Understand economics from scratch

Chapter 18 Why is the career of Americans to run a business—the economics of manufacturers that you must understand (2)
There are 3 short-run average total cost curves and one long-run average total cost curve.Judging from the long-term total cost curve of the enterprise, the enterprise can adjust the factory scale according to the market demand.It can also be seen that the long-run cost curve is much flatter, with an almost straight line in the middle.Also, almost all short-run curves lie above the long-run cost curve.This shows that in the long run, the firm has greater freedom to choose which scale to choose—it can choose any short-term cost curve for production.In contrast, in the short run, companies have almost no choice but to operate along the curve selected at the beginning.

You can also see the impact of production output on business costs at different times.In the short term, if Changhuai Automobile Company wants to increase the output of automobiles, it can only hire more people within the established factory scale, and there is no other way.This caused its average total cost to balloon.But in the long run, due to the expansion of factories and workshops, the cost remains unchanged when the production volume increases significantly.

However, the so-called long-term or short-term, economists did not give an exact time limit.Because it is related to the size of the enterprise.For some large-scale manufacturing industries, such as shipyards, the long-term refers to 1 year or more.For some service industries, such as barber shops, its long-term may refer to 1 months or half a year.

Say's Law: Supply creates demand

Ricardo, a representative of the classical school, said: "Anyone who engages in production is for consumption or sale; sale is to buy some other commodity that is directly useful to him or beneficial to future production. Therefore, when a person is engaged in production, he must Instead of being a consumer of one's own goods, one must necessarily become a buyer and consumer of other people's goods."

The simple understanding of Say's Law is "supply creates its own demand".Say believes that a commodity must be purchased by another commodity, because money is only a medium of exchange, then, when a product is produced, other products of equal value will have a market, that is, a certain demand will be created. .Therefore, the oversupply of some products in society is not due to insufficient money or insufficient demand, but because there are too few other products that can be exchanged with them, so production should be expanded to achieve a balance between supply and demand.

From this, Say makes the following point:

(1) The more produced, the more diversified the products, the better the sales will be, the better the economic situation will be, and the more prosperous the economy will be.

(2) This principle also applies to foreign trade. When we buy foreign goods, we also promote the production and sales of domestic goods.

(3) The national policy focuses on how to promote the development of production, rather than encourage consumption or trade protection.

For example, rock sugar must be needed in coffee shops, because you think they are complementary, rock sugar companies cannot fail to sell rock sugar, because coffee shops need rock sugar, then if the coffee shop closes down, rock sugar will not be sold, no one needs it Now, you might think that coffee shops won't go out of business because people will always need coffee.But when people are unemployed and don't even go to restaurants, how can they drink coffee?So why are people unemployed?The company closed down, the company produced work uniforms, and the work uniforms were supplied to rock sugar companies, and the rock sugar companies no longer needed work uniforms, because the rock sugar could not be sold, the reason was that the coffee shop did not want rock sugar, because the coffee shop closed down... …

From this point of view, it is impossible for rock candy not to be sold, because it can be seen from the above cycle that the closure of the coffee shop is caused by the closure of the rock sugar business, and the failure to sell rock sugar is caused by the closure of the coffee shop.This is illogical.This is what Say's Law says.Say's law holds that supply itself can create demand, and it is impossible for products to be unsold, because the purpose of product production is for consumption, and the company that produces cups is to use the cups in exchange for the raw materials (such as plastic) needed by the company. Plastic companies are in exchange for the equipment and raw materials needed for their own production. Such a continuous cycle will form a circle in society, and all products can be exchanged out.Relying on the product itself can create demand, and the temporary imbalance between supply and demand only appears in individual departments. Overall, supply and demand are in balance.

In life, Say's Law is often used in the marketing of the product itself, because the product must be sold, and the reason why the product is unsalable is due to the product itself.In this industry, there are too many products to supply, and the demand companies must choose. In this way, whose products have more advantages in terms of price and performance, their products will be able to sell well.So what companies have to do is to improve their products.For example, companies that produce mobile phones, some mobile phones are popular because they can access the Internet, support video, and have good call quality and novel styles.However, some mobile phones are unsalable because the product itself is more fancy than practical.

The great thing about Say's Law is that, according to the idea that "supply creates its own demand," there can be no problem of overproduction in the economy as a whole.The root cause of the oversupply of a certain commodity is not demand, but the corresponding production of other products is too small, so, in the final analysis, it is a problem of product structure.Structural imbalances result in overproduction of some products and underproduction of others, creating an imbalance between supply and demand in the economy.For example, when talking about how to expand domestic demand, one of the aspects is to expand the rural consumer market.Here, we should not only consider how to produce products suitable for farmers' needs, but also how to promote the development of agricultural production.Because in order to increase the purchasing power of farmers, it is necessary to increase the income level, which depends to a large extent on whether more and better products can be produced.It can be seen that Say's Law is not outdated, it still guides our economic activities in many aspects.

Economies of Scale: Theoretical Support for Strengthening Enterprises
In the 20s, when Wang Yongqing took over Formosa Plastics, he was not favored by others.Formosa Plastics produced PVC plastic powder. At that time, the PVC plastic powder market in Taiwan was mainly occupied by the Japanese because the Japanese had low production costs and lower prices.Wang Yongqing carefully analyzed the PVC production at that time. The main raw material of PVC is chlorine gas. Taiwan is the production base of caustic soda. Chlorine gas is the waste product of caustic soda, so the price is extremely low.At that time, Taiwan's labor and electricity prices were far below world levels, and the government adopted a policy of supporting private enterprises with many preferential policies.If Formosa Plastics can achieve the lowest average cost like Japan, which is lower than these countries in currency terms, then Formosa Plastics will surely succeed.

After careful thinking, Wang Yongqing sold other properties of the family and borrowed money to expand the production of Formosa Plastics.By 1960, Formosa Plastics had become the leader in the PVC industry at that time, with a monthly output of 1200 tons.After the cost drops, the price is far lower than similar products in the world.In this way, Formosa Plastics not only drove Japan out of the PVC market in Taiwan, China, but also exported it to countries all over the world.Formosa Plastics has achieved great success.

The success of Formosa Plastics depends on various efforts, such as internal management and good relationship with the government, etc., but the most important thing is that Formosa Plastics achieves the lowest cost by expanding its own output. This is the magic weapon for Formosa Plastics to win.

In order to effectively reduce costs, it is necessary to analyze the most essential thing among various factors that affect costs, that is, to do the analysis of "unit cost".Cost reduction has always been the main goal pursued by every enterprise.

The first is that average cost has been falling as output has increased.The production technology of this industry is characterized by the need for a large amount of investment at the beginning. When the output increases later, the cost per unit of product increases is not much, and the initial investment is allocated to more and more products, so that the average cost is getting smaller and smaller. .

The second situation is that no matter how the output changes, the average cost remains basically the same.This kind of industry is generally insignificant in the economy. Its market demand is not large and its output is not large. The production factors used are not relatively scarce in the economy and do not compete with other industries for production factors. increase, factor prices will not rise, and costs will not increase.And the initial investment is not large, such as pens and other small items.

In fact, it is more of the third situation. As the output increases, the average cost first decreases.When the output increases to a certain amount, the average cost reaches the minimum.If output increases further, average cost increases.That is to say, the average cost first decreases with the increase of output, and then increases with the increase of output.And the output when the average cost is the lowest is the output of moderate scale.

For many enterprises, costs cannot be reduced and efficiency cannot be improved. An important reason is that they have not achieved an appropriate scale.The principle of achieving the right size applies to all industries, although each industry does not implement it in the same way.Industries such as iron and steel, home appliances, and automobiles have strong links between production, so they are suitable for centralized production, that is, factories must be large in scale and concentrated in the same area to take advantage of economies of scale.Some other industries, such as retail business, have adopted a combination of centralization and decentralization.Centralized purchase, unified logistics distribution, and unified management system ensure the lowest cost.

When the operating costs of enterprises come down, consumers can buy cheaper goods.

(End of this chapter)