You can also examine the variable costs; these would be the costs that move up and down during the manufacturing process (such as raw material costs and labor costs). When a firm reduces their overall costs, this would increase their overall marginal revenues, by increasing the profits that they are making on each unit. The point when costs have been reduced as much as possible is when a firm would be perfectly competitive. Where, they have reduced costs as much as they can to increase profits. For example, an electronics manufacturer is seeing declining marginal revenues and increasing marginal costs by manufacturing their products in the United States. This causes them to move their manufacturing plant to Mexico, where the fixed and variable costs are lower. At which point, their marginal revenues will increase dramatically. This is the point that the firm will be maximizing their profits.
Clearly, for any kind of business to maximize their profits requires that they decrease their marginal costs and increase their marginal revenues. This is accomplished by reducing the fixed...
At which point, the marginal revenues will increase. The point that a business will be classified as a perfectly competitive firm, is when they have reduced their marginal costs as much as possible, to increase their marginal revenues. Once this takes place, it means that business will be able to increase output as much as possible. This will have a ripple effect on their overall bottom line, as maintaining such levels for long periods of time will result in a dramatic increase in profits. This is significant because it underscores a basic trend that is occurring in globalization, where businesses are using the various free trade agreements and lower fixed / variable costs to increase their overall marginal revenues as much as possible.
Bibliography
"Marginal Costs." Money Terms. 2009. Web. 26 Apr. 2010.
"Marginal Revenues." Money Terms. 2009. 26 Apr. 2010.
"Profit Maximization." Investwords. 2010. Web. 26 Apr. 2010.
Smith, Adam. Wealth of Nations. Mineola: Dover, 2002. Print.
