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HI5003 Economics for Business and Manufacturing Industry

Choose a topic from Micro economics that matters to you and find a recent news article covering that topic. Following are some of the topics from where students need to choose ONLY one topic:
Monopolies, Duopoly and Oligopolies in Australia
Demand and supply of certain resources in Australia
Costs of production in manufacturing industry in Australia
Reforms in Education, Meat, Agriculture and Tourism
PL see the additional guidelines provided for this assignment. 
Introduce the issue, who is interested in it and why. x The economic analysis (present the issue in terms of economic concepts and theories you have learnt in class. 
Explain what actions you would recommend to the key players and/or policy holders.
Explain how the above analysis supports your conclusion

Answer:

Introduction

The cost of production is an essential factor in the determination of an economy’s level of output production. Costs greatly influence this levels and the impacts are directly transmitted to the whole economy. The manufacturing industry has a higher percentage in the contribution to the Australian GDP. This paper will be important for the government to ensure that policy actions taken should get the costs of production going down. Actually, a concern on the cost of production is only raised when the cost soars. Otherwise, everyone would agree that a low cost of production would be good for an economy. The cost of production for the Australian manufacturing industry has been going up on the recent years (Elaine, 2017). This has resulted in many firms to close down owing to their inability to cope with the high costs.

This


paper will also determine the impacts of high costs of production on the Australian general price levels and the unemployment rate. It shall also determine what should be done to make sure that no more firms gets out of business and an attempt to revive the closed ones. The paper will also be useful to the management of the manufacturing firms. It will create an awareness to the firms that the cost of production is high and so they will make good decisions aimed at lowering their costs. In the real sense, we expected that the resulting impact from a rising production costs is that of inflation rate. The firms will raise their prices so as to minimize the possibility of making losses. The Australians will also be assisted by this study in understanding why products made in the own economy are very expensive. While the study will be done on one line of business, i.e. the fall in the car industry, the result will be used in solving the problems faced by other businesses too.

The Analysis

Australia is one of the 13 economies in the whole world that have the ability of building cars. It has been assembling and building automobiles for 91 years now. However, the car industry is now nearly closing its doors owing to the high costs of production. The car manufacturing companies in Australia are 3 in number; Toyota, Holden and Ford. Hawthorne (2015) noted that the number of people employed in by these firms is 8000. The number employed by support manufactures and services companies is five times that of the 3 companies (40,000 jobs). This means that, if these companies closed down, all these jobs may be wiped out and the unemployment level in Australia would go up (Valadkhani, 2016).

The Australian government offers an assistance to the suppliers and manufactures of approximately $ 400 million. If the companies stopped their operations, this money will go back to the government. However, the companies would be able to compensate the workers for redundancies. This according to Hawthorne will result in the government’s intervention and will spend more than $ 1 billion dollars in paying those redundancies. Of the 3 manufacturing companies, Ford was predicted to go out of business first. The other two were projected to continue operation until 2017. The predictions were made in 2015. The decline in the relative importance of the Australian manufacturing industry was observed by Kryger (2014), when he noted that decades ago the performance was very high.

Initially the manufacturing sector had a very high contribution to the Australian GDP as indicated by the graph on the contribution over the past 10 years. The trend of the contribution is falling. The argument for this can therefore be tied to the increased production cost over the years. Higher costs has caused the companies’ gross operating profits to fall.

According to Kryger (2014), the profitability gap between all other businesses and the manufacturing sector has been widening since that of other businesses has experienced some improvements; whereas that for manufacturing continued falling. According to Onselen (2014), the reduced profitability has resulted in lower employment level is this sector as exhibited in the graph below.

In the case of price levels, the cars made in Australia are very expensive. Even if there are regulatory by the government for the car oligopoly car manufacturing firms not to overcharge the consumers in terms of high prices, the government allows for these firms to set prices at the level where there marginal costs are equal to marginal revenue. There is no way that the costs should be allowed to be more than the firm’s revenues. Thus, the prices charged has to be higher.  The companies are planning to shift their production to other economies where costs will be lower (Cunningham et al., 2015).

In the manufacturing industry, the input price in the long-term trend has been rising faster than that received from the sale of their output. The combination of input prices experiencing a strong growth and the output prices a weaker growth has resulted in the narrowing of the manufacturing industry’s profit margins. One of the factors behind increased costs is that of the unions demanding better work conditions and higher wages for the employees together with the appreciation of the Australian dollar (Valadkhani, 2016).

Recommendations

While the study dealt mainly with the fall in the car industry, the results should also be used with other manufacturing firms such as the Electrolux refrigerator factory that also announced its closure. The technological innovation in Australia should be improved by an additional investment on research and development (R&D). Bearing in mind that tax in an important part of the production costs, I would recommend the government to ease the tax burden on this sector. I would also recommend that the unions be regulated by the government so that the wages they demand would be reasonable depending on the economic situations.

Conclusion

As can be deducted from the negative effect that could be caused by the closer of the manufacturing firms, such as the increased unemployment rate and subsequently an increased government spending on the government’s side as a remedy to the same, the government is supposed to take control immediately. The situation may worsen if the closing of manufacturing firms continues; the competitive nature of the Australian economy will fall and the firms that will be able to survive will sell products at very high prices.

References

Cunningham, B., Bazlley, J., Kavanagh, M., Nikkolai, L., Simmons, S. and Slaughter, G. (2015). Accounting: information for business decisions. 2nd ed. South Melbourne, Vic.: Cengage Learning.

Elaine, (2017). Australia has the highest manufacturing-cost structure among largest goods-exporting countries: study | Australian Manufacturing. [Online] Australianmanufacturing.com.au. Available at: https://www.australianmanufacturing.com.au/15915/australia-has-the-highest-manufacturing-cost-structure-among-largest-goods-exporting-countries-study [Accessed 9 Apr. 2017].

Hawthorne, J. (2015). Australia's car industry one year from closing its doors. [Online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/the-economy/australias-car-industry-one-year-from-closing-its-doors-20151012-gk7ip0.html [Accessed 8 Apr. 2017].

Kryger, A. (2014). Performance of manufacturing industry: a quick guide – Parliament of Australia. [Online] Aph.gov.au. Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1415/Quick_Guides/Manufacturing [Accessed 8 Apr. 2017].

Onselen, L. (2014). Australia's huge manufacturing labour costs - MacroBusiness. [Online] Macrobusiness.com.au. Available at: https://www.macrobusiness.com.au/2014/01/australias-huge-manufacturing-labour-costs/ [Accessed 9 Apr. 2017].

Tradingeconomics.com. (2017). Australia GDP from Manufacturing | 1974-2017 | Data | Chart | Calendar. [Online] Available at: https://www.tradingeconomics.com/australia/gdp-from-manufacturing [Accessed 8 Apr. 2017].

Valadkhani, A. (2016). Collapse of Australian car manufacturing industry | Swinburne news. [Online] Swinburne.edu.au. Available at: https://www.swinburne.edu.au/news/latest-news/2016/10/collapse-of-australian-car-manufacturing-industry-.php [Accessed 9 Apr. 2017].

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