Economics of Cost and Production Term Paper

Economics of cost and production is a variable set of concerns that are specific to production, distribution and consumption of products. The achievement of getting a product to the consumer is a linear process and each step on the timeline requires different production and cost considerations. In general the short-term issues of production and cost involves reducing the cost of individual components, once the research and development stage has evolved to a usable product while the long-term production and cost issues can redirect economics to improve production through various means while still attempting to reduce short-term production costs. Short-term concerns are those dealing with the procurement of raw materials and potentially repurposing manufacturing machinery to meet the needs of a new product. While long-term production costing involves reducing set up time and even specializing equipment to manufacture goods more effectively. Long-term production and cost issues can also more effectively focus on prevention expenditures as presumably a product outlook is more healthy than it was at an earlier time and can absorb the short-term costs of such applications to help avoid unforeseen costs in the future. (Dorf and Kusiak, 1994, p. 861) the most effective production plan can simultaneously adjust to short-term production cost cutting while paying attention to the long-term production cost model. (Kee, 2001, p. 139)

In the short run, the costs relevant for evaluating a product are the flexible cost of resources used in its production, as well as the opportunity cost of using a bottleneck activity. In the long run, a company’s management can adjust its contractual and managerial policies governing labor and overhead resources to meet its production needs. In effect, over an extended time horizon, a company s committed cost is subject to management control. The ability to change these costs over the long run transforms them from a committed into a flexible cost. Therefore, the incremental cost for evaluating the economics of manufacturing a product in the long run is the cost of all resources used in its production. (Kee, 2001, p. 139)

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Kee, intones that the goal of a short-term bottleneck (when supply is outstripped by demand) is often essential to long-term production cost decisions, but cannot be relied upon as a long-term goal, as it is unlikely to continue when production is streamlined and the market demands are met by production. On the other hand this bottleneck situation, whether coerced or occurring naturally as the market demand increases above the ability to produce the product can assist the firm in making long-term production decisions, such as the implementation of automation and the redirection of resources to this product, as needed on a just-in time scale.

Failure to coordinate short- and longer-term decisions may lead to a series of short-run decisions that become the firm’s long-term strategic plan by default. The problem with this ad hoc approach to strategic planning is that a series of short-run decisions may be suboptimal relative to a decision made initially from a longer-term perspective. Conversely, have near-term implementation issues. Failure to understand and act on these issues may delay and/or impair the implementation of longer-term decisions. Consequently, short- and long-run decisions must be integrated and coordinated to make resource allocation decisions that are optimal in the shor t, as well as the long-term.” (Kee, 2001, p. 139)

To further this discussion of short- and long-term production and cost one must at least briefly understand the . This model was developed by the Toyota Motor Corporation to mirror the ability of certain suppliers to provide just the amount of a product that a market demanded at the time it was demanded. To apply this model to manufacturing one must have a careful set up for short- and long-term goals of production, and potentially this model can effect short run production and be ignored by cost cutting that attempts to buy raw materials in bulk to meet the demand of a bottleneck in the early life of a product. (Ohno, 1988, pp.26-33) Just-in-time has become a goal of many in manufacturing, as they seek to and long-term production and cost issues. In the short-term, procurement is lower and waste is less, and in the long-term the firm is not left with surplus with regards to either raw materials or unwanted or slow selling finished products.

Short-term goals of production and cost often revolve around the idea that the most important job of the manufacturing team revolves around how to procure the most raw materials at the lowest price and how to effectively cut costs of production of a product while retaining or even raising its market price. Long-term goals on the other hand have to do with assessing the quality of a product and attempting to prevent product failure in the future, so as to from attrition and/or in the worst case scenario recalls. (“Value, in Economics,” 2004) Both sort and long-term decisions and plans must be in place and balanced for a product to meet the demands of profit, no matter the industry or the size of the firm. (Hegji, 2001, p. 17)

Short-term production and cost goals, revolve around the attempt to most immediately recuperate the cost of research and development as well as the cost of bringing a product to full production. These costs include both fixed and variable costs, where variable costs are sought at lower rates and fixed costs are fixed. Short-term production and cost may be influenced heavily by attempting to bottleneck the market while long-term production and cost models attempt to sustain the longevity of demand through the application of investment in resources that best meet quality assurance to reduce attrition and returns. In long-term production cost scenarios the firm is attempting to re-contract and lower fixed as well as variable costs and may also pay much more attention to preventative application and reduction of labor costs through automation and speed of set up and production.


Dorf R. C and Kusiak, a. (1994) Handbook of Design, Manufacturing and Automation. New York: Wiley-IEEE.

Value, in Economics. (2004). In the Columbia Encyclopedia (6th ed.). New York: Columbia University Press.

Hegji, C.E. (2001). Fixed Cost, Marginal Cost and Market Structure. Quarterly Journal of Business and Economics, 40(1), 17.

Kee, R.C. (2001). Evaluating the Economics of Short- and Long-Run Production-Related Decisions [*]. Journal of Managerial Issues, 13(2), 139.

Ohno, T. (1988). Toyota Production System: Beyond Large-Scale Production

New York, NY: Productivity Press.

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