Question

As an economy develops and becomes more integrated into the world economy how do its costs of production change and how well can they be managed both in the short-run and long-run?” Explain your opinion.Try to add real examples, either from own experience or from other business, to enrich answer quality and to connect theory with practice.

Answer 1

Case Details:-

Over the years, there are examples of numerous economies which have grown and have become more developed from being ones where almost everyone was lacking even basic access to facilities such as education, healthcare, nutrition etc.

There are key examples of countries such as China, India and Vietnam which were considered among the worlds worst economies in terms of their living standards, but have made tremendous progress over the last few years and have been able to create a middle class wherein people have increased their earnings over a period of time.

As a country experiences the development process, its production capacity rises and so does the overall productivity of it as a nation. This has a huge impact on the cost of operations for the firms that operate within the country as the cost of operations decline sharply.

The country experiences innovation, technological upgradation and rapid competition which help in reducing the overall costs for firms in numerous industries. For example, making a phone in China would have been a nightmare in the earlier eras, but considering the fact that development and skill upgradation have allowed it to become cost effective is one key reason why it sees all major companies producing goods and services in the country.

One key concept here is that of short run and long run. In the short run, firms are unable to manage their costs because factors such as technology, skill set and labor force remain the same. However, in the long run, countries see technological growth and development which allows them to gradually acquire knowledge and lower down costs significantly to increase production.

Conclusion:-

In economics, long run refers to a time period wherein all costs for a firm or a country are variable and a country can continuously expand its operations by upgrading technology or adding skill to the labor force.

In the short run however, costs can be managed only by changing the level of production to a certain degree beyond which firms cannot manipulate cost of production.

However, as a country begins to grow its capacity to produce goods and services increases and this allows it to produce the same at a lesser cost as productivity remains higher and infrastructure investments become lower.

For example, when companies start their operations, then in the short run their control over costs is negligible. They have to accept the cost at which others are taking raw material and sell at a price which the market accepts. However, in the long run the same firm can innovate and create technology or increase manpower skills which would enable them to earn higher for themselves and curtain cost of operations. Major companies such as Apple and Microsoft are key examples wherein in the begining of their journey costs were higher but later they got lower as technological innovation took place.