An Economic Analysis of Outsourcing Essay - 1745 Words

An Economic Analysis of Outsourcing Outsourcing can be termed as shifting of major functions (production, back office processing and call centers) of a firm from one area to other which in return gets them more profit. Usually large firms base their head offices in developed countries and operate their productions from other developing countries where they can produce the goods at a cheaper cost. One of the main reasons for outsourcing of jobs from US to other developing countries like China and India is the low cost of production due to cheap labor available which in turn reduces the variable costs (6) involved. Some economists look upon it as a threat to US while others think of it as a way for its progress. The outsourcing of†¦show more content†¦Since labor was cheap they recruited more and increased productivity (6) and get more sales which helps to lower the variable cost involved (6) and increase the profit margin. But during the mid 90s US companies saw that China was offering wages much lower than Mexico, so they began to focus on China. In the beginning monopolistic competitors (11) began move to China and earn huge profits which caught the attention of Oligopolists. They began to invest huge amounts in capital to build factories and start manufacturing products in China. They concentrated for profits earned in the long run. They knew that since wages are low the cost involved in this can be transferred to increasing the production, charge a low price and maximize sales revenue.(11) They made tie-ups with local companies which helped them to study more about doing business in China. Most of the jobs that were outsourced were unskilled jobs which demanded low wage rates w hile the skilled jobs still remained here. The wage rate compared to the US Dollars is very low in Countries. For example the average salary of a software programmer in US is about $60,000 to $80,000 while that of India is just $5,880 to $11,000 (Kansancityfed.org Ââ€" Off shoring in the service sector: Economic Impact and Policy Issues). Taking into consideration this fact as the main reason for companies to go offshore; when they can get the same labor with theShow MoreRelatedPrice Elasticity Scenario647 Words   |  3 Pageshow to price his product so that it can be competitive in the market. This brief analysis will illustrate some of the economic principles that are relevant to the decision that Carlos faces and evaluates different option in which he might select from. Resource Scarcity The notion of the scarcity of resources is at the heart of economics and economic theory. The definition of a scarce resource is as follows (Economic Glossary): A resource with an available quantity less than its desired use. 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