Virtually, all enterprise firms appear similar when it comes to the primary objective: to increase the output in order to maximize proceeds.
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However, in order to increase production of output, the firm must incur additional expenses, which might trim down the profits realized. Thus, in any firm, the liaison between costs and profits is so much imperative, as it will determine the quantity of the output.
There are different types of costs namely: implicit costs, opportunity costs, fixed costs, variable costs, marginal costs and total costs. Nevertheless, in economics, we refer to all these types of costs as opportunity costs. There is a reason why this is so.
Take for example a company that manufactures steel metals. We do not expect the firm to produce steel of the same quantity as the resources. Some resources will remain unused and evidently, the returns from auxiliary production always appear predetermined. In overall, opportunity costs are either explicit or implicit (Petroff, 1989, p.1).
How do franchise firms benefit from economies of scale?
Undeniably, many firms benefit from the economies of scale. To start with, economy of scale is a concept that mainly applies to the production of goods or services, or any other activities that a firm engages.
In other words, “economies of scale” is a phrase that refers to the fiscal competence resulting from production or sales in either small quantities or vast quantities. Normally, costs are the scales of reference. Thus, in order to determine the economies of scale of a firm, economic efficiencies in form of costs always apply.
For instance, Sony is a company that manufacturers PlayStations, color printers, free scanners, computer keyboards and mouse, and CD and DVD players. These commodities have one ordinary similarity, economies of scale. In order for Sony to maximize profits, it produces each of these commodities in vast quantities.
For example, by 2005, Sony had managed to vend off over 100 million PlayStations realizing a turnover of US$67 billion. The other commodities produced by Sony will also generate certain amount of turnover. This means that firms benefit a lot from the economies of scale (Wiley Publishing Incorporation, 2011, p.1).
What might be some potential disadvantages of being a part of a large corporation?
At times, being part of a large organization can pose some challenges to stakeholders. For instance, large organizations always pay higher taxes from their own income. This is a hike to production costs. It is quite evident that at one point, especially at the start-up phase, a business will make losses.
Now, consider an example of a person business through a corporation, that is, the person is part of a large organization. Unless the corporation realizes profits, it is hard for an individual to figure out their enterprise profits notwithstanding individual income from alternative sources.
However, this does not stop here. Immediately the organization realizes huge profits, another predicament jets in. The organization will have to pay “double tax” meaning every penny realized as profit, meets a double tax and hence reducing the profit margin further. Indeed, this situation can be a frustrating experience to those who are part of a large corporation.
Effect of very competitive market on long-run profits
The increase or decrease of demand affect the firm’s production and hence, long-run profits. If the number of firms producing a certain commodity increases, it means that the supply will be more than the demand. This will force companies to produce less hence, a reduction in the profits realized.
In a competitive market, firms will earn a specific profit and if the status remains so, everything from marginal cost to average total cost to marginal revenue will reverse to equilibrium. At equilibrium, the greatest beneficiaries will be consumers who will buy commodities at lower price making companies to make normal profits (When the business is beautiful, 2003, p.1).
Petroff, J. (1989). Chapter 3: Production Costs. Web.
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When small is beautiful. (2003). The Economist. Web.
Wiley Publishing Incorporation. (2011). Production Costs and Firm Profits. Web.