There have been Requests for greater explanation of yesterday’s Post as to effects on Production, mainly issuing from malicious individuals who want to watch me fall on my face. There still remains that small segment of the reading Public who would want clarification, so I advance with full Warning that mysterious are the ways of Production, and I am the last person to ask about the Process. The heaviest inquiry seems to be for my definition of scope between the factors, an area where Anyone will fail; simply pick the advantageous Period of Time, and Error will resound! Here is my estimate of the Situation, and I will state categorically that it will be wrong some 30% of the Time.
I will start with the easiest–Supply contracts. The first statement on them is that they are always fulfilled; something to do with financial liability. They are of two types: those in which you guarantee a certain provision of Product, and those in which you are guaranteed a certain level of Product. Some are of set Price for the Product, others are tied to a sliding Scale based upon an agreed upon estimate of Inflation. When you are guaranteed a certain level of Delivery, reduction of Production schedules lead to intricate problems of building Inventory without maintenance of Production schedules. When you promised to deliver a certain level of Product, then the above mentioned financial liability comes into being. Production schedules are almost always maintained to eliminate the problems associated with Supply contracts; outside of the issue of declared bankruptcies. The current economy suffered from a shortage of Supply contracts before the last downturn, as everyone figured that Production Costs would reduce while Consumer Demand would remain High; seriously sapping a normal Recovery mechanism.
No one takes to the Time to supply me with a fund of accurate Answers to the following, so I am giving my best guess-estimates. Prices affecting Production schedules seem to center around these rates: a 1% rise in Material Costs equate to roughly a $.70 increase in the unit of Energy utilized and/or about a 4% rise in the Cost of Capital (holding True only in the Short-Run, and then only until Interest Costs reach 9% Prime rate). Land or Capital Costs came be contemplated to remain the Same throughout the intermediate period, and affect Production only in the long-term. Labor is the most difficult to judge, but I estimate that a 1% Material Cost increase, a $.70 Energy Cost, a 4% Finance Cost, and a $2.15 labor unit Cost (Hour) remain roughly the same in impact on total Production Costs. Remember that all these sub-Costs are in flux, and can counter each other’s impact. The final element must be stated that Consumer Demand is second in power only to Supply contracts, and can be impacted by all of the sub-Costs, but has relatively no impact upon the sub-Costs in the Short or Intermediate Runs. I will Now leave it to any and every decent economist to acclaim that I am full of it! lgl