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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.
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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).
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 price based on competitors and demand was $50K, which equaled $500K in total revenue. The revenue produced was $500K - $5K (Advertising/R&D) - $250K = $245K profit. The advertising budget will determine promotions; add spots and market potential based on averages and market trend.
No, I do not think there is a diminishing return on the money I spend on advertising. The target market, trends and demand will assist in decision making for R & D and prime add spots. The results of the R & D and advertising will provide customers whereas; little or no advertising will have the reverse affect on sales. This supports R & D, the economic theory of "production, market, sell and distribute a product'; Effective Business Decisions, fourth Edition pg 24. The numbers of units that can be produced at various prices while holding all factors that influence supply.
By having a baseline concerning trends and demands in the market and competitors production it allowed me to move on an open market and make a greater profit. My production strategy was to capture a larger market share over my competition. By supplying 7 units, the total production cost is $175K. The 7 units x $50K = $350K - $175K costs = $175 profit. In round 1, I made a $175K profit and in round 2, I made a $245K profit. Therefore, in rounds 1 and 3 the profit was the same and round 2 was a better round because of the added benefit of advertising and R & D.
In short and long run markets that prohibit collusion, the market has a transparent and open economic program. In this business environment, the company's objective is to gain profits with only two basic constraints which are consumer demand for the product and production costs. The price of the product is determined by the customers demand along with the supply that fixes the price. In addition, production costs and advertising will be deducted from the company's profits. In the short run market, if a company's costs curve is greater than the revenue curve the company is losing profit and may go out of business. In the long-run market a company which is losing profit will have to close or reduce the overall production costs, which may lead to a poor quality product.
In an open market, the longrun has a possibility of more competition as other companies enter the market. In a competitive market, barriers do not exist and the long-run can also adjust variable factors in production costs. In a positive market, companies enter and become competitors and other companies will loose profit and close if they do not program for variables in the economy and business.
The short and long-run markets that do not prohibit collusion and form various trade barriers such as Monopolies, Cartels and Oligopolies that shut out other competitors. The short and long-run markets in a monopolistic market structure create trade barriers to prevent the entry of competitors into a market. This allows for the monopoly to create market gains and profit. Another group called a cartel is formed to control production and price on a particular product such as Emeralds, Diamonds and Oil. These cartels or oligopolistic markets form a control over the product and production, price and distribution are all controlled by a few companies or individuals.
In a market of free trade agreements, rules and laws several impacts can be extrapolated to produce a strong economic forecast, competition and greater profits. In creating a competitive market both domestically and internationally markets thrive. Various trade agreements also form reciprocal cooperative laws allowing merchandise to enter each others market free of duties creating greater economic profit and larger markets. To protect ones Intellectual Property Rights (IPR), various trade agreements offer anti-piracy and counterfeiting protections, tax incentives and interest free loans for a certain period within the international community. This transparent economic structure allows for business to grow and strengthens the overall financial structure of the region.