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US: The Coming Battle between Profits and Prices - "Pricing power is rising, but so are costs, and that will soon squeeze margins"

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Introduction

US: The Coming Battle between Profits and Prices "Pricing power is rising, but so are costs, and that will soon squeeze margins" The article states the fact that due to the latest sings of a stronger economy is leading to inflation threat worries. Lately companies are dealing with a generalized rise in pricing power but, at the same time, they are facing an increase in cost of the inputs due to inflation. For example the prices for unfinished intermediate goods (INPUTS) have gone up by 7.8% from a year ago. But the prices of finished goods (OUTPUTS) have gone up by only 1.8%. On the other hand, but also affecting the input prices is the labor rises. ...read more.

Middle

As seen in chapter 8, the long run average cost curve will experience a shift to the right when there is an increase in cost due to an increase in the price of the inputs. In this case this concept is applicable, since the increase in cost is due to an increase in labor costs, and inflation in the unfinished goods (raw material that lead to the finished good). According to what we saw in class, the goal of management is to maximize profit. As seen in chapter 2, the profit maximization level is reached when marginal revenue equals marginal cost. This would determine the optimal level of output at which profit is maximized. ...read more.

Conclusion

Another situation they should consider is the alternatives they have to reduce costs different from the decrease in input prices. A way to decrease their costs is to increase the learning curve. The learning curve is the average cost reduction over time due to production experience. This will significantly reduce cost, because the workers are more experience that allows the firm to produce output more efficiently at each and every output level. Productive efficiency leads to a downward shift in the long run average cost curve at all levels of output. Another choice they have to decrease their costs is by determining the optimal level of the inputs used in the production of their products. If the company allocates based in the input that has higher MP/P ratio, this will lead to maximizing the amount of output that the company gets with the same amount of expenses. ...read more.

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