Economics Chapter 10 - Cost Structures

Chapter 10 - Context

• Expected Skills: Characterize cost structure of a company, analyze how economic factors (interest rates, costs of materials) influence business decisions. Explain choosing to make products in-house or outsource.

• Associated Knowledge: Production factors (capital, labor, raw materials, knowledge), productivity gains and production costs, value chain, principles and goals of outsourcing.

Rising Energy Costs Impacting Production

• Gas and Electricity Prices: Gas prices soared in August 2022, reaching record highs. Maintenance issues on the Nord Stream gas pipeline further impacted gas prices. Electricity prices significantly increased.

• Industry Pressure: European industries heavily dependent on energy face immense pressure due to extremely high energy costs.

• Production Halts: Some companies are reducing or halting production. Examples include the permanent closure (in late September) of primary aluminum production in a Slovakian plant run by Norsk Hydro, and a indefinite halt in zinc production at a Dutch facility run by Nyrstar.

Question 1: Production Issues and Consequences

• Problem: High energy costs (electricity and gas) are significantly increasing production expenses for industrial companies.

• Consequence: This directly affects the profitability of companies that rely heavily on energy for production, causing them to cut back on or entirely suspend operations.

Question 2: Responses to Cost Pressures

• Responses: Some industrial companies are forced to curtail or cease operations if production costs become unsustainable.

Explore how energy costs, particularly gas and electricity, influence production decisions for companies. This quiz examines the implications of rising costs on the production process, outsourcing decisions, and overall business strategies. Understanding these factors is essential for navigating today's economic landscape.