Tuesday, 30 April 2013

Marginal Concept


Managerial Economics
Case Study Analysis
          Marginal Concept
Some land might be very good for producing certain crops - rich in nutrients and easy to access and work. This land is likely to be used first for any cultivation because the relationship between the cost of producing the crop and the return gained from selling it will be highest. However, land that is not so good will be taken into cultivation if certain conditions allow.
These conditions could be a rise in the price of the crop concerned or a means of either reducing the cost of producing the crop (perhaps through a greater understanding of how to maximize crop yield). Alternatively, it could be through some technological development that raises productivity (output per acre) or yield (for example, through breeding, selection and genetic modification).
The capital cost of exploiting this resource is very high and at the margin is only worth investment if the return from one extra barrel of oil is greater than the cost of extracting it.
The cost of exploiting the oil sands is relatively high. The separation of the oil from the sand is capital intensive, and then there have to be refineries that will process the oil into its constituent parts. Added to this is the cost of reclaiming the land and replanting it.
Oil prices are determined by an international market. The demand for oil has been rising in recent years. There is, at the moment, plenty of oil available but the ability of the world to extract oil and to process it is where the problem lies. At present, we simply do not have the processing capacity to refine oil to keep up with the rising demand, which is why the price has risen so dramatically. (There are other reasons, of course - concern over Middle East politics, the turmoil throughout the Middle East…etc).
As the price rises, marginal oil reserves - those that exist but are relatively expensive to exploit - become viable. In simple terms, if a barrel of oil from the oil sands area costs $30 to produce, then if the price rises above $30 it makes it economically worthwhile to extract for production, whereas at $25, the decision would be less obvious.
It is certainly the case that non-renewable resources remain exactly that - non-renewable - but as technology develops and as resources become more scarce in relation to demand, the market will lead companies to look to exploit resources that may have been considered impossible to extract or which were simply too costly to produce. It is all down to decisions at the margin.
Questions
1.     Most of Europe’s coal mines have closed down. There are still large reserves of coal available. Under what circumstances would you envisage businesses opening up coal mines and exploiting these resources?
2.     Discuss the relevance of marginal concepts to the destruction of the rain forest.
3.     How might an understanding of marginal concepts help to establish strategies to conserve as opposed to destroying natural resources-consider ONLY crude Oil?

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