Economic Theory Assignment

Added on - 28 May 2020

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ANSWER 1:We note that the question is asking for two answers. One is the effect of anextra shift on short run marginal costs. The second is the consequent effect on pricingdecisions due to this change in marginal costs. The key lies in differentiating betweenvariable and fixed costs. Variable costs of production are costs that vary with output level.Typically wages are a good example as we need more workers who are paid in the form ofwages to produce more. Fixed costs are costs that do not vary with how much is produced.A good example is rent paid for the factory premises. In this case of our firm a new shift willimply more workers and attendant usage of raw materials and electricity ( to possibly runthe machines). The added costs of wages of the workers in this shift and the costs ofelectricity and materials constitute variable costs. From economic theory we know thatwhen variable costs rise, the marginal cost curve shifts upwards (from MC1 to MC2) toreflect higher marginal cost for unit production. The typical shape of the marginal cost curveis U shaped reflecting the law of variable proportions. The new shift may not change theshape of the curve but it will certainly shift the marginal cost curve upwards. As aconsequence pricing policy needs a review. An equilibrium condition demands that marginalrevenue equals marginal cost for a firm. The price that maximises profits for the firm is aprice where MR and MC are equal for the last unit produced. As MC rises with the extra shiftthe effect on price will be to increase it from P1 to P2, and quantity produced in equilibriumrises from Q1 to, n.d.Cost concepts. [Online] Available at:[Accessed 28 August 2017], n.d.Costs. [Online] Available at:[Accessed 23 August 2017].Page2of8
Answer 2:We need to analyse the shift from 1 supplier to multiple suppliers for Nora Nicest KnickKnacks. There is another change that has occurred along with this supplier change- Nora hasexpanded her product offering to go beyond tee-shirts, and it now includes cups, mugs, keychains and many other items. This expansion in offerings is beneficial as Nora is able to caterto a wider customer group. This in itself will allow her to create more value as she caters tomore customers with wider choices. She will be able to capture a larger part of this valuecreation with the right kind of pricing, keeping in mind consumer preferences.She can also gain value created from the expansion in supplier base. She is no longerdependent on a single supplier who could get away by capturing larger share of the valuecreated due to the supplier-buyer relation. Multiple suppliers allows her to be flexible in herchoice of suppliers and consequently she can take away a larger part of the value createdfrom each supplier as compared to the value she got from a single supplier.Tescari, F.C. & Brito, A.L.L., 2016.VALUE CREATION AND CAPTURE IN Buyer Seller Relationships.[Online] Available at:[Accessed 8 Jan 2018].Page3of8
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