Running head: ECONOMICS

Economics

Name

Institutional Affiliation
ECONOMICS 2

Economics

Question 1

For a coffee business, the difference between shutting and going out of business is its ability to

meet its variable and fixed cost. The coffee shop may decide to implement a decision to shut

down its operation. The operation shut down is made when the firm cannot meet its variable cost

of production (Krishna, Pandey and Thimmalapura, 2017). In that situation, there will have a

high cost when it produces in comparison to stopping its production. The decision to shut down

will be made if the average revenue is below its average variable cost at the optimal output of the

firm. Production at this part will not help to get enough revenue to take care of the associated

variable costs (Krishna, Pandey and Thimmalapura, 2017). Producing more output will have a

higher cost than revenue. During the shutdown, the only loss to the coffee shop is the fixed cost.

On the other hand, going out of the business of the coffee shop is when it permanently stops

doing business (Krishna, Pandey and Thimmalapura, 2017). In such a situation it has failed since

it cannot mean it variable as well as the fixed cost. In this case, the revenue of the firm is less

than its variable cost. That means the firm is operating at a loss and shutting down it not help it

to avoid those costs. For the case of the coffee shop, there are various variables and fixed costs

the business has to take care of. The variable cost of the coffee shop includes labor, cost of input

and transportation cost. On the other hand, the fixed cost of the business includes rent,

depreciation and licensing fee(Krishna, Pandey and Thimmalapura, 2017). In the short run, the

firm is required to ensure that its revenue is able to take off that fixed cost to avoid going out of

business. The business may not be able to handle the variable cost that would lead to shut down

of operation to avoid incurring those costs.

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Question 2

Economies of scale are the cost advantages that a firm gets due to its operation on a large scale.

The cost per unit of a firm reduces as the scale rises. There are various factors that affect

economies of scale of the firm that include market control, statistical, technical and

organizational elements (Baumers, Dickens, Tuck and Hague, 2016). Economies of scale have an

impact on the business surrounding at different levels that include plant, production or the whole

business. When the average cost of a firm reduces as the output increases then the firm has

economies of scale. Some of the economies of scale like the cost of manufacturing are

determined by the physical and engineering feature of a firm (Baumers, Dickens, Tuck and

Hague, 2016). An example of economies of scale is when a firm is given a trade discount due to

buying a large quantity and the chance of getting input at a lower price per unit when brought at

a huge quantity.

On the other hand, diseconomies of scale are cost shortcoming that a firm gets due to increased

size. In this case, the production of services and goods is at a higher unit price (Busse, Chordia,

Jiang and Tang, 2017). When an enterprise grows to a certain level the average cost of the firm

rises. Examples of diseconomies of scale in an enterprise include duplication of efforts,

communication, top-heavy companies, and office politics. An excessively large firm has a high

cost of communication and the management is not able to deliver a message to the workers

effective. There is duplication of efforts in a large firm because it not possible to trace what each

worker is doing leading to wastage. Office politics also play a role in increasing the cost of

operation and each worker services their interest.

Question 3
ECONOMICS 4

Two characteristics of perfect competition are perfect mobility and perfect knowledge. Perfect

mobility of factors of production means that the factor of production can move without any

problem in the economy (Azevedo and Gottlieb, 2017). It helps to ensure that there is a uniform

cost of production in the market. An example of perfect mobility of factor of production is when

labor is able to move from one country to another without restriction. If that is possible then it

will mean that a firm will source labor from the cheapest country. As a consequence demand for

local labor will reduce and the cost of labor. That enables a firm to get the cheapest labor in the

market. If that situation of labor was to apply to all the costs of production it will mean that all

the firms will face a similar cost of production (Azevedo and Gottlieb, 2017). Due to a similar

cost of production, the firms sell at a uniform price.

Perfect knowledge means that firms both buyers and sellers have similar knowledge about the

market. Due to perfect knowledge about the market, there is no single player who can take

advantage of the other (Azevedo and Gottlieb, 2017). An example of perfect knowledge is when

all the buyers and sellers know exactly where to get a certain product in the market. If all the

buyers know where to get the product at a low price it will make it impossible for the seller to

price discriminate. It will lead to uniform prices in the market (Azevedo and Gottlieb, 2017).

However, the characteristics of a perfect competitive market are not present in a typical market.

Question 4

The money will be invested in the production of computers and mobile phone software,

particularly the operating system. The business will be made a monopoly by the various barriers

of entry that the firm will put in place (Andersen and Vetter, 2015). A software producer can be

able to create barriers of entry for others by refusing to share their expertise. The firm will ensure

it has a patent for its products that will prevent others from producing a similar product. In that
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case, others will not able to produce products provided by the firm. In addition, the production of

software requires high technical expertise and infrastructure (Andersen and Vetter, 2015). Those

two requirements will mean high capital input for the firm. Due to the need for high capital,

many firms cannot be able to join the market of software production.

The invested capital will help the firm to produce software on a large scale. Large scale

production of the software will mean that there will be economies of scale for the business

(Andersen and Vetter, 2015). Due to economies of scale, the business will be able to have a low

cost of production. The firm will a low cost of production that will enable it to block others from

joining the market by selling at a low price. The product produced by the firm will be highly

differentiated that will ensure that it is the sole producer of the product (Andersen and Vetter,

2015). The monopoly will be made strong by ensuring the highest customer satisfaction that

creates customer loyalty in the firm.

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References

Andersen, P., & Vetter, H. (2015). Pricing as a risky choice: Uncertainty and survival in a

monopoly market. Economics: The Open-Access, Open-Assessment E-Journal, 9(2015-

29), 1-22.

Azevedo, E. M., & Gottlieb, D. (2017). Perfect competition in markets with adverse

selection. Econometrica, 85(1), 67-105.

Baumers, M., Dickens, P., Tuck, C., & Hague, R. (2016). The cost of additive manufacturing:

machine productivity, economies of scale and technology-push. Technological

forecasting and social change, 102, 193-201.

Busse, J., Chordia, T., Jiang, L., & Tang, Y. (2017). Mutual fund trading costs and diseconomies

of scale.

Krishna, K. M., Pandey, N. K., & Thimmalapura, S. (2017, December). Break-even analysis and

economic viability of powertrain electrification—An analytical approach. In 2017 IEEE

Transportation Electrification Conference (ITEC-India) (pp. 1-6). IEEE.