Business Economics: Costs, Quality, and Environment
Company Costs and Structure
Fixed and Variable Costs
Fixed costs are those that always exist and never change. Variable costs are those that vary with the level of production (i.e., they change as production changes). The total cost is the sum of fixed and variable costs.
- TC = FC + VC (Total Cost = Fixed Cost + Variable Cost)
- ATC = TC / Q (Average Total Cost = Total Cost / Quantity)
- AVC = VC / Q (Average Variable Cost = Variable Cost / Quantity)
- MC = ΔTC / ΔQ (Marginal Cost = Change in Total Cost / Change in Quantity)
Direct and Indirect Costs
Direct costs are those directly associated with production that can be easily assigned to each product and measured by the number of units produced. Indirect costs affect the production process and the surrounding environment rather than the product directly.
Business Cost Structure
The business cost structure is considered a straight plot allowance of costs. The starting point is the direct costs of production, which make up the primary cost. To this, you must add indirect costs, such as industrial costs forming manufacturing costs, and marketing and administration costs that make up the cost of the business or farm. All of these together form the total cost of the company.
Break-Even Point and Performance Threshold
The neutral or performance threshold is the quantity of output sold from which the company begins to make a profit. It is also called the break-even point or balance point.
- B = TR - TC (Profit = Total Revenue - Total Cost)
- TR = p × Q (Total Revenue = Price × Quantity)
- Q = FC / (p - VCU) (Break-Even Quantity = Fixed Costs / (Price - Variable Cost per Unit))
Company Quality and Management
Quality is the set of technical characteristics that define a product. Striving for quality does not mean getting the maximum possible quality, but rather the fair quality that the product needs, as both excess quality and lack of quality impact costs. This is why we talk about Quality Management. It is implemented in different ways: inspection, process control, integrated quality management, and total quality.
Quality Certification
The quality system of the enterprise should be recognized or regulated. There is an international institution called ISO which regulates quality and sets the conditions to be satisfied by the quality system of the company to be recognized. In Spain, this regulatory body is AENOR.
Business and the Environment
There is a strong relationship between economic activity and the environment. Companies must incorporate environmental management, driven by factors such as:
- Regulation (Normativa): Legislation to enforce environmental laws.
- Society: Demands to avoid environmental damage.
- Economic Factors: Caring for the environment can improve the economy.
- Business Ethics: Leaders taking on ethical values and environmental conscience.
Externalities and Social Costs of Production
When a product is made, it generally generates costs. If paid by the company, these are internal costs. But in other cases, these costs are paid by someone outside the firm; in this case, they are called external costs. These costs are referred to as positive and negative externalities.
Environmental Business Opportunities
- A) Reducing ecological impact: Installation of equipment to control and reduce contamination.
- B) Protection of the environment: Through the transformation of production processes, technology, and the organization of operations.