The paper “ Factors Determining Demand and Supply of Goods and Services and Relevance of the Economic Theory” is a potent variant of assignment on macro & microeconomics. Operational business enterprises depend on the resource cost structure to determine their effectiveness in the field of competition. The resource cost structure is the analysis of the distribution of the costs associated with the production of goods and services. It considers all the factors of operation such as labor, capital, raw material among others. Consequently, a business firm considers its sales and marketing expenses in determining the cost structure.
In brief, the cost structure evaluates the expenditure and income of a firm. Moreover, the management system and external forces such as competition and government regulations affect the effectiveness of the kind of cost structure adopted by a firm (Mankiw, 2014, 39). The steps to establishing a business cost structure involve the invention of the idea of the product, assessing the raw materials and evaluation of the other factors of production required to complete the production of the product into a useful product. Essentially, the harmony of other components of operations such as wages and salaries to the employees is crucial.
Consequently, ancillary services offered to the workers such as vacation, retirement, and health benefits contribute to the determination of the cost structure. Mankiw (2014, 47) records that the components of effective, however, do not end at the initial production stage of the good, but also incorporates the transportation, storage and marketing policies and methodology. The determination of the cost structure depends on two major specific elements of cost determination such as fixed costs and variable costs.
However, other costs determinants like marginal revenue and marginal costs. Improper calculation of the cost structure is likely to hinder the performance of a firm. The determination of the costs under the fixed and variable costs is crucial as it directly affects the performance of the firm. For instance, placing a cost that is dependent on the net production in fixed cost is likely to deprive the performance of the firm and, therefore, lowers its net income and performance. Such costs should be under the variable costs so that the increment in the profit of the firm subsequently promotes an increase in the operational income.
Some firms, therefore, record higher performance to others because of the proper cost structure in their managerial operations. The analysis of the cost structure on one side helps the producer to determine the unit price of the goods and services offered. The price must exceed the cost of production. In the case of a higher cost of production than the unit price of the good then the business is likely to experience the closure of its operations.
Moreover, cost structure aids a firm in determining the profit margin through evaluation of its expenses and refining its structures to increase efficiency and responsible utilization of the limited resources to maximize output. The aspect creates an impact on the unit output raising the profit margin (Bird and Bird, 2007, 97). Firms that do not manage their cost structure effectively suffer from bankruptcy. For example, Solyndra Company, a solar panel manufacturing company that was a model of the United States green technology after obtaining a loan of $ 535 million could not pay back due to improper cost strategy.
Even though the company claimed that their bankruptcy was due to stiff competition in the international solar panel industry especially in China, Bird, and Bird (2007) record that their bankruptcy was because of the poor cost structure. Their unit cost of manufacturing was approximately $6 per watt while their sales were $ 3.5 per watt. On the other hand, Shell, one of the world-leading oil and Gas Company, thrives because of the proper cost structure. Shell evaluated its cost structure through the zero-based cost management strategy and presently records a better performance.
It is, therefore, clear that the cost structure contributes greatly to the bankruptcy of a firm.