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Economics

Essay by   •  March 9, 2011  •  1,111 Words (5 Pages)  •  1,103 Views

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Every firm is striving to increase production and decrease costs. However, cost considerations rise with increased rates of production. Therefore companies need to decide what level of output they want to maintain. An industry dealing with this issue right now is the ports of the United States. While there is technology available that can greatly improve operational efficiency, the labor unions have been objecting to its implementation.

When firms produce goods or services, they must consider that to understand that when they continue to increase the amount manufactured, they reach a point of decreasing marginal product. As they produce more of the good, the amount produced by each additional worker will decrease, and will continue to decrease until there is actually negative production by each additional worker. This affects the cost structure of the firm as well. According to this theory, the marginal cost ( MC), the additional cost of producing each new unit of product, increases with each additional product. This may sound like doomsday for large companies as they face this impediment in their efforts to make more profit. However, this is only true when one views a company in the short-term production run. In the short-term the capital investment in the company is unchanging. However, in the long run, companies can change their entire production capabilities. They can purchase new land or upgrade technology, enabling a shift in their entire production curve as it becomes more efficient in its production methods. This investment in capital enables the company to produce at a scale that maximizes profits as they progress towards the Minimum Efficient scale of Operation.

As of now the U.S. ports are not meeting these economic goals of efficient production. The contrast in efficiency between U.S. ports and European and Asian ports could never be more pronounced. There is an obvious problem in how the U.S. ports are handling their cargo. The handling cost of cargo can be categorized as either Fixed Costs(FC) and Labor Costs (LC). The FC would include the land, machinery, and buildings while the LC would include the personnel needed to operate and manage the ports. The short-term production run is defined as a situation in which the capital is fixed and the labor is considered to be variable. The labor can be increased to produce more but with a consequent increase in cost and decrease in Marginal Product (MP) since too many workers creates inefficiencies. This results in increasing marginal costs. When marginal costs continue to rise, a company realizes that they must produce at a greater economic scale in order to create a greater economic profit. In the case of the U.S. ports, the traditional way to produce at a greater scale was to hire more laborers. Accordingly, Total Product (TP) would rise, albeit at a steadily decreasing rate. However, with increases in technology we would be able to produce a far greater amount using even less labor. This would cause a downward shift in the entire production cost curve as the ports would be able to produce a greater number of moved cargo at a lower price.

There are a number of areas where the increase of technology would greatly affect efficiency of operations. One suggested application for new technology is the process of loading and unloading cargo on docks. On Asian docks for example, only one operator is necessary to man equipment for manipulating the cargo. By contrast, U.S. ports need a team of four workers to man each crane. Updating technology on U.S. ports would allow for greater efficiency while cutting costs. Secondly, less skill is required to operate this sophisticated technology, ( The machine automates nearly the entire procedure with operators only handling pickups and drop-offs.) Asian dock workers are generally high school graduates and earn only 20% of their U.S. counterparts. Asian docks also have video monitors which enable operators to determine which boxes to pick up, while West Coast clerks still manually chalk large yellow X's in to indicate which containers

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