Competitive Firm Over the Last

Competitive Firm Over the last several decades globalization has been bringing about increased amounts of competition. In many circles there has been the push to maximize profits as much as possible. However, to achieve this objective the overall view of the most productive / competitive firms will vary. Where, you have a number of different theories that provide insights as to how productive a particular business will be.

A good example of this can be seen in the book the Wealth of Nations, where Adam Smith said that the perfectly competitive firm is when, "The rate (profit margins) is naturally regulated partly by general circumstances of society, their riches or poverty, their advancing, stationary or declining condition; and partly by the particular nature of employment." (Smith 52) This is significant because it provides a general theory as to how a firm's profits are to be affected by the up and down swings that occur in the economic cycle.

Yet, to fully understand a perfectly competitive firm, requires that you examine how profit maximization works. This will provide the greatest insights as to how a competitive firm is able to maximize their profits. To fully understand what a perfectly competitive firm looks like requires a careful examination of the several key terms to include: profit maximization, marginal costs and marginal revenues. Profit maximization is when a company will examine how they can increase output as much as possible.

("Profit Maximization") Marginal costs are one of the tools that are used to determine this objective. ("Marginal Costs") This is when you are monitoring the total production costs for each unit that is produced. The marginal revenue is as a second tool that is used to determine profit maximization. Where, you are measuring the overall profit margin that is being made off of every unit produced. ("Marginal Revenues") The way that a competitive firm would maximize profits is by reducing their overall marginal costs as much as possible.

This can be accomplished by reducing the overall fixed costs that would be used to produce a product, such as rent on the location or the facility. 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 and variable costs as much as possible. At which point, the marginal revenues will increase. The.