Economics I

Economics I

December 08, 2007

ROUND 1

I decided to produce seven (7) units based on the initial guidance of requiring less than 20 units being produced. The guidance also stated that in past production cycles I produced between 1-10 units. The next factor was the Market Research and the composition of a total of six companies that manufacture the same product. This led me to determine that the market demand forecast would be between $50K and $100K per unit considering all six companies. Upon selecting the total number of units seven and the other companies populated with lesser units I determined that I would receive the larger market share overall.

My production costs per unit is $25K x 7 units = $175K, the total number of units sold 7 multiplied by the Market demand price $50K = $350K. Based on the $350K - $175K = $175K profit over my operating costs. In discussing the relationship between demand and pricing to the units supplied provides a direct relationship to the cost of supply and demand. This law states a direct relationship of quality demanded of the merchandise and price per unit.

Per the parameters of the problem (Round 1), based on Market Demand Forecast and past production and sales are realized if production increases one will have a surplus of product. If one supply’s 10 units the base forecast for all six companies totaled 27 units. Based on the Actual Market Demand using the total market supply the price will be approximately $30K per unit, a reduction of $20K from my original $50K. This provided revenue of $270K - $250K = $20K profit therefore providing a poor overall margin of success.

In the reverse, when producing 5 units at $25K the total production cost is $125K. The sale of 5 x $50K = 250K - $125K profit because the company is closest to the margin base of the overall market share. These figures are based on “Static Demand” function when the manufacturers are using fixed factors such as market share, income, and competitor’s products which influence consumer demand.

My production cost will vary as different factors within the market fluctuation. Power, transportation, salaries, product components will increase or decrease depending on various market trends. Consumer surplus and price discrimination comprise the consumers that have money to purchase a product versus those customers who do not or are unwilling to pay the market price.

Overtime, I would expect production costs to rise based on supply and demand, market fluctuation, energy costs, transportation fees, competition, political, legal and technological factors. These factors will impact on the overall market costs, consumer willingness to purchase the products and advertising and Research and Development (R & D).

ROUND 2

I determined that $5K was a good beginning for advertising and R &D based on the fact that I now had $625K and could afford the additional costs knowing that advertising brings in more customers. By spending more in the advertising and R & D, I can introduce my company to the potential clients and set the mindset that my product is a higher quality product over my competition.

My profit this round was greater in that I produced 10 units at $25K each and my production costs totaled $250K. My total