When the third through the sixth workers are hired, the marginal product of labor is positive. Each new worker will add to a firms total output. However, the marginal product of labor will diminish as each worker is added to producing a product. Why for example would the third worker increase output by four units and the sixth worker used in producing the widget increase output by one unit?
Say there are three tasks in producing a product and the firm hires one worker for each task. After the third worker is hired the benefits of specialization diminish. After the third worker is hired output will increase total output but at a diminished rate. The theory is called diminishing marginal returns. As more and more labor is added to producing the product less and less output from each additional unit of labor will be produced.
The firm will produce diminished output as each unit of labor is increased because its workers will be working with scare capital resources. Capital is any man made resource that is used to produce other goods. In the production of a widget where there are three tasked used in producing it, each of the workers would be assigned to each task. The fourth, fifth and sixth workers would have to wait to use the capital, machines since only three workers can be assigned to a task at a time. So each additional unit of labor beyond the third would not greatly increase the speed of producing the widget but in contrast would diminish marginal returns. As more and more labor is added output will continue to fall and at some point could produce negative returns.
Friday, March 20, 2009
Sunday, March 15, 2009
Economic Economies of Scale
Economies of scale refer to a firm’s costs. The reductions of a firms average total cost of producing a product as the firm expands the size of the firm. Economies of scale have to do with the long run average total cost of the firm. Economies of scale (economies of mass production) lower the average total cost of production in the long run as plant size increases for a period of time.
Factors that lead to lower average cost of production are labor specialization, managerial specialization, efficient capital, and other factors. Labor specialization increases as plant size increases. Hiring more workers means that labor can be specialized. It can be divided and subdivided. As the number of workers increase they can focus on a few tasks as opposed to having six or seven tasks to do. Workers can focus full time on the task they have specialized skills in. A small plant on the other hand may need skilled workers to perform unskilled work which will lead to higher production costs. Workers become more efficient and proficient as they focusing on fewer tasks. Finally specialization increases time management and eliminates the loss of time that accompanies a worker having to change from task to task.
Managerial specialization is another area which lowers average total cost of production. A manager that is highly specialized and can handle 20 employees may be under utilized in a smaller firm if they are managing only half that number of employees. In a smaller firm the production can be increased by increasing labor without any additional labor cost for management. Small firms are not able to utilize management specialization as a sales professional may have to manage their time between different executive functions while selling, such as personnel, finance and marketing. A larger firm can allocate labor to focus and specialize on each managerial function. The cost to produce each additional unit will decrease and produce greater production efficiency.
Larger firms tend to have efficient capital to purchase the most efficient equipment which is expensive and usually only available to larger firms. Large machinery and equipment require a high volume of production to be utilized efficiently. Smaller firms would not be able to produce high volumes to utilize large machinery and equipment.
An example of this idea would be the automotive industry. The industry utilizes efficient robotics and specialized assembly line equipment. Utilization of this type of equipment would require a mass number of outputs. The fabrication of automobiles utilizing any other equipment would be inefficient and cost the firm more in production cost.
Other factors that producers have to manage are startup, design and development cost. These costs are incurred regardless of the projected and expected sales. These costs are decreased as the number of outputs increase. Increasing output lowers costs because these expenses are divided by the number of outputs. Also a firms advertising cost decreases as the number of outputs increase. Economies of scale are further increased as firms output is increased. As firms sell more their marketing and production expertise usually increase as they learn by doing.
These are the factors that lower a firms average total cost as a firm expands its operations. Average total costs become lower when the percentage of output increases faster than the percentage of production resources.
Firms that grow and utilize economies of scale increase their potential to thrive in the 21st century. Smaller firms unable to expand can expect to struggle with higher production costs.
Factors that lead to lower average cost of production are labor specialization, managerial specialization, efficient capital, and other factors. Labor specialization increases as plant size increases. Hiring more workers means that labor can be specialized. It can be divided and subdivided. As the number of workers increase they can focus on a few tasks as opposed to having six or seven tasks to do. Workers can focus full time on the task they have specialized skills in. A small plant on the other hand may need skilled workers to perform unskilled work which will lead to higher production costs. Workers become more efficient and proficient as they focusing on fewer tasks. Finally specialization increases time management and eliminates the loss of time that accompanies a worker having to change from task to task.
Managerial specialization is another area which lowers average total cost of production. A manager that is highly specialized and can handle 20 employees may be under utilized in a smaller firm if they are managing only half that number of employees. In a smaller firm the production can be increased by increasing labor without any additional labor cost for management. Small firms are not able to utilize management specialization as a sales professional may have to manage their time between different executive functions while selling, such as personnel, finance and marketing. A larger firm can allocate labor to focus and specialize on each managerial function. The cost to produce each additional unit will decrease and produce greater production efficiency.
Larger firms tend to have efficient capital to purchase the most efficient equipment which is expensive and usually only available to larger firms. Large machinery and equipment require a high volume of production to be utilized efficiently. Smaller firms would not be able to produce high volumes to utilize large machinery and equipment.
An example of this idea would be the automotive industry. The industry utilizes efficient robotics and specialized assembly line equipment. Utilization of this type of equipment would require a mass number of outputs. The fabrication of automobiles utilizing any other equipment would be inefficient and cost the firm more in production cost.
Other factors that producers have to manage are startup, design and development cost. These costs are incurred regardless of the projected and expected sales. These costs are decreased as the number of outputs increase. Increasing output lowers costs because these expenses are divided by the number of outputs. Also a firms advertising cost decreases as the number of outputs increase. Economies of scale are further increased as firms output is increased. As firms sell more their marketing and production expertise usually increase as they learn by doing.
These are the factors that lower a firms average total cost as a firm expands its operations. Average total costs become lower when the percentage of output increases faster than the percentage of production resources.
Firms that grow and utilize economies of scale increase their potential to thrive in the 21st century. Smaller firms unable to expand can expect to struggle with higher production costs.
Thursday, March 5, 2009
Is Your Money Safe When Stock Prices Tumble?
Common stock is a security which represents ownership in a corporation. Holders of common stock have the right to elect board of directors and vote on corporate policy. If a corporation goes bankrupt and has to liquidate their assets; bondholders, preferred shareholders, and other creditors will have claim to the corporation’s assets before common stockholders. Common stock is riskier than other security instruments. However common stock will usually outperform bonds and preferred stock over the long term.
Preferred stock is a security that has claim over common stock with respect to corporate dividends and often to the assets of the corporation in the event a corporation has to liquid their assets. Preferred stock holders have no voting rights of the corporation.
Have you ever heard a financial guru say now is a great time to invest in the stock market if you have a long term mentality for investing. The assumption is that what comes down must go back up to its all time highs. This investment advice is a myth.
Over the last 18 months there have been several stocks that were at their all time highs and are now worth almost nothing. In fact they have lost 60% to 95% of their value in the last 18 months.
So what happens when you buy shares of stock in a corporation? The corporation uses investor’s money to pay its accounting expenses and to grow the corporation. Hopefully the corporation can make a profit and not a loss. If a corporation makes a profit they can choose to pay dividends to their shareholders. In theory the price of the stock will grow in value. Supply and demand for the corporations stock can contribute to the growth of the stock price.
How do you know what company to invest in? There are many factors that can go into the decision making. The name, company, brand or longevity of a company should not really be considered when deciding on a good investment. Find a company that is in a growing sector. Financials, real estate and construction are sectors of the economy that are not performing well. Research the company financials and find out everything you can about them. Some of the company fundamentals to look for are P/E ratio, Acc. Distribution, EPS rank, Price Rank, Group Rank, F/E Score, Estimates, Financials, 52 wk low’s and 52 week high’s. You can find company information from many sources or what I have found to be the easiest, fastest and most accurate way is to subscribe to Investools an investor education resource. There are 12 sectors of the economy and each sector has industries within them. For example the 4 industries within the Healthcare Sector are Biotechnology & Drugs, Healthcare Facilities, Major Drugs, Medical Equipment & Supplies.
Some of the companies that are struggling and have tumbled were some of the strongest and most respected companies of the American and the world. Over the last 18 months AIG has been as high as $60 and now it is at .35 cents, Citigroup high $50 and low $1.02, Wamu high $40 and low .01 cents. The American big 3 auto makers Ford, General Motors and GM are on the verge of bankruptcy.
If you are not invested in the right sector and industry your investment might not return to the levels you purchased the stock at. Maybe a better money management decision might be to cash out and take your losses.
Preferred stock is a security that has claim over common stock with respect to corporate dividends and often to the assets of the corporation in the event a corporation has to liquid their assets. Preferred stock holders have no voting rights of the corporation.
Have you ever heard a financial guru say now is a great time to invest in the stock market if you have a long term mentality for investing. The assumption is that what comes down must go back up to its all time highs. This investment advice is a myth.
Over the last 18 months there have been several stocks that were at their all time highs and are now worth almost nothing. In fact they have lost 60% to 95% of their value in the last 18 months.
So what happens when you buy shares of stock in a corporation? The corporation uses investor’s money to pay its accounting expenses and to grow the corporation. Hopefully the corporation can make a profit and not a loss. If a corporation makes a profit they can choose to pay dividends to their shareholders. In theory the price of the stock will grow in value. Supply and demand for the corporations stock can contribute to the growth of the stock price.
How do you know what company to invest in? There are many factors that can go into the decision making. The name, company, brand or longevity of a company should not really be considered when deciding on a good investment. Find a company that is in a growing sector. Financials, real estate and construction are sectors of the economy that are not performing well. Research the company financials and find out everything you can about them. Some of the company fundamentals to look for are P/E ratio, Acc. Distribution, EPS rank, Price Rank, Group Rank, F/E Score, Estimates, Financials, 52 wk low’s and 52 week high’s. You can find company information from many sources or what I have found to be the easiest, fastest and most accurate way is to subscribe to Investools an investor education resource. There are 12 sectors of the economy and each sector has industries within them. For example the 4 industries within the Healthcare Sector are Biotechnology & Drugs, Healthcare Facilities, Major Drugs, Medical Equipment & Supplies.
Some of the companies that are struggling and have tumbled were some of the strongest and most respected companies of the American and the world. Over the last 18 months AIG has been as high as $60 and now it is at .35 cents, Citigroup high $50 and low $1.02, Wamu high $40 and low .01 cents. The American big 3 auto makers Ford, General Motors and GM are on the verge of bankruptcy.
If you are not invested in the right sector and industry your investment might not return to the levels you purchased the stock at. Maybe a better money management decision might be to cash out and take your losses.
What Is Scarcity And Opportunity Cost?
Individuals, institutions, and society make choices among scarce resources. Demand and needs from individuals, institutions and society far exceeds the resources available. In economics scarcity exists because resources are limited. Because resources are scarce we must decide what we want to consumer and what we want to give up.
In economics nothing is free. There is a cost to everything. The cost may be explicit or implicit. Explicit costs are those expenditures a firm makes to others that supply resources to the firm. Business accounting expenses of a firm are considered explicit costs. Depending on the type of business the business expenses might be expenditures for labor, materials, products, machinery, utilities, rent, etc.
Implicit costs are intangible cost of the firm. Implicit costs are considered the opportunity costs a firm could make on its own resources. When a firm gives up something by using its own resources there are implicit cost. An example of implicit cost would be if someone chose to work on their home in stead of going to work. Let’s say someone worked on their home for 2 hours. If they went to work they would have earned $100 (2 hours X $50 an hour). The foregone wages of $100 would be the implicit cost. Let’s say the materials to work on their home cost $50.
Explicit cost + implicit cost = total cost. Explicit cost = $50 in material, implicit cost = $100 of foregone wages. Total economic cost is $50 in material + $100of forgone wages = $150 total cost.
In economics nothing is free. Costs are not always the monetary value given up to get something in exchange. If someone gave you a bottle of water for free, from your perspective it may seem free, since you did not give any monetary value for the bottle of water. To produce goods and services it takes natural, manufactured and human resources. When these scare resources are used to produce this bottle of water society has given up the opportunity to utilize these resources for the production of other goods and services. To economists this is called opportunity costs. The choices that are made are tradeoffs.
In economics individuals, institutions, and society must make choices among these scarce competing resources
In economics nothing is free. There is a cost to everything. The cost may be explicit or implicit. Explicit costs are those expenditures a firm makes to others that supply resources to the firm. Business accounting expenses of a firm are considered explicit costs. Depending on the type of business the business expenses might be expenditures for labor, materials, products, machinery, utilities, rent, etc.
Implicit costs are intangible cost of the firm. Implicit costs are considered the opportunity costs a firm could make on its own resources. When a firm gives up something by using its own resources there are implicit cost. An example of implicit cost would be if someone chose to work on their home in stead of going to work. Let’s say someone worked on their home for 2 hours. If they went to work they would have earned $100 (2 hours X $50 an hour). The foregone wages of $100 would be the implicit cost. Let’s say the materials to work on their home cost $50.
Explicit cost + implicit cost = total cost. Explicit cost = $50 in material, implicit cost = $100 of foregone wages. Total economic cost is $50 in material + $100of forgone wages = $150 total cost.
In economics nothing is free. Costs are not always the monetary value given up to get something in exchange. If someone gave you a bottle of water for free, from your perspective it may seem free, since you did not give any monetary value for the bottle of water. To produce goods and services it takes natural, manufactured and human resources. When these scare resources are used to produce this bottle of water society has given up the opportunity to utilize these resources for the production of other goods and services. To economists this is called opportunity costs. The choices that are made are tradeoffs.
In economics individuals, institutions, and society must make choices among these scarce competing resources
Friday, February 20, 2009
Wall Street Journal WSJ
Wall Street Journal is offering a discount for anyone that is interested
Get The Wall Street Journal for 75% off!
Get The Wall Street Journal for 75% off!
Thursday, February 12, 2009
ECONOMICS
What is Economics?
Economics is the social science which studies how individuals, institutions, and society make optimal choices (the best choice) with scarce resources.
Microeconomics is concerned with decisions made by individual units such as a household, a firm, or an industry, and with individual markets, specific goods and services, products and resource prices.
Macroeconomics is concerned with the economy as a whole. The aggregates of households, businesses, and goverment which measures the total economy.
Economics is the social science which studies how individuals, institutions, and society make optimal choices (the best choice) with scarce resources.
Microeconomics is concerned with decisions made by individual units such as a household, a firm, or an industry, and with individual markets, specific goods and services, products and resource prices.
Macroeconomics is concerned with the economy as a whole. The aggregates of households, businesses, and goverment which measures the total economy.
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