GM's+2B+Expansion+U.S.+Automakers+are+Back

Kaki Tsang IB Economics HL Y1 Current Event #5 May 14, 2010

Article Title: GM's $2B Expansion: U.S. Automakers Are Back  Source: []  Article Date: May 10, 2011  Brief Explanation:  General Motors have officially decided that it will invest 2 billion US dollars so that the company can add 4,200 job openings and open 18 new plants in 8 states. In microeconomics, this is simply a company deciding to increase factors of production in the long run. The long run is a time period in which all factors of production are variable. With an increase in factors of production, theoretically the firm should be moving to a direction of economies of scale, decreasing average costs to increase total output. But this involves a time to plan and invest for the future, which is exactly what General Motors have done. Their goal of 4200 job openings and 18 new plants would probably be met in 2-3 years. After the downfall of the auto industry in America over the past years, General Motors is hoping to make a comeback that will allow it to supply a greater quantity of higher quality cars.  With every economic decision, there is an opportunity cost. In this case, spending 2 billion US dollars on increasing labor and number of plants, it misses out on other possible investments, such as improving automobile technology for making energy efficient cars.  Definitions:  1. Average total cost - total cost per unit of output  2. Long-run – period of time in which all factors of production are variable (time for planning)  3. Economies of Scale- any decreases in long-run average total costs that come about when a firm alters its factors of production in order to increase its scale of output  4. Opportunity cost – the next best alternative forgone when an economic decision is made  5. Factors of Production – resources that allow an economy to produce its output/service (land, labor, capital management)  6. Supply –the willingness and ability of producers to produce a quantity of a good or service at a given price in a given time period.  Graph:   * Graph 1 shows a PPC with GM's two investment options (Labor+number of plants/Technology improvements). It also shows increasing opportunity cost moving along the curve.

<span style="margin-bottom: 8.0pt; mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"> *Graph 2 shows a LRATC curve. The part of the curve labeled "economies of scale" is where GM is, because it is increasing its factors of production in the long-run to lower average total costs and increase output. <span style="margin-bottom: 8.0pt; mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"> Evaluation: <span style="margin-bottom: 8.0pt; mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"> GM is planning to make a comeback after the company has been at an all-time low for the past couple years. Many have lost their jobs working at GM and their cars have not been selling well with competition from Japanese and European automobile companies such as Nissan and BMW. I believe GM has made the right choice in making this investment to increase the number of workers and plants. They need to come out stronger with the production of their automobiles. There are also benefits for the public because of the new job openings that GM has offered. <span style="margin-bottom: 8.0pt; mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;"> What GM might want to consider is investing in other areas, such as automobile designers and engineers that can help come up with new, innovative ideas. The modern focus with automobiles is creating an energy efficient car, possibly powered by electricity. Other brand names such as Nissan and Toyota have the advantage in this area, and to match up with competition, GM may have to step up the technology to produce energy efficient automobiles. <span style="margin-bottom: 8.0pt; mso-layout-grid-align: none; mso-pagination: none; text-autospace: none;">