Question

4. How do the constraints that a firm faces limit the profit the firm can make? Explain your answer.

Answer 1

Businesses have supply costs that are used in the operation or products purchased for resale. Manufacturers purchase raw materials for production, and retailers and distributors purchase finished products for resale. These members of the trade channel and other business organisations, including paper, computers and software, also provide supplies for operations use. A big obstacle to economic growth is the inability to buy materials and goods at reasonably low prices. Based on your size and customer base, the greater your bargaining power, the better your ability to achieve low costs.

Companies typically have manufacturing or operational processes to prepare customers for products and services. This involves converting the raw materials into finished goods for manufacturers. This usually involves for resellers the packaging, transportation and marketing of goods to customers. The ability to quickly and cost-effectively conduct these manufacturing processes is important. Output constraints include labor costs that are affected by the supply of skilled labor and the capability of the equipment available. Additionally lead to automated manufacturing processes and workflows.

Larger consumer segments usually contribute to greater sales volume and more revenue opportunities. Furthermore, a wider customer base allows you the freedom to purchase from manufacturers in greater quantities, thereby increasing the economies of scale or cost per product. The strengths of your offer and the level of competition you face restrict your ability to enter certain markets while you can select markets to follow.

You need to generate demand from customers along with a sizeable market to achieve revenue and high price points. This needs a good value plan and successful promotional messaging. Budget constraints are a major obstacle for small businesses seeking to attract clients. Additionally, if your market has a number of strong competitors, your ability to attract a significant number of clients is constrained to dictate high prices and revenues.