lectur2-page44

lectur2-page44 - cheap alternative either. Our unemployment...

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Above, we see a market that is in disequilibrium. The current rate of consumption is less than the current rate of production at the prevailing market price. As a result, inventories are increasing. These increasing inventories will pressure a manager to take some action. What would you do? Let’s assume that this is the market for Ford, F-150, extended cab, 2-wheel drive pickup trucks. Could we slow down the assembly line to reduce the rate of production? Yes, but now we are producing fewer trucks during the same work day or work week. What will happen to overhead costs per truck produced? What will happen to labor cost per truck produced? This action would cut into per unit profit margins. We could shut down the plant temporarily , and lay our workers off. Not a
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Unformatted text preview: cheap alternative either. Our unemployment insurance rates will increase, and some workers may find another job. Dont forget those overhead costs that keep on going whether we are producing or not. We have been focusing on the production or supply side of the equation here. What about looking at another perspective, the consumption or demand side of the management decision. What could we do to increase consumption of our trucks? Lower the price? That is easy and cheap to do. Yes, this action MAY cut into our profit. We might be surprised to learn that profits MAY increase, but that is a discussion for later in the semester. We could offer a rebate (lower price), low interest financing (lower price), and/or dealer incentives (lower price) 44...
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This note was uploaded on 12/29/2011 for the course ECO 210 taught by Professor Malls during the Fall '10 term at SUNY Stony Brook.

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