Decreasing fixed costs
Decreasing fixed costs pulls the TC curve downwards in a parallel fashion until the TR curve is intersected. (see Figure 5.19). A decrease in fixed cost could also be achieved in a variety of ways. For example:
* We could imagine the firm’s owner seeking to negotiate a lower interest rate with their bank manager on a loan originally taken to purchase capital.
Whilst this could be a possibility it might also be seen as a dangerous suggestion (e.g. if the bank sees its investment to be at risk due to the firm’s current losses it may decide immediately to foreclose on loan to ensure repayment).
* The firm could consider moving to cheaper premises. (The disadvantage of such a movie is that it may cause dispruption to production and the act of moving in itself involves additional expenditure.)
* Baldwin’s currently uses outside contractor to clean office and factory space. This fixed cost could decrease by negotiating either a lower price or seeking a cheaper contractor.
* Decrease expenditure on research and development. Although such a cut might be considered short – sighted, it nevertheless achieves an immediate cost saving.
Suggest other policies that could achieve a decrease in fixed costs.
Figure 5.19 shows the successful implementation of one of the above strategies. The TC curve shifts down in a parallel fashion and profit function shifts upwards. As marginal costs are unaffected by decreasing fixed costs. The output where marginal cost equals marginal revenue remains at Q1 and price stays constant at P1 The consumer does not therefore benefit from the cost saving, all the gain going to the producer as increased profit. (Note: see Baumol’s model of sales revenue maximisation in Chapter 6.)
Increasing the level of demand
Increasing the level of demand at each price causes the demand curve to shift outwards and the TR curve to shift upward upwards until it crosses the TC curve (see Figure 5.20). We will initially imagine how the firm might cause the total revenue function to shift upwards without at the same time having to increase overall expenditure. For example:
* The firm might increase demand by using its current advertising expenditure more productively. This might involve moving to a new advertising agency.
* Redesigning the product, at no additional cost, to appeal to additional consumers.