Practise short-run and long-run shutdown decisions from cost and revenue curves, including AVC, ATC and real business closure contexts.
Sources for use with Section B
The impact of the global health crisis
Figure 1 Amazon’s annual revenue, 2010–2020 (billion US dollars)
Figure 2 Worldwide market share of cloud infrastructure providers by revenue, Q4 2019
Extract A Amazon
Amazon, the American global distribution business, increased its revenue from $280.5 billion in 2019 to $386.1 billion in 2020. For the year ending 31 March 2021 its profit was $167.6 billion. The business operates mainly online but it also has several physical stores. Amazon’s success has been driven by its methods of competition including its focus on convenience, fast delivery, low prices and choice for its consumers. Over 28% of consumers complete an Amazon order in three minutes or less and 50% of consumers in under 15 minutes. Amazon produces its own products such as Amazon Prime, Alexa, Kindle, Fire and Echo, as well as selling millions of additional products. Amazon also offers the opportunity for third party suppliers to sell on its website.
During 2020, the global health crisis prevented consumers from visiting physical stores. As a result many people used Amazon to purchase products online. This led to an increase in the demand for goods supplied by Amazon. Its costs of production increased by $4 billion, mainly as a result of employing an additional 400 000 workers in 2020. By the end of the year, it employed 1.3 million full-time and part-time workers globally. A fall in labour productivity also caused an increase in costs.
Extract B Small and medium-size enterprises (SMEs) in South Africa
As a result of the global health crisis the revenues of many South African enterprises fell significantly. In July 2020 a management consultancy company conducted a survey of 4 500 businesses in South Africa to examine the impact of the global health crisis. It reported that 21% of enterprises were closed but, of these, 64% indicated that they expected to reopen.
The survey also established that SMEs were 26 times more likely to close than much larger enterprises. In addition, SMEs would require R1.1 trillion of government financial support in order to remain open in 2021. In South Africa SMEs make up 98.5% of the total number of enterprises and contribute 39% to the country’s GDP.
In the survey 70% of SMEs reported that they cut back on spending to survive. Over half of medium-sized enterprises were only able to survive by closing parts of their business or reducing capacity until the economic situation improved. However, the revenue of many SMEs did not cover their variable costs and they were forced to shut down.
The survey findings were not all negative. Those SMEs offering essential services, such as food, reported an increase in revenues. Although costs had also risen, profits had either remained constant or had increased.
With reference to Extract B and your own knowledge, discuss reasons why many SMEs in South Africa shut down in 2020.
Illustrate your answer with an appropriate diagram.
