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Technological change

You are the owner of a small bread factory and are thinking of lowering costs and expanding. Your small-business advisors suggested that you first review your operations and make some technological changes. Complete the following

Explain what a technological change is and how you can use it to lower your costs.

Assume that you thought of something innovative to change your process. Would it help you in the short run? How? The next thing that your small business advisors asked you to do was to break down your costs and see what you can reduce.

Develop a table that you believe shows the explicit fixed costs of the bread factory and the total amount of the costs

Describe your variable costs.

Because you are not an expert yet on analyzing costs and optimal production levels, you decide to do a very simple analysis of your short-run fixed and variable costs if you expand. You decide that your only fixed cost will be the ovens and the variable costs will be the workers. Quantity of Workers Quantity of Ovens Quantity of Loaves of Bread Produced Cost of Ovens Cost of Workers Per Instructions

1.Graph the total cost and the average total cost.

2.Calculate the marginal product of labor, and add it to the table.

3.Calculate the average product of labor, and add it to the table.

4.What is the significance if one is greater than the other?

5.Although there seems to be a great demand for your bread, why would productivity decline when you hire more labor in the short run? How would that reflect on your production graph?

What are your marginal costs?

7.At what point do your marginal costs and your total costs intersect?

8.What happens to the total costs after this point?

9.Calculate your average total costs, your average fixed costs, and your average variable costs.

10.Is your marginal cost greater than or less than your average variable cost or your average total cost? What does that mean? Where do you want your marginal costs to be?

What happens to your average variable costs as your output goes up? Why is that?

12.Explain why in the bread-making business that, in the long run, all costs are variable and the average total costs equals the average variable costs. How would expanding the business affect the economies of scale? When would you have constant return to scale and diseconomies of scale? Provide examples.

13.Where is the optimal level of production and the optimal level of prices in the short run? Is there enough information to make a decision for the long run? What information do you need?

Sample Answer

Technological Change and Cost Analysis for Your Bread Factory

Technological Change:

A technological change is the introduction of new equipment, processes, or methods of production. In your bread factory, you can implement technological changes to:

Increase Efficiency: New machinery might automate tasks like mixing dough or shaping loaves, reducing labor costs and increasing output.
Reduce Waste: Ovens with better temperature control can minimize burned bread, lowering ingredient costs.
Improve Quality: Dough-proofing chambers with precise humidity control can lead to consistently delicious bread, potentially increasing your selling price.

Full Answer Section

Short-Term Benefits of Innovation:

If you come up with an innovative process, like a faster bread-proofing method, it can benefit you in the short run by:

Boosting Production: You can bake more loaves in a shorter time, potentially increasing sales and revenue.
Lowering Labor Costs: If fewer workers are needed due to increased efficiency, labor costs can decrease.

Cost Breakdown Table:

Cost Category	Description	Example
Fixed Costs	Expenses that don’t change with production levels within a specific timeframe (short-run).	Rent, Loan Payments, Oven Costs, Insurance
Variable Costs	Expenses that change with production levels (short-run).	Ingredients, Labor Costs, Utilities (proportional to use)

**Short-Run Cost Analysis (**Assuming Ovens are Fixed Cost)

Table:

Quantity of Workers	Quantity of Loaves Produced	Cost of Workers	Marginal Product of Labor (Additional Loaves Produced per Worker)	Average Product of Labor (Total Loaves Produced / Workers)
1	100	$100	–	100
2	220	$200	120	110
3	300	$300	80	100
4	340	$400	40	85
5	350	$500	10	70

Graphs: (You can’t create graphs here, but I can explain)

Total Cost Graph: This would likely show an upward trend as the number of workers increases due to rising labor costs.
Average Total Cost Graph: This might initially decrease as production increases and spreads the fixed costs over more loaves. However, it could eventually rise as diminishing marginal returns set in (explained later).

Calculations and Analysis:

Marginal Product of Labor (MPL): This shows the additional loaves produced when one more worker is hired. It’s calculated by subtracting the previous row’s “Quantity of Loaves Produced” from the current row’s and dividing by 1 (since we’re adding one worker).
Average Product of Labor (APL): This shows the total loaves produced divided by the number of workers.
Significance of APL vs. MPL: If MPL is greater than APL, it means adding another worker is increasing overall efficiency (producing more per worker). When MPL falls below APL, adding workers leads to diminishing returns (less additional output per worker).
Productivity Decline in Short Run: Adding workers in a small space can lead to inefficiencies. There might be limited work areas or tools, causing workers to get in each other’s way. This is reflected in the production graph by a flattening or even slight downward slope as MPL falls.
Marginal Cost (MC): This is the additional cost incurred to produce one more unit (loaf) of bread. It can be calculated by finding the difference in total cost between two production levels and dividing by the difference in loaves produced between those levels.
Intersection of MC and TC: The point where marginal cost (MC) equals total cost (TC) might indicate the point of diminishing returns, where adding another worker starts to cost more than the additional bread produced.
Total Costs After Intersection: After this point, total costs might increase more rapidly as inefficiencies outweigh any production gains.
Average Total Cost (ATC): This is the total cost divided by the total loaves produced.
MC vs. Average Costs: When MC is less than ATC and AVC (average variable cost), it means adding another unit is decreasing overall average costs. You ideally want your MC to be below ATC for increasing production to be efficient.
Average Variable Cost (AVC): This is the variable cost per unit of output (loaf). As output goes up, AVC might initially decrease due to spreading fixed costs over more loaves. However

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Technological change

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Technological Change and Cost Analysis for Your Bread Factory

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