Maximizing the profits of a company in long and short periods of time

The main function of a manufacturing company is undoubtedly the production of goods. Production decisions depend on the time period in question. There are two time periods that determine and influence production decisions; the short term and the long term period.

The short-term period is one in which the quality of at least one factor of production cannot vary, the other term is also called fixed factors. In this period of time, production can be increased by increasing the qualities of the variable factors or by improving the efficiency of the production process.

In the short-run production period, the profit-maximizing level is the point at which the marginal cost increases until it equals the revenue from the sale of the additional unit. Therefore, marginal costs must equal marginal revenue. If the revenue from the sale of an additional unit is greater than the cost of producing the additional unit, then it is worth producing that additional unit as it will increase profits.

Therefore, in the short run, as long as the marginal revenue is greater than the cots, the firm can increase its profits by producing and selling more units.

As for the long-term period, all the quantities of all the factors of production can vary. Therefore, output can be increased by adding the quantities of all inputs. In this way, profits can be maximized in different ways, such as product diversification to reach more areas of the market.

Also in long-term production, more brands can be created, such as different flavors, colors and packaging to increase sales. The company may also choose to operate at the optimum level; this is where the marginal cost equals the lowest average costs.