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Rising Cost of Production in Europe

In economics, production may refer to a process of converting materials (tangible or intangible) into a final product or service. Cost of production is the key determinant of business profitability and sustainability (Rasmussen 2012). When the cost is high, investors tend to avoid such market due to low return on investment. On the other hand, market with low production cost attracts huge investments. In a nut shell, production cost has significant impact on growth and development of any economy (Nell 2011). It features most government forums as well as business talks and reports.

Rising cost of production in United Kingdom and Australia attracts sharp interest from different quarters. In the recent past, Toyota made major announcement concerning unbearable cost of car manufacturing in Australia (BBC, 2013). Consequently, the president hinted their deliberate plan to wind-up production plant in Australia. In other business news, eggs retailers and producers raised their concern over the issue of cost of production in UK market and other parts of Europe (SEPRA 2013). There is also a worrying cost of producing oil in this continent which is likely to hamper economic progress.

The issue of cost of production in Australia especially in relation to recent announcements by car manufacturers attracts the attention of Prime Minister. The unfortunate economic circumstance is developing political pressure in Australia where the opposition is blaming the government for rising manufacturing cost (BBC, 2013). It also affects labour market since significant number of people stands to lose jobs when manufacturing plants are closed. In UK, eggs retailers and other investors in the sector are affected by rising cost of feeds (IEC 2013). Retailers claim that the business has no meaningful value due to low business profits. In addition, the intention of packers and supermarkets in UK to reduce egg prices poses further damage to retailers and producers.

Considering the impact of closing car manufacturing plants in Australia, there is need for the government to intervene in this situation. The main issue is high cost of labour and strong currency hence making it difficult to do business in Australian market. Besides Toyota, there are other car manufacturing companies that have expressed the same intention (BBC, 2013). Thousands of people stand to lose employment hence raising a serious issue. The government may opt to introduce necessary measures to make the market friendly to car manufacturers. High rate of unemployment implies low purchasing power which reduces government indirect tax (Nell 2011). It also reduces direct taxes which are deducted from workers’ salaries and company earnings as well as other government levies. In respect of this, the overall economy stands to lose thus urgent need for government intervention.

In UK, government may opt to intervene through legislation on cost of feeds. High cost of eggs production may discourage people from this business. When retailers and producers get low returns, they may opt to quit the business and look for better alternative (BFREPA, 2013). Such step may lead to low supply of eggs in UK market which does not meet the current demand. Withdraw of such investments also reduce purchasing power as well as affecting producers’ revenue. In the long run, the cycle affects the whole economy of UK and entire Europe (Varian, & Repcheck 2010). To save the situation, the government may introduce subsidies on animal feeds just to ensure producers do not incur high expenses.

High cost of production in the market discourages local and foreign investment. No investor is willing to engage resources in a market that is not likely to give returns (Baumol, & Blinder 2011). Outcry of egg producers and car manufacturers in UK and Australia respectively signifies that those markets are not viable for investment. It gives other competing economies such as China an opportunity to dominate. The government has a sole responsibility of restoring confidence in the market (Cowen, & Tabarrok 2013). Toyota has been in Australia for several decades and losing such investor is a blow to the economy. The same applies to UK market when investors complain against rising cost of production. It portrays negative image on government commitment to creating suitable environment for investment (Varian, & Repcheck 2010).

In Australia, car manufacturers particularly Toyota is concerned with cost of labour. The company revenue cannot sustain the wage bill hence making the process expensive. To reduce labour cost which is a key aspect of production, the government should introduce measures that lower cost of living in the country (Cowen, & Tabarrok 2013). When the cost of living is low, employees are comfortable with low salaries. The cycle reduces production cost for the manufacturers and other investors in the economy (Varian, & Repcheck 2010). The case of UK is different since cost of feeds is the major concern. In this case, the government may decide to lower taxes on feeds and other levies to feeds manufacturers. Such measure reduces feeds prices drastically hence enabling investors in this sector make high profits.

Besides government interventions, other key players in the market can also control the situation. When the labour cost is high, Toyota and other car manufacturers may seek other ways of cutting operational cost. The management may opt to reduce budget for corporate social responsibility and other allowances that are not essential to production (Sheffrin 2013). Effective financial control should be put in place to reduce wastage of resources. Change of remuneration structure and system may also save the situation. Such measures ensure cost of operation is low hence making the production profitable and sustainable (Baumol, & Blinder 2011).

The government and business leaders should utilize all avenues of controlling cost of production. Closing manufacturing plants is not ideal option due to undesirable effects it has on the economy (Nell 2011). Quitting the business is not solution either. The main concern is how to curb rising cost of production without affecting economic progress (Norsker, et al 2011). The government plays a leading role in protecting investments from collapsing due to cost of production. The management and other players may also introduce control measures to facilitate business profitability. Not unless this is done, Australia and UK may experience harsh economic environment in future. These businesses play a crucial role in both economies and ignoring the issue of production cost is a serious blunder.

Reference

Baumol, W., & Blinder, A. (2011). Microeconomics: principles and policy. Cengage Learning.

BBC News Business, (2013) — http://www.bbc.com/news/business-26114894

Cowen, T., & Tabarrok, A. (2013). Modern Principles: Microeconomics. Worth Publisher.

International Egg Commission (IEC), (2013).

Nell, E. J. (2011). The Quantity Equation and the Classical Theory of Production and Distribution. Sraffa and Modern Economics, 2, 186.

Norsker, N. H., Barbosa, M. J., Vermuë, M. H., & Wijffels, R. H. (2011). Microalgal production—a close look at the economics. Biotechnology Advances, 29(1), 24-27.

Rasmussen, S. (2012). Production economics: the basic theory of production optimisation. Springer.

Scottish Egg Producers & Retailers Association (SEPRA), (2013).

Sheffrin, S. (2013). Microeconomics: Principles, Applications, and Tools. Pearson Prentice Hall.

The British Free Range Egg Producers Association (BFREPA), (2013).

Varian, H. R., & Repcheck, J. (2010). Intermediate microeconomics: a modern approach (Vol. 6). New York, NY: WW Norton & Company.