Isn't Everyone After the Quickest Profit? |
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What is produced is what people want. Firms will follow changes in household demand, changing production as demand is influenced by tastes and preferences, and by technology.
Firms in competitive markets usually attempt to find the least cost, greatest profit method of production.
Economists assume that firms, operating in competitive markets, always try to maximize their profits. This is done by increasing the quantity of goods or service you produce. As we know, revenue equals the price per unit multiplied by the quantity sold. In competitive markets, there is little likelihood of increasing your price without decreasing the quantity you sell.
Firms will produce one more unit of a good, as long as the additional revenue gained is greater than the additional cost of production. Economists say ''Production increases as long as marginal revenue is greater than marginal cost''.
In a market economy, firms invest in research and development, and in new technologies, in a continual attempt to lower their costs. Firms are always looking for the least cost method of production.
At the same time, some firms may be focussing on sales maximisation, in an attempt to gain a share in the market. A firm may sell at lower prices for a time, and reduce the profits paid to it's owners, as result. The shareholders in this firm may be focussing on the long term, 5 to 10 year period, rather than on the next two years. Proponents of this management objective focus on market share as the key to profitability.