Marginal Cost Role in the Economy - Paper Example

Stability of the microeconomic elements within a community is dependent on some factors linked to the broad notion of demand and supply. Production level, revenue acquisition, stability in exchange rates and pricing of the product are all economic variables that can be controlled and detected by the non-market forces hence influencing the general economic stability of the society. Demand is defined as the ability and willingness of the members of the community to acquire products and services at the prevailing prices whereas supply is viewed as capacity and willingness of the producers, manufacturers, and suppliers to distribute and make them available to the public despite the existing market and non-market conditions. In this reference, the principle of marginal cost can therefore intervene and play a unique role in influencing the level of production, demand, and supply of the products into the economy. Marginal cost is an economic principle that refers to the adjustments or shift in the opportunity cost arising from the increase in a unit of production. In other words, it relates to the extra cost that is incurred in producing a single additional unit of goods in an economy.

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The opportunity cost aspect is a notion implying to the actual value forgone while making the decision. The explained economic variables, therefore, influence the production, demand, and supply of the products in the economy. This paper, therefore, explains the concept and role of the marginal cost in the society about the production of goods and services. It also provides a critical analysis of what if a radical change occurs in the marginal cost of production. Furthermore, it outlines and highlights the changes that are likely to be envisioned in a case where the Rifkin's vision of a zero marginal cost becomes a reality. In achieving such an objective, this paper argues that; even though the microeconomic elements of the economy are dependent on many variables, marginal cost is critical and impacts the productions of goods and services immensely.

Concept of the Marginal Cost

Understanding the notion of marginal cost is crucial and imperative as it affects the production of goods and services directly. It is a concept dependent on other factors that may act to strengthen or reduce its efficiency in operation. The marginal cost has a long run and a short-term effect on the economy. Notably, this cost may vary about the mode of product hence referred to as variable and at times it may fail to be flexible hence regarded as fixed. The computation of the cost functions assists in determining the total costs, average total costs and other units that are useful in determining the amount of the total available contribution that the business is to allocate to produce the extra unit of good (Coase, 2013). Importantly, it can be therefore noted that the production of the additional unit does not only affect the economy positively or negatively, but the scarce business resources have to be reallocated to meet the demand based on the needs of the society.

In the current modern world that embraces technology as the pillar and driver of the economy, the aspect of marginal cost may fail. Reason being the conception of the internet of things is intervening hence impacting the greater understanding of capitalism negatively. Furthermore, it must be noted that most world countries embrace capitalism as the simplest mechanism having a larger input to the economy as a result of the efforts of the people. Capitalism is a state of the economy where the stability of economic variables is controlled by the few in the society. Even though it is a reality that capitalist countries perform better about production and the pricing of the goods and services, the internet of things as postulated by Rifkin's may work to its disadvantage hence impacting the economy in a greater way through the marginal cost reduction.

The Role of the Marginal cost in the Society

From the actual definition of marginal cost, it is clear that the productivity of any given industry within a community is greatly dependent on the marginal cost. The non-market factors such as the political affiliations, demographic factor, and other relevant policies determine the marginal cost hence the productivity of the manufacturing firms have to increase to meet the demands of the target. The marginal cost, therefore, plays the following roles in production processes within the community.

Quantity and price of the products

It is important to understand that the marginal cost is that amount that a given producer firm adjusts, uses as capital or subjects towards producing an extra unit of any good. It is an expense to the organization. Therefore, the decision regarding the price of the goods and quantity to be produced must be made about the amount subjected in attaining the finished products. The sole reason for any business institution despite meeting the needs of the community is profit making. There is no future for any business that operates in a loss. Firms, therefore, decide on the price of the products and the quantity to produce so as to ensure that it receives a required and expected profit margin based on the marginal costs. If marginal cost is not considered, therefore, the business may be operating from a zero marginal cost society which is likely to kill capitalism hence reduced hard work among the people. About quantity, the company must focus on the increased budget and expenditure of the firm so as to equate it with a number of products to be produced. It is imperative to note that, the amount of production is governed by the demand of the target group to a given product. When the demand is higher, and the price is also above the marginal cost, the firms will prefer to produce more so as to increase profitability. In this manner, therefore, it is clear that the marginal cost indeed is given more consideration in making the decision pertaining the quantity of products to be produced as well as their prices.

Economies of Scale

The conception and understanding of the yardsticks within the emblem of economies of scale is very significant to the business. Whenever economies of scale are mentioned in any economic sphere, it illuminates the differences, advantages, and limitations of the methods of operation within the small and large scale. Notably, these services are linked to the firm's financial capability, those who are financially threatened will find it hard to operate in a market where the marginal cost of production is almost equivalent to the market prices as the profit margin is likely to be low or the business may end up in losses.

On the other hand, if a firm is financially stable and can increase the volume of purchasing products that are in a wholesale basis, the amount of profit expected is likely to be higher. It is what is referred to as economies of scale, the benefits that accrue to a firm as a result of the large-scale operation. The position of the marginal scale is therefore relevant in determining the profitability and level of exploitation under which a given firm may decide to operate in. If the marginal cost is higher, the company is likely to maintain the standard of operation since the profit margin will still increase, on the contrary, if the firm is producing on a large scale, it may opt to maintain or raise the level of operation since the cost of production is low, demand is high, and the market or consumers are available. The conception of the marginal cost is therefore important to the society especially the business in controlling their level of operation hence of significant contribution to the community as a whole.

Significantly, it is important to understand the basics acknowledging that the marginal cost of production at times may change in the community. This phenomenon may result in some implications, which may affect the community positively or negatively. Any sudden change in the marginal cost may result in three effects, first is that, the marginal cost may become lower than the price of the products in the market. Secondly, the marginal cost may equate the price or become higher than the price. In all these circumstances some adjustments may be made in the economy.

Higher Marginal cost

As previously highlighted, the higher marginal cost has a negative implication to the economy at large. Some of the primary consequences of this phenomena includes the following;

Reduced production

Production level and marginal costs are inseparable. The higher the marginal cost, the lower the rates of production and vice versa. In a situation where the cost of input is greater hence elevating the amount needed to produce an extra commodity as a result of demand is likely to work negatively on the production of goods.

Increased prices of products

Prices of products in any economy is never determined by any single firm that operates within. It is a collective decision determined by other non-market economic factors. If the marginal cost increases beyond the prices of the products in the market, it is bound to cause inflation in the economy hence affecting the public. The marginal cost has the challenge of increasing the expenditure of the firms hence the need to improve the profitability of the institutions. If the marginal cost of production is higher and all the businesses are driven to make profits, it only implies that the only option available to meet the profitability ratio is heightening the prices so as not to end up in losses.

Collapse of firms

The idea of companies collapsing is one of the major impacts of high marginal costs in the economy due to the increased cost of production. Nonmarket factors are critical when it comes to influencing the production costs mainly through marginal costs. Increased marginal costs are likely to drive other firms out of the market since they will be unable to meet the increased cost of production and reduced market supply as a result of high prices with the aim of making profits.

Mergers and Acquisition

Mergers and acquisition are key market concepts and mechanisms which are typically applied to save the companies from collapsing and losing the entire assets. In many cases, the companies usually decide to merge with a motive of becoming bigger and operating on a large scale so as to obtain the economies of scale advantage and compete effectively in the market. The acquisition which is the mechanism where more major companies tend to buy all the assets belonging to the smaller companies adding on what they have so as to improve profitability also comes in as a result of increased marginal cost (Stiglitz, 2012). There are market prices that are not affordable to all consumers hence likely to affect the production quantity, price hence the general productivity of the firms in an economy. In such a case, companies will prefer to merge or acquire to remain in the market and access profits as a result of large-scale operations which might not be enough to meet the expectations of the company but adequate to keep them in the market. An economy is therefore not safe with higher marginal costs which are far beyond the prices of goods and services.

Other aspects such as the phenomena where the marginal costs equal the prices of goods in the market may as well have a bigger challenge of profitability and increased cost of products as well resulting in the highlighted factors. Conversely, if marginal costs reduce, the reverse of the above factors may happen. Some of the scholarly identified aspects include the following;

Entry of new firms into the market

The primary factors that determine the interest of enterprises to reach the market are the production cost, demand, and costs of operation. At the time when the marginal cost is low, and the market demand is high...