VI. Writing

Write an essay on one of the following topics.

1. My views on social responsibility of business. Can marketing strategies be fully honest? Advertising: helping to choose or manipulating human values?

2. Business ethics in the Republic of Belarus.

Unit 6 Production Costs

I. Anticipating the Issue

Discuss your answers to the following questions.

1. Do you know what production costs mean?

2. Can you illustrate the concept of production costs on the examples of an enterprise, a shop, a farm?

3. What factors of production compose production costs?

II. Background Reading

Read the following text. Focus on the meaning of the boldfaced words. Determine whether what you anticipated coincides with the information of the text.

Production Costs

1. The goal of any business is to earn as much profit as possible. Profit is the money that businesses get from selling their products, once the money it costs to make those products has been subtracted. Businesses use several measures of costs to make sure that they are operating efficiently.

2. The cost that a business has to pay even if a factory is unused and output is zero is called fixed cost. Fixed cost includes such things as interest payments on debts, rents, and taxes. It also includes depreciation, which is a measurement of the decreasing value of capital goods, such as machinery, as they are used over and over again. Total fixed cost is called overhead.

3. Variable costs are production costs that change when the level of production changes. For example, labour costs change when workers work overtime or are laid off. Other examples include gasoline for delivery trucks and packaging supplies. Another example of a variable cost is the cost of the electric power to run machines. If the machines are not running, there is no cost for electricity. But when the machines are being used, the business has to pay for the electricity to run them. The sum of all fixed costs and variable costs is the total cost.

4. Businesses find that marginal cost is the most useful measure of cost. It is the extra cost of producing one additional unit of output. For example, if the addition of one worker yields a marginal product of 7 units and increases variable costs by $90, each additional unit of output has a marginal cost of $12.86, or $90 divided by 7. In this way, the marginal cost per unit can be found for each additional worker. As a result, a firm knows the cost of producing each new unit of output as variable costs rise.

5. Inputs affect production because different inputs have different costs, and inputs can be combined in different ways. For example, a gas station is likely to have large fixed costs, such as the cost of the lot and taxes. The variable costs are probably small, such as employee wages and the cost of electricity. Because of this, the owner might be able to keep the gas station open 24 hours a day for a fairly low cost. Since the variable costs are small, they may be covered by the profits of the extra sales.

6. Fixed and variable costs affect the way a business chooses to operate. For this reason, many stores are doing business on the Internet. Businesses engaged in e-commerce – an electronic business conducted over the Internet – reduce their fixed costs in many ways. They do not have to rent a building for their store(s) or hold inventory. For a fraction of a physical store’s cost, a virtual store can show their products, make transactions, and reach more markets.

7. When a business knows its total costs, it can determine how many goods and services it must produce for its total costs to equal its total revenue. This is called the break-even point. Most firms, however, want to earn a profit.

8. Businesses use two key measures to find the level of production that will generate the greatest profit – total revenue and marginal revenue. Total revenue is the total amount a firm earns. Put simply, total revenue is equal to the number of units sold multiplied by the average price per unit. For example, if 148 units of total output are sold for $15 each, total revenue is $2,220. Marginal revenue is the more important measure. It is the extra revenue from the sale of one additional unit of output. Businesses find their marginal revenue by dividing the change in total revenue by the marginal product.

9. Marginal analysis is a way to make an informed decision by comparing the extra costs of doing something to the benefits gained from it. Marginal analysis helps in finding the break-even point – the total product the business needs to sell in order to cover its costs. For businesses, this means gradually adding variable inputs (for example, workers) and then comparing the extra benefit (marginal revenue) to the extra cost (marginal cost). As long as marginal cost is less than marginal revenue, the business can continue to increase its variable inputs. Eventually, marginal cost and marginal revenue are equal, and the profit-maximizing quantity of input is reached. This means the firm has reached its greatest total profit. If marginal cost exceeds marginal revenue, profits will begin to fall.