Question

Explain whether there is a difference between goals in maximizing output for a given cost of minimizing the cost of producing a given level of output.

Answer 1

It is not necessarily true that minimizing cost of production by firms under monopoly, duopoly or oligipoly competition is a sufficient condition for profit maximization. Under neoclassical economicc theory, it is assumed that all firms aims at maximizing profits. There are several factors of production in a production unit such as raw materials, inventory, human resources, office stationary, shipping etc. which constitute aggregate cost of production of the firm. It is therefore, main objective of every firm of reducing their aggregate cost of production of specific output level. Even if a firm is raising or reducing its output level in a given period, in that case too, it will attempt to minimize its cost of production which may or may not maximize firm's profits.

Profit maximization of the firm depends on several factors such as input cost of production, number of competitors in a market, market demand for different products, purchasing power of the people etc. Thus we can say firm's minimizing cost of production of specific output is one of the conditions for fiirm's profit maximization but not sufficient enough for a firm maximizing its profits for specific production level.

In Accounting term also, firm's profit maximizing not necessarily depends on firm's minimizing cost of production of specific output. In accounting, Firms total profits is equal to total revenue minus total cost. But in accounting, we also include depreciation cost of machines, opportunity cost in determining cost of production of the products.

We can explain cost minimization strategy of a typical firm producing a fixed number of output say 2000 school bags in a month. Also assume that the firm employs 30 workers and buys raw materials from other firrms. There are also other factors of production involved such as inventory, shipping, maintenance and taxes. If certain input costs of production for example raw material expenses, inventory cost or maintenance cost increases, then firm will try to reduce certain input costs such as labour cost, import of cost effiicient machines etc to minimize the cost of productiion of certain output level. But firms cannot always take the risk of downsizing labour strength or installing new machines for cost minimization. In that case, many firms raises price of finished products to maximize profits. In a monopoly or duopoly market, where there are just one or two firms selling same product type, it is easy for the firm to control the entire market and raise price of the products in order to generate maximum revenues.