Company Cost Minimization - Essay Sample

There are some ways that the company can use to minimize its cost of production while maximizing profits. This can even be done during an economic recession so that the firm can reduce its operating cost to increase profit margin (Chen & Horton, 2009). This can be done either through termination of some employees from work without changing their wages or keep all the staff but reduce their salaries. These two methods can work for the employer, but one of the options is most appropriate over the other.

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The best way to choose is to reduce the wages of all employees (Hartley, 2015). This method can work appropriately because it will ensure that the company maintains its production capacity at a reduced production cost. It is also important because it will make sure that the company has a stronger human resource that can increase labor efficiency than when the company terminates the contract of some employees. It is disadvantageous to end the work of some staff because it will make the company has less labor force that cannot support the necessary production capacity (Chen & Horton, 2009). Through termination of work of some employees, the cost of production will reduce, but it will also reduce the company production capacity. The effect of this is that there will be a reduction in sales volume alongside the cost of production and this sets back profitability.

Economies of scope and scale are two different concepts used in economics. They are mainly utilized by the company to minimize its production cost. The Economies of scope is a critical economic theory which assumes that the decrease in the average total production cost result from the increase in the quantity of goods produced by the company. Economies of scale are an economic concept which ensures that the firm has a cost advantage when there is an increased production of the level of one particular product (Hartley, 2015). Economies of scope is a concept that focuses on average total cost which decreases with the increase in the level of production and it is only able to give the cost advantage to the firm when it only produces complementary goods. On the contrary, economies of scale provide cost benefit when the company delivers products to a significant quantity (Chen & Horton, 2009). An example is where the business that provides shoes has a fixed cost of $10000 in one month and can only produce one design. When the company only offers one pair of shoe, the average total cost is $10000. When there is an increase in the output level to 10000 shoes the average cost per month will be$1 per unit. The economies of scale increase with the increase in the degree of production.

It is important for the business to continue producing more products in the short run even though it incurring losses (Hartley, 2015). This can happen when the prices of the products are still above the average variable cost. Under this condition, the company needs to continue operating because it is still able to make the profit.

Perfect competition market can use resources efficiently than monopoly when there is high demand. When demand is high in a competitive market, the company will ensure that it uses its resources effectively to supply more products in the market. It will use its resources efficiently to meet the high level of market demand (Hartley, 2015). This condition is rare in the real world because when the demand for a given product increase, prices for the same product increases thereby attracting more companies to enter the market. The increase in more firms in the market increases supply which reduces quantity demanded to an equilibrium point.

References

Chen, D. L., & Horton, J. J. (2009). The Wages of Pay Cuts: Evidence from a Field Experiment.Berkman Center for Internet and Society at Harvard Law School, 1-31.

Hartley, J. (2015).Sticky Wages and Nominal Rigidities: Why Nominal Wages Have BeenStagnant since the Great Recession. Retrieved from