Analysis of Price Ceiling, Fixed Costs and Business Operations
Analysis of Price ceiling, Fixed Costs and Business Operations
Discussion Six
Price ceiling refers to a situation whereby government imposes a limit on the highest prices of commodities that can be charged (Arnold 2010). The practice of price ceiling has both advantages and disadvantages. Arnold (2010) noted that it helps prevent suppliers from charging high prices on commodities. Imposing a fixed level of prices on goods helps control the inflationary tendencies (Arnold 2010). On the other hand, production of products may be inefficient because the supply of goods and services may be lower than the demand (Arnold 2010). Without these measures, producers are more likely to exploit consumers by charging relatively high prices. Therefore, government intervention is needed to control the price levels.
In the case of a child being diagnosed with life-threatening illness, the demand for the prescribed medicine is perfectly inelastic (Arnold 2010). There are higher chances that, I will be charged higher prices than in the absence of price ceiling. The reason being, the pharmaceutical company, knows that even if they charge high prices, they are still assured of my demand for the medicine (Rastogi 2010). For a medication that is meant to achieve a healthy weight, the demand is perfectly elastic. Therefore, the amount supplied may not match the existing demand. When maximum prices are set, producers may be discouraged from production (Arnold 2010). The pharmaceutical company will not be able to research to improve the production of the drug efficiently. Arnold (2010) the need to conduct research will be involved since there will be a dead weight loss.
Discussion Seven
Fixed cost is the mandatory operating expenses of business (Arnold 2010). The increase in fixed cost leads to an increase in the average fixed cost. Rastogi (2010) also argued that cost incurred in producing one unit of the commodity, that is, fixed cost divided by quantity is the average fixed cost (AFC=FC/Q). The average variable cost does not depend on the fixed cost. It varies due to the levels of production (Arnold 2010). Therefore, an increase in fixed cost does not impact on the variable cost. For example, a 20% rise in rent taxes, does not impact on the amount of electricity used to produce 40 or 60 packets of milk. However, average total cost (ATC), will increase since it is the sum of variable costs and fixed cost divided by the output quantity. Changes in the fixed cost only affect marginal cost when there are variations in the variable cost of production (Arnold 2010). An increase in fixed cost of output alone does not influence the marginal cost.
Discussion Eight
Starting own business involves several costs. The company will need a space for offices, warehouse or retail (Rastogi 2010). Also, the owner needs to pay rent as well as a license and permit for legal operations (Rastogi 2010). An enterprise also requires incurring expenses on purchase of fixed assets such as equipment and machinery as part of the initial cost. Additionally, there would be variable costs such as salaries, advertisement, market research and products will also be incurred.
Small businesses suffer competition from established ones given the product quality, client base and the prices of the same commodities offered by competitors (Rastogi 2010). Existing businesses which enjoy economies of scale may efficiently provide products at relatively low prices without any losses.
The price levels for a starting business would be determined by the prevailing prices in the market, the cost of production and the desired profit (Arnold 2010). Finally, the quantity produced will depend on the demand in the market, availability of capital and labor charges incurred.