In a market economy, the questions of what to produce and how much to produce are determined by the level of consumer demand in the economy for each individual product.
The problem of how to produce is typically determined by a comparison between the cost and efficiency of the factors of production in producing that good or service.
Although maximizing profits is a firm's major objective, the firm also has other objectives including meeting shareholder expectations, increasing market share and maximizing growth. In some cases, a firm may not seek to maximize any particular objective but simply engage in satisfying behaviour.
To achieve maximum profit the firm must combine resources at the lowest cost. Increasing productivity and efficiency will further reduce costs.
Increased profits can be achieved through specialization, where the factors of production are used more intensively to complete a narrow range of tasks in the production process.
A firm may reduce costs by increasing its level of output and achieving economies of scale. On the other hand, diseconomies of scale may result if increasing output levels begin to raise average production costs.
Internal economies and diseconomies of scale result from changes in production levels for the individual firm, whereas external economies and diseconomies of scale result from changes in production levels or size of an entire industry.
Investment and technological change can affect the costs and competitiveness of firms by improving production methods, lowering prices, reducing staffing requirements, increasing output, raising profits, expanding product variety and fostering globalization.
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