Market Structure Denise M. Minor ECO 561 Week 3 Individual Assignment Professor John Lindvall November 11, 2010 Market Structure Thomas Money Services started out as a consumer finance company granting small loans for household needs. Over the years, the company expanded by issuing business loans, financing acquisitions and commercial real estate loans. The company also became involved in financing equipment through a subsidiary named Future Growth Inc. (FGI). Thomas Money Services acquired a lot of lucrative business opportunities over the years.
However, the fall of the economy has caused profits to decrease resulting in layoffs. This proposal will provide recommendations on increasing revenue, achieving normal production levels, and ways to reduce cost. First, in order for Thomas Money Service to increase revenue, the company should produce enough quantity until their marginal revenue equals marginal cost (MR=MC). Currently, marginal costs are above marginal costs, causing a decline in profits. Equilibrium was determined through graphing both marginal revenue and marginal costs.
The equilibrium occurs when the company produces an output of 7 with marginal costs of $88 and marginal revenue of $14,000. It is apparent that the company is not a monopoly because marginal revenue would always equal marginal costs (Perloff, 2007). Another way that the company can increase revenue without changing the price is through advertising. Advertising could assist the company by providing consumers with information regarding the products and services provided through the company. Information provided suggested that at an output of 1 the product’s elasticity of demand at -26.
However outputs of 7 and more became less elastic, causing the product to eventually become inelastic after outputs of 13. This inelasticity suggests that consumers purchasing behavior did not change because the price changed. Therefore, in order for the company to increase revenue, they should produce quantities that sustain equal levels of marginal revenue and marginal costs. Thomas Money Services is a competitive firm and should therefore set their quantity to maximize profit because they cannot affect market price (p. 76).
In order for the company to achieve normal production levels they must produce at quantities that will keep marginal revenue and marginal costs at equilibrium. By graphing both marginal revenue and marginal costs, Thomas Money should produce at an output of 7 in order to achieve normal production levels. Average total cost for an output of 7 = 203. 3, which is the average fixed cost plus the average variable cost. In determining how much the company should produce in or to maximize profit, both total revenue and total cost were graphed.
Profit is the total revenue minus the total costs (Output Decisions: Revenues, Costs, and Profit Maximization, 2010). When graphing total revenue and total costs, we can determine how much should be produced. There was a large difference between the total revenue and total cost curve, at a quantity of 7. Therefore, the company should produce an output of 7 in order to maximize profits and increase normal production levels. In order for the company to increase revenue and achieve normal production levels, fixed and variable costs may need to be determined.
Fixed costs cannot be adjusted to maximize profits because they have no affect on price or output. Variable costs can be adjusted according to the amount of output produced. Therefore, the company can adjust variable costs upon changing the technology used for production. This can be done through innovative machines that could produce products without having to pay more laborers to get the job done. The variable cost should be decreased, which will cause marginal costs to decrease, thus causing the profit maximizing quantity to increase (2010).
In conclusion, the economic downturn has affected Thomas Money Services monetarily. Understanding ways of increasing revenue in times of economic crisis is important for the company to maintain and even maximize profits. Achieving normal production levels is also important because the company should be aware of maximizing profits without spending a lot of money on production. Furthermore, understanding fixed and variable costs help make decisions regarding both increasing profits and decreasing costs.
Therefore, understanding economic concepts help to understand how to make executive decisions and recommendations which help organizations maintain profitability in times of economic turmoil.
References Output Decisions: Revenues, Costs, and Profit Maximization. (2010). Retrieved November 11, 2010, from Pearson Education: http://wps. pearsoncustom. com/pcp_90734_uop_casefair/109/27997/7167399. cw/index. html Perloff, J. M. (2007). Microeconomics. Boston, MA: Pearson Addison Wesley.