Revenue,_Cost_Concepts,_and_Market_Structure_Proposal

Revenue, Cost Concepts, and Market Structure Proposal Janet Lloyd ECO 561 University of Phoenix Online Dr. George Sharghi April 3, 2011 Will Bury is an enterprising inventor that has created a proprietary technology that he has developed and patented in his garage. Will has taken the technology to take printed word from text materials and create a file with the option of reading books digitally or listening to them with a realistic synthetic voice. Will’s technical skills have outpaced his business acumen. He needs to decide whether he should quit his job that pays $200,000 a year plus benefits package, which his family is dependent on or devote his attention full time to his new business. Will needs to do research on who would want to acquire the books, how much he would charge, and how many employees if any to hire to help transform and scan them into his digitizer. Will, will need to increase revenue for the company in order to make it a reality. He will need to achieve ideal production levels, determine how fixed and variable costs should be adjusted to maximize profit, and identify methods to reduce costs. Increase revenue With today’s internet and online university’s the need for digitized books has increased dramatically. More and more people are using technology and buying personal devices that can access the internet and download books to read for leisure. They can use these devices to read a book or listen to one while they are doing other things. Because Will entered the market with a new idea in technology and patented his idea he had a monopoly on the production of his digitizer. This creates a barrier that prohibits competitors from creating a substitute product and blocks competitors from entering the market. Because Will lives in a country that has a market system as an entrepreneur he can be assured that he can obtain and use economic resources to produce goods and sell them in his chosen market area (McConnell, Brue, & Flynn, 2009). Will also has the freedom of choice that enables him to dispose of his property and money as he sees fit. Thus the revenue he makes he can decide if he wants to reinvest in his own company or not. As the economy grows the production possibilities curve will move to the right or increase. This will allow Will to produce more digitizers for sale and increase revenue for his company. To achieve an increase in revenue for his company Will needs to come up with a viable market plan to advertise more aggressively through ads in newspapers, magazines, and on the internet through well-traveled sites. He needs to take advantage of the patent he has on digitizers and the fact he is the only one producing them before his patent runs out. Eventually Will should consider selling his digitizers to increase revenue and expand his business. He would be able to sell his digitize at a higher profit than selling books considering they are easy and cheap to make (University of Phoenix, 2011). Digitizers and digital books would be an elastic expense to consumers or a luxury item. When the economy is in a trough or down slope they would be more sensitive to price increases. This makes them relatively elastic. Even modest changes in price will affect the amount of product sold. In the first 6 months of his business Will sold 1000 books at $10.00 each and 2000 books at $15.00 each which included the $5.00 fee for royalties. The $10.00 was for books that were no longer under copyright laws and they were free. These books are books that were written before 1928 and thus the copyright laws have expired (Sayer, 2009). According to Circular 92 Title 17 of the United States Code (2009) a copyright is the duration consisting of the life of the author and 70 years after the author’s death. This would explain why Will sold more of the $15.00 books than the $10.00 books. Popularity of new novels for pleasure and up to date text books would increase the demand for these books than books published before 1928. He needs to sell his digitized books at a cheaper price then the books on CD’s currently on the market selling for $20.00 each. In order for Will Bury to achieve ideal production levels he will need to look at marginal revenue and marginal cost. The marginal revenue product is the demand for any resource and is derived from product demand. This will depend on the productivity of the resource helping to create a good or service and the market value or price of the good or service it helps produce (McConnell et al, 2009). Because digitizing books is a new technology that has many applications, from helping the visually impaired to educating college students, there could be an increase in demand as more and more people use it. Consideration of the law of diminishing returns applies which will cause the marginal product of labor to fall beginning with the first worker hired (McConnell et al, 2009). Hiring workers decreases profit due to wages added to the final product but only after wagers surpass efficient production. Instead of paying high school graduates $10.00 per hour they could be started out at minimum wage with increases as the product sells more. The price charged for the books should be the change in total revenue divided by the unit change in resource quantity equaling the marginal revenue product (McConnell et al 2009). The firm can hire additional units of labor to maximize profit as long as each successive unit adds more to the firm’s total revenue than to its total cost. The marginal revenue (MR) is the change in the total revenue from selling one more unit. The marginal revenue curve is an increasing line as the total quantity product increases. As a purely competitive company it is a price taker so it can maximize its economic profit or loss by adjusting its output. Marginal cost (MC) is the change in costs when one more or less unit of output is produced. MC is the change in total cost divided by the change in product. Marginal cost is all of the cost in producing the last good. When MR=MC and is closest to 0 profit is maximized (McConnell et al, 2009). To maximize profit Will Bury will only be able to adjust variable costs not fixed costs. Variable costs are the costs that can be changed such as wages, utilities, and materials used in production. Variable costs are costs that vary with output (McConnell et al, 2009). Variable costs can be adjusted to maximize profit. By decreasing wages or laying off workers Will can increase profits. Fixed costs are costs that cannot be changed such as rent, buildings, and machinery. These costs are independent of the output even though Will works out of his garage there is still a fixed cost in its use. He will still have to pay the mortgage, utilities and machinery even if the output is 0. Once these costs are incurred they cannot be adjusted to maximize profit. In order to reduce costs Will Bury will need to reduce his variable costs. By adjusting the variable cost through production level Will can reduce total costs. In order for Will Bury to see his dream of owning a business in digitizing books, he will need to increase his revenue. This can be done by hiring employees to help him scan books using his own technology which he patented. In order to increase revenue Will needs to be aggressive in promoting his product to consumers. Increasing his output would enable him to achieve his ideal production levels and reduce costs. Will shows he is caring and loves his family. He wants to be a good provider but also wants to pursue his dream of becoming an entrepreneur. He works to much and does not like to sacrifice the time he could be spending with his daughter. Will is considerate and believes he can make it in digitizing books. References: McConnell, Campbell R., Brue, Stanley L., Flynn, Sean M., (2009) Economics. Principles, Problems,and Policies Eighteenth Edition Ch.’s 8, 9, and 12. McGraw-Hill Co. Sayer, Peter, (2009) IDG News, Digitized Book Readers www.pcworld.com United States Copyright Office, (2009) Title 17 of the United States Code Circular 92 Ch. 3 www.copyright.gov/title17/ University of Phoenix, (2011) Online scenario Will Bury ECO 561 University of Phoenix