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Answer to Question #56586 in Microeconomics for Kazuhisa Yamaguchi

Question #56586
Most of the cost of a flat screen TV involves the LCD panel. Globally, 220 million flat screen TVs were sold in 2011 for $115 billion. Although scale economies in massive factories and volume discounts on electronic input components have driven the cost of LCDs down from $2,400 to $500 the last decade, the price has fallen even faster. In 2001, the average selling price of a large LCD panel was over $4,000. By 2011, this price had fallen below $600. Sony Corporation finds its flat screen TVs now fail to cover the full cost of the LCD panels and instead impose a $126 ($500 - $374) loss per TV sold. Nevertheless, the indirect fixed costs of the LCD factories including Korean Samsung, Japanese Sharp, Panasonic, and Sony constructed are partially covered by operating (continue production). Losses would be greater in the short run if they shut down.

What would you advise SC in light of the competition from the other manufacturers?
Expert's answer
When there are some improvements in the technology of production, the supply of the final products increases, so the supply curve moves to the right, the quantity supplied increases and the equilibrium price of a product decreases. That's why with the fall in production costs there is a fall in prices, and the higher is the increase in supply, the more the price will fall. If the Sony Corporation faces losses and can cover its variable (direct) costs, then it should continue producing. But if it can't cover even its fixed (indirect) costs, then it should shut down.

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