Question

In: Economics

THE Aboitiz Group is laying off employees as a way to cope with the financial impact...

THE Aboitiz Group is laying off employees as a way to cope with the financial impact of the coronavirus disease 2019 (COVID-19) pandemic.

In an e-mail to BusinessWorld, Aboitiz Group said the company has conducted a review of its operations amid the challenges posed by the current crisis.

“Part of the review (of operations) is the rationalization of its workforce, where, regrettably, several team members will be affected by their service ending on July 31, 2020,” the company said.

“They will receive a substantial separation package to support them through this transition,” it added.

The Aboitiz Group did not respond to questions on how many employees will be affected.

Aboitiz Equity Ventures, Inc. (AEV), the listed holding company of the Aboitiz Group, posted a 42% drop in net income to P2 billion in the first quarter due to operational disruptions from the pandemic-induced lockdown.

Its power arm Aboitiz Power Corp., which made up for 55% of its net income, contributed 43% less to AEV’s first-quarter earnings at P1.6 billion. The decline is attributed to power outages and lower selling prices.

“This was not an easy decision for the Aboitiz Group to make but one that had to be done as it has not been spared by the health and economic crisis,” the company said about the layoffs.

“It is still not clear on how long the COVID-19 pandemic will last but we share everybody’s hope that a vaccine will be developed soon,” it added.

The government reported some 7.25 million Filipinos were already jobless in April, up by 4.98 million year on year.

Last month, the Labor department said some 10 million workers may lose jobs this year due to the pandemic.

Shares in AEV at the stock exchange fell P1.35 or 2.73% to P48.15 each on Tuesday.

Please answer below:

news article today on Aboitiz's Decision on Cut Jobs. Please read the article and relate the firm's decision to cut jobs. What has happened to the firm's/group's total cost, average total cost, and profits in the short- and long-run (time periods). Why?

Solutions

Expert Solution

First let us see what kind of shock the Covid-19 pandemic is. This is a short term demand shock. Due to the pandemic and the consequent shut downs, the demand has gone into a downward spiral. People are not buying the same products they were before.Their priorities have also shifted towards healthcare and finally, as people get laid off and economical output goes down, the incomes are going down further resulting in a demand shock.

Such short term shocks result in lower profits and higher costs.

In case of Aboitiz, we can see that

In the short run

Average costs will be up- This is because as economy goes in shut down or shifts priorities, supply and transportation costs will increase. To make one unit of any product now will cost more than before. So, average costs will increase.

Total costs may increase or decrease- It depends on the production level. If the production level is still same as before, then total costs will definitely increase. But if the total production is being reduced due to lower demand, then the extent of reduction in production will decide if the total costs increase or decrease. The higher the production reduction, the higher the chance of reduction of total costs.

Profits will be down. This is mentioned in the article clearly. Aboitiz posted a drop in income to the tune of P2 billion. This is bound to happen as average costs increase.

In the long run, the economy and demand will be back to its natural equilibrium and the profit, costs etc should be back to its normal level. Demand shocks are usually temporary and economy always goes back to its long run average level. This will happen again and in the long run everything will be back to the old level.


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