Costs of typical firm

Characteristics

Current situation

Future trend

Main fixed costs

Relatively high as it takes much money to commit sufficient researches.

The equipment and laboratory works of companies need many funds too.

This industry takes much scientific knowledge to produce effective goods. Therefore, the trend of decreasing the main fixed costs barely exists now and is unlikely to happen in the nearest years.

In future, more funding will be necessary to attract customers with advertising, which costs are also included in the fixed costs.

Main variable costs

The weight of variable costs is substantially lower than the one of the fixed costs.

The weight of variable costs will increase as the industry develops for the reasons stated before.

Economy of scale (scope)

The economy of scale exists because the average costs tend to decrease dramatically when a large scale is applied.

As for economy of scope, the production of cognitive enhancers requires much specified equipment and knowledge and the industry is unable to develop any products other than those.

As the industry develops there are no obvious reasons for avoiding production of other products using the formed brand. For example, producing drugs different from cognitive enhancers will be not difficult as both of these types need pharmacological knowledge and well-developed pharmacological company.

Are there minimum efficient scale (MES)?

What is the efficient growth mode?

A firm’s minimum efficient scale is relatively high because the amount of production should be high to decrease the level of average costs to the level of marginal costs (as the variable costs are incredibly low and fixed ones are high). The efficient production growth mode for now is to keep the production constant.

In future, the minimum efficient scale will decrease and the growth model will change to extensive production.

Sensitivity of costs to capacity utilization

The sensitivity of variable costs is high and the sensitivity of fixed costs is low

As the company grow further, the amount of plants and, consequently, equipment increases which leads to lowering the sensitivity of variable costs and heightening the sensitivity of fixed costs

Behavior of marginal cost

Marginal costs are constant and very low, not affected by changing of the company’s scale.

The situation does not change generally but if any new (rare) material of ingredient will be discovered, they will increase.

Exit barriers

The costs of redundancy are high and will affect the decision to exit. Also, the costs of upturn exist but they are relatively low to be considered as a decision-making factor.

The tendency of market growth will cause the increase in the upturn costs.