Economies of Scale and International Trade Essay

Economies of Scale and International Trade - Essay Example As the report states that the pricing behavior of a company is generally assumed to be based on the motive to maximize profit. Pricing decisions may not be expected to influence that of other companies in a large economy. The two major factors considered in setting a price that maximizes profit are the ‘elasticity of demand’ and the ‘marginal cost’. A key factor that determines the elasticity of demand as a variable is the output. It therefore becomes necessary to fix a ‘profit-maximizing output’ as well as a ‘profit-maximizing price’. From the research it is clear that the primary assumption deals with the mass production of some goods in a community that shares a common ‘utility’ function. As such the acceptance of these goods is considered to be uniform. It is also assumed that production ‘cost’ is a constant for all these goods, while the labor employed for manufacture is seen as a ‘linear function of output’. One factor that remains variable is the ‘elasticity of demand’ that each producer might have to tackle. While marginal costs are assumed to be stable, average costs are considered to be reducing. Manufacture of unit goods would match the numbers derived from individual consumer needs, which equals the number of individual workers. Yet another assumption is that there is ‘full employment’. An approach to a solution again is suggested in three steps. ... One factor that remains variable is the 'elasticity of demand' that each producer might have to tackle. While marginal costs are assumed to be stable, average costs are considered to be reducing. Manufacture of unit goods would match the numbers derived from individual consumer needs, which equals the number of individual workers. Yet another assumption is that there is 'full employment'. The Problem The problem is simply stated in a symmetrical manner with three variable factors that need to be arrived at: Pricing of each product in relation to corresponding wages Output of each product Total number of products manufactured The Solution An approach to a solution again is suggested in three steps. The first is to assess the 'demand curve' for a given company. The next step involves a study of the relative pricing policies that companies apply, and linking of output with the profitability factor. Thirdly, profitability as well as entry is studied to arrive at the number of companies. The demand curve for a given company is worked out by considering consumer behavior of individuals, based on budget availability and the 'marginal utility of income'. The level of individual consumption in relation to output is read as the total demand for the product of a company. The company's pricing policy can hardly influence the consumer's 'marginal utility of income' where there is mass production of goods. The pricing behavior of a company is generally assumed to be based on the motive to maximize profit. Pricing decisions may not be expected to influence that of other companies in a large economy. The two major factors considered in