The main goal of most businesses is to make a profit. However, profit is calculated using total revenue and total costs. Therefore, businesses must consider the revenue along with the costs corresponding to the specific number of output in order to increase profit accurately. Firms or industries can increase profit in two ways: firms or industries can take advantage of a market with increasing demand, or firms or industries can find a way to lower the total costs of production.When demand within a market increases, the equilibrium price of the product increases along with the quantity sold at the equilibrium price. If the market structure is a perfect competition, an increase in demand allows firms or industries to raise the price of the product as well as sell more of the product at the higher price. In this instance, total revenue increases and if the increase in total revenue is greater than the increase in total costs, the firm has succeeded in increasing its profit.However, this is assuming the increase in supply from an increase in the number of firms in the market does not surpass the initial increase in demand for the product.
For instance, the movie retail industry has shown a trend of increasing demand and shows a growth in demand greater than the growth in demand of the movie rental industry. Blockbuster has been a firm well established in the movie rental industry but has noticed other firms such as Wal-Mart taking advantage of the growth in demand of movie sales.Blockbuster has started integrating movie sales into their firm alongside movie rentals. Because the movie retail market is a competitive market, Blockbuster can easily enter this market and hopefully, increase the firm’s profit with the market’s increase in demand. Because Wal-Mart already offers movies at a relatively low price, Blockbuster could not raise its price of movies higher than Wal-Mart in order to compete in the market.
However, the increase in demand for movie sales allows Blockbuster to enter the market and to benefit from movie sales along with Wal-Mart.However, if too many firms decide to enter the market, firms may have to lower the price of movies in order to sell the increase in supply of movies that may be greater than the increase in demand for movie sales. With lower movie prices, fewer firms will want to enter this market. This market will eventually consist of a number of suppliers equal to the equilibrium number of suppliers for the market who are willing to sell movies at the equilibrium price. Before this occurs, Blockbuster has an opportunity to increase its profits by taking advantage of an increase in demand of this market.Whether a monopolistic or competitive firm or industry, if the firm finds a way to reduce the total cost of production, they will also benefit from an increase in profits. With a decrease in the total cost of production, firms or industries now can keep more revenue for profit. Therefore, the firm or industry will increase its profits assuming the demand for the product stays the same.
For instance, one industry actually has a negative profit but has an opportunity to increase their profit by reducing its total costs of production.The internet allows consumers to now pay bills online, communicate online, and even shop online. The post office has experienced a major decrease in volume of mail and profit due to such advances in technology. In 2001 alone, the post office accumulated a 1. 7 billion dollar deficit. However, the U.
S. post office has since closed 1,337 offices and two mail centers. In addition, the U.
S. post office has sold properties and moved carriers to other posts in order to get rid of unnecessary fixed costs and to liquefy or more efficiently use some of their current fixed assets.In addition, some of the properties occupied by U.
S. post offices were sold to companies planning to build shopping malls containing a post office in the shopping center. In addition to closing offices, the U. S. post office laid off much of the staff occupied these offices. This decreased the variable costs along with the fixed costs of the U. S.
postal system. If the current demand for the U. S. mail delivery service stays relatively the same to the current demand, the U. S. post office has an opportunity to increase their profits to a positive amount in which their total revenue exceeds their total cost.The U. S.
post office has further plans to review 3100 more offices to possibly close and to work towards a five day delivery system instead of a six day delivery system. These changes would further cut down on variable and fixed costs and allow the U. S. post office to come closer to the goal of increasing their profit.
Businesses can utilize both of the strategies discussed above to increase profits. In addition, firms or industries must also consider the long run average costs in order sustain the increase in profit for the long run.Long run average costs also include what scale of production in which the firm wishes to operate. Although taking advantage of an increase in demand of a market or decreasing the cost of production can increase a firm’s profit, the firm must also consider long run factors in order for the firm to consistently sustain this increase in profit. Peers, Martin.
“Blockbuster’s New Pitch: Why Not Buy That Movie? ” The Wall Street Journal. November 1, 2002. Chen, Kathy. “Post Office Looks to Scale Back.
” The Wall Street Journal. June 15, 2009.