of economic study. 2. Why Pepsi and Coke managed to maintain its leadership position compared to General Motors and Ford because of it managed to adapt to changing market situations and consumer tastes and preferences whereas the two car manufacturers couldn’t. (3.) 1.1. When the demand is 100, the company would make a loss of -$350000. Although actual demand for a product … For Plant 1: In this case, where the demand is 200, Plant 1 cannot be used, as the maximum number of units that can be produced by … However, economies of scale may also arise from an increase in the number of plants of a firm, irrespective of whether the firm continues to produce the same product in the new plants or diversifies. Compared are solar stills, solar-assisted desalination, reverse osmosis for small plants. Similarly, if the size of the plant is smaller than SAC 4, average cost of production is higher. Many small businesses strive to grow their operation to reap similar benefits. c. Another form of advertising could be to integrate advertising into the shows itself. Plant location and size decisions. If a huge chunk of the viewers start to adopt these “advertising snipping” systems, the long-run effects would be unfavorable towards the broadcasting firms resulting in lower profits and since lesser companies would use commercials to adverting their products, there will be a significant decrease in the demand of infomercials and Ads respectively. After the owner installs the hardware, the PVR downloads all upcoming TV schedules to the hardware via a phone or cable connection. So, smaller firms with the right resources and capability may be able to achieve economies of scale in developing markets. When the demand is 150, the maximum profit that they would earn is $1725000. The two sets of products are very different from each other. Calculate the “viewer elasticity” based on the two points. In some cases, they can experience lower borrowing costs or other incentives compared to competitors of a smaller size. Discuss two examples of the product that fits this pattern. In economic terms Coke and Pepsi managed to maintain its oligopolistic nature of market structures in comparison to General Motors and Ford who lost the battle of market dominance and the market turned into a monopolistic one. When the demand is 200, the maximum profit that they would earn is $3200000. Economic comparison is made for three different plant sizes. When the demand is 250, the maximum profit that they would earn is $4075000. The other suggestion would be to slowly decrease the price of the advertising rate per second so that the companies still continue to advertise and are not discouraged to stop advertising at all. We’ll occasionally send you promo and account related emails. Yet, no matter how much the owner may want to expand, he may have to limit production to a level that will maximize the business's profit at the current stage of its business. al.Ch. However, when the Japanese invaded the U.S market they had large scale operational advantage and brought products into the market which the consumer then wanted (small, reliable and well priced) which posed as a direct threat to General Motors and Ford. They are very typical examples of the Network Effect. A firm is making a long-run planning decision. Never have they ever faced a challenger of a competitive advantage until recently by red bull which is also only in the energy drinks category, overall beverage category its an unrealistic thought to conquer the market as no company can enter with a competitive edge in the mainstream carbonated drinks category. 4, pp. Optimal plant is the size where costs are minimized, i.e. However, physical size, at least in productive niches, is a fundamental determinant of the ability to acquire resources (Grime and Pierce, 2012), and forms an axis of trait variability distinct from that of the plant economics spectrum (Díaz et al., 2004; Cerabolini et al., 2010a). The amount of labor required to produce 150 units will be 50(50×1). Also, switching to competing product is very rare due to high switching costs and probable software incompatibility. What Is the Profit Maximizing Amount of Labor to Hire? Victor is an alumnus of St. Lawrence University, where he graduated with honors in economics and mathematics. A model of optimal plant size is developed which predicts that 1) plants experience increasing returns to in‐plants inputs, 2) the relative price of plant output is greater in rural areas than in urban areas, and 3) plants are larger in urban areas than in rural areas. (b) Comment on the economies and diseconomies of plant size (if any) which are evident in your graph. Therefore, Profit =150*50000-(4500000+(100*12000)+(150*2500)) =$ 1425000. The amount of labor required to produce 200 units will be 200(50×4), Therefore, Profit =200*50000-(3600000+(200*12000)+(200*2500)) =$ 3500000, The amount of labor required to produce 200 units will be 150(50×3), Therefore, Profit =200*50000-(4500000+(150*12000)+(200*2500)) =$ 3200000, The amount of labor required to produce 200 units will be 100(50×2), Therefore, Profit =200*50000-(5400000+(100*12000)+(200*2500)) =$ 2900000. However, cars fall in to the automobile industry and is not a fast moving good, a person takes into consideration multiple factors before graduating into a stage to be willing to purchase (readiness to buy) the product unlike Pepsi or Coke. Managers can only operate at an output level where the extra revenue gained from one more unit of production matches or exceeds the extra cost involved in making that product. when all economies of scale have been obtained, but diseconomies have not set in. Thus in this case where demand is 150, to generate profit, BAC should go with Plant 1 as it would maximize profit. When the demand is 200, the maximum profit that they would earn is $2900000. It is for the simple reason that more people would use the PVRs to record TV shows and would skip the commercials shown in between shows, thereby resulting in less viewership of ads. (2. Thus the total profit that can be made by Plant 1 is $1062500. When the demand is 250, the maximum profit that they would earn is $4975000. (2.) Suppose price is held constant at the value from part (a). New nuclear power plants typically have high capital expenditure for building the plant. Suppose that the expected number of viewers is one million people. increases all (both fixed and variable) inputs by a common proportionality factor. When the demand is 100, the company would make a loss of -$1250000. The Economics of Plants. Users merely enter the name of the show(s) they want recorded and the system finds the time and channel of the show and automatically records it. Therefore, Profit =150*50000-(2700000+(200*12000)+(150*2500)) =$ 2025000. Discuss the long-run effects if a significant proportion of the viewers begin adopting these “advertising snipping” systems: 5. Also, it can lead to missing products or breakages all of which can cause the firm’s unit cost to rise. Therefore, the suppliers tend to have little value in the PC value chain. The quantity demanded will decrease from 28 to 15. Now if we consider the probability factor, where in this case it is 0.2, then the profit made would be: Demand = 100; Loss = -$50000; Probability= 0.2. eBay. Here the products success is determined by the increasing acceptability and compatibility of the product rather than it being superior of inferior than and of its competition. Now if we consider the probability factor, where in this case it is 0.2, then the profit made would be: Demand = 200; Profit = $ 3500000; Probability= 0.2. Here, the Market Liquidity or the amount of money that is there in the market is a major determinant of transaction cost for the sale and purchase of securities. For Pepsi and Coke due to the brand loyalty created through the years we cannot clearly say at what price a consumer will make a shift. When the demand is 100, the company would make a loss of -$50000. 184.108.40.206. James Brickley, et. Optimum Plant Size Economics Definition. Brand loyalty is very important, because consumer switching costs are very high, hence main focus of the competition lies in innovation (to create temporary differentiation) and building tailored solutions to increase brand loyalty. Companies are developing new technologies that make it even easier for users to “snip” commercials. The phrase "economies of scale" refers to the benefits experienced by many large firms because of their size. Now if we consider the probability factor, where in this case it is 0.5, then the profit made would be: Demand = 150; loss = $ 1125000; Probability= 0.5. Victor Rogers is a professional business writer who started his career as a financial analyst on Wall Street. Over the long run, it can serve to reduce the unit cost of production for firms. When the demand is 200, the maximum profit that they would earn is $3500000. Established players have a huge advantage over new entrants, because they have already attained their Minimum Efficient Scale, creating a cost advantage. One decision that many companies have to make at the start is whether to own or rent their space. The greater the installed based of a network product, the larger the number of compatible network connections and therefore the more possible value for a new customer. One very important example is the online stores. Therefore, Profit =150*50000-(5400000+(50*12000)+(150*2500)) =$ 1125000. (1.) If OQ 2 is considered to be most profitable level output, the firm will select SAC 2 —the medium-sized plant. Personal video recorders (PVRs) are digital video recorders used to record and replay television programs received from cable, satellite, or local broadcasts. The suggestion that we would provide to these major commercial network firms for these networks would be. EBay has a bidding system wherein buyers can place bids on the products they want to buy within a certain period of time and the highest bid gets the product when the time frame expires. Social Networking websites such as Facebook, Twitter are also a very good example of The Network Effect. Stock Exchanges: These are basically stock exchanges where stocks of listed companies are traded. Similar corre- lations hold between prices and export status. Both firms started in 1997: As of mid-2003 TiVo had nearly 700,000 subscribers and ReplayTV had about 100,000. Why Is Marginal Revenue Product Important to a Company. An interesting exception occurs, however, with network effects. But when the number of users on a network based product reaches 30 to 40 percent market share, achieving more and more market share beyond that point becomes cheaper and cheaper (indicated by the increasing slope of the sales penetration curve). For e.g. What price should you charge? Theory of production, in economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce, and how much of each kind of labour, raw material, fixed capital good, etc., that it employs (its “inputs” or “factors of production”) it will use. Increasing emphasis on corporate accountability is producing the need to accept a more numerate approach to business decision taking while the overall scope for off-the-cuff decisions is rapidly diminishing. â€¢ Competitors have relatively equal size, â€¢ Competitors have relatively unequal size, â€¢ Competitors have relatively equal market share, â€¢ Competitors have relatively unequal market share. One team developed a new process … The aim of CLAM is to base individual plant production levels on customer orders and to reduce excess inventory. (D) If we consider the probabilities, to identify which plant the company should build, then we need to consider the profit that can be made by each plant and then identify which plant makes maximum profit. With respect to pepsi or coke when a new challenger enters the market with little knowledge or small scale production capabilities, they either buy it out or launch its own version of the product. Using this essay writing service is legal and is not prohibited by any university/college policies. In the above figure, from 0 to 30 percent market share, the sales and advertising effort required to attain each additional point of market share have a diminishing return indicated by the reducing slope of the sales penetration curve. 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