Markets, Profits and Prices Case Study Example | Topics and Well Written Essays - 1500 words

Markets, Profits and Prices - Case Study Example If revenue is less than total variable costs, a firm should stop operating, even in the short run (Barron, Lynch & Blanchard, 2003, p.241). The second rule applies the concept of marginal cost. The profit must rise if producing another unit of output adds more to revenues that to costs. Similarly, the profit must fall if producing another unit increases costs by more than it increases revenues. The analysis of fixed, variable and marginal costs combined with identification of the market in which Boeing operates and the concept of opportunity costs can assist in understanding how Boeing estimated the offer made to its workers in a commercial aircrafts division. In the context of production, fixed costs are costs that do not change with the level of output they produce. Whether the firm produces 1 million units of output or zero units of output, those costs must be paid (Barron, Lynch & Blanchard, 2003, p.241). For Boeing, the plant, machinery and equipment should constitute the majority of its fixed costs in the commercial aircraft division. ... Other fixed cost components might include wages to executives, administrative and selling expenses, leases, etc. Overall, Boeing is expected to have a very high level of fixed costs. "On the other hand, any costs that do vary with output, like materials and labor, are referred to as variable costs" (Barron, Lynch & Blanchard, 2003, p.241). The major variable costs for Boeing are materials used for aircraft production (i.e. steel), utilities and labor. It is stated in the article that there are more than 18,500 members of the International Association of Machinists and Aerospace Workers covered by the Boeing contracts. This number indicates that Boeing hires a large amount of workers. Therefore, labor costs might account for the majority of variable costs of Boeing in producing commercial aircrafts. The total cost of producing a given amount of output is simply the sum of costs associated with the hiring of all the inputs, both fixed and variable. The average cost for Boeing is the total cost divided by the number of aircrafts that Boeing produces. Even though average cost figure provides some useful information to the company, it does not seem to play a significant role in economics decision-making."The marginal cost of production is the increase in total costs resulting when output is increased by one unit" (Barron, Lynch & Blanchard, 2003, p.79). Commercial aircrafts are very large products. So the marginal cost of production of Boeing should be very high in money terms, but commensurate with the prices Boeing charges for its aircrafts. Out of fixed and variable cost, only variable cost plays a role in decision-making. "Because the fixed costs do not vary with the level of output, they are irrelevant in