In the decade of 1990s , the most commonly
used Way to contain or to cut costs was to
reduce the number of people on a company‟s
This is not a new concept . However, What is
relatively new is where such consolidation
or close tie –ins takes place between the
different “Centers Of Excellence” and the
rest of the company. This is largely because
of the proliferation and falling cost of
broadband communications . Now a company
can have its support function relating to
headquarters as well as to all its other
locations in the world where it operates.
An additional way in which companies have
tried to cut costs to remain competitive is to
Consolidate , and then reduce headcount . It
is no surprise that mega mergers making the
news in recent years primarily involve
companies that have been experiencing
considerable changes in the economics of their
In a typical business organization , cost is generally
considered the domain of the accounting
department. Its presentation to the outside world is
based on generally accepted accounting principles.
Any cost not affected by a decision is considered
irrelevant . Both economists & cost accountant use
the concept of relevant cost when analyzing
business problems and recommending solutions .
Out of pocket
Most firms experience rising marginal
productivity at early stages of production as
they hire additional workers because additional
workers give them the opportunity to work as
a team and allows individual workers to
specialize and become very good at particular
parts of the production process. As a result, the
Total Product curve will rise very fast at these
early stages of production. Generally, however,
when these firms try to grow too big for their
fixed inputs hire too many workers, the workers
start to get crowded and marginal productivity
starts to drop off. This results in much slower
growth in output.
The firm employs two inputs , labor & capital.
The firm operates in a short run production period . Labor is
its variable input, & capital is its fixed input.
The firm uses the inputs to make a single product .
The firm operates at every level of output in the most
The firm „s underlying short-run production function is
affected by the law of diminishing
In the long run , all inputs to a firms production
function may be changed . Because there are no
fixed inputs , there are no fixed costs.Consequently,
all cost of production are variable in the long run. in
most work situation managers of firms make
decisions about production & cost that economic
theory would consider short run in nature .
As output increases, observe that total cost
increases , but not at constant rate . As with the
short-run function , the rate of change of the long-
run total cost function is called the marginal cost .
If a firms long run average cost declines
as output increases , the firm is said to
be experiencing economies of scale . If
long run average cost increases as
output increases , economists consider
this to be a sign of diseconomies of
scale . There is no special term to
describe the situation in which a firm‟s
long run average cost remains constant
as output increases or decreases .
The reduction of a firm‟s unit cost by
producing two or more goods or
services jointly rather than separately is
called economies of scope .
The concept of economies of scope is
closely related to economies of scale .
Engaging in more than one line of
business may require a firm to have a
certain minimum scale of operation . A
good example of economies of scope is
the case of pepsi-Co beverage & snack
business relative to its distribution
The learning curve is a line showing the
relationship between labor cost and
additional units of output . Its
downward slope indicates that this
additional cost per unit declines as the
level of output increases because
workers improves with practice . The
reduction in cost from this particular
source of improvement is often referred
to as learning curve effect .