Question

Do firms really minimize costs? Find and discuss evidence of firms practicing cost minimization in the real world.

Answer 1

Firms do seek to use lowest cost combination of inputs possible to maximize profits as every firm has a goal of maximizing profits. When a firm is producing at the profit maximizing output level, it chooses the combination of inputs that minimizes the cost of producing that output level. Minimizing costs is a necessary condition for maximizing profits, but not a sufficient one.

Firms minimize the cost following way.

1. by simplifying processes & production procedures.

2. Outsourcing non-core activities.

3. Better pricing mechanism, technological advancement & efficient use of capital & labor.

There are examples of ‘no frills’ or low cost airlines (South west airlines, Jet blue & EasyJet) & discount retailers such as (Walmart, Poundland, Lidl and Aldi).

The low cost airlines have successfully adopted cost minimizing processes & ways by increasing operational efficiency & employing efficient pricing mechanism to maximize profits. They have removed no essential parts of airline service.

Discount retailers are also successful in minimizing costs by identifying cost reduction actions which do not affect revenue & quality as well as operating efficiently. They have optimized supply chain & in store processes.