Reference no: EM131491640
One of the fastest and most direct ways for producers of goods and services to increase revenue is to raise prices, right? Not really, not in a competitive market. The main characteristics of a perfectly competitive market is the ease of entry to the market by producers, products are identical, and there are many producers in the market. This means that producers take whatever price the market has to offer at the market equilibrium, and consumers have many producers to buy from at that price level. This leaves producers with one of two options to increase their profits; they either increase their production or cut down on their production costs.
If producers choose to increase their production level (more quantities), then they face two challenges. The first challenge is that factors of production have a limited capacity (as a taxi driver you cannot be in two places at the same time or fill the taxi with more people than it can seat). The second challenge is that, hiring additional factors of production (more workers and/or more machines) increases the marginal cost of production (the additional costs that result from producing additional units) due to the law of diminishing return (the more your hire, the less productive the labor will be since you still have limited capital - machines and space).
If producers choose to reduce their production costs (mainly variable costs) by producing less than their full productive capacity, they might not produce enough to cover their total costs (fixed costs plus variable costs), leading to higher average cost (total cost divided by total units produced), and thus less profits.
Provide us with an example or a scenario from your personal (or professional) experience, observation, a story that you have read, or an idea or thought that you might have for practical, creative, and/or effective ways to minimize production costs. Please note that the term "production" refers to the process of turning input into output and applies to the production of goods and services, not only factory production.