Concept of Optimum Firm Understood
“The optimum point can also be called the sole factor that defines the optimum size of any business. The optimum point is different for difference industries. It largely depends upon the nature of industry in question. ”
Every business concern wants to reap more and more profit. To achieve this aim, a businessman tries to use all productive resources economically. The intrinsic thought is to reduce cost of production.Every business endeavors to reach that level of production where maximum output is possible at the minimum production cost. The point at which average cost becomes minimum is called the optimum point. If production is increased beyond this point, the average cost is bound to go up. Whereas, in the case where production is lower than this particular point, one has a chance of reducing the cost.
The attainment of optimum point is possible partly due to the judicious judgment of a businessman in using his resources and partly due to fierce competition, which tends to the removal of ineffective components of a business.
This optimum point can also be called the sole factor that defines the optimum size of any business. The optimum point is different for difference industries. It largely depends upon the nature of industry in question.
Moreover, the optimum size goes on changing with changes in technology and managerial methods. The optimum size also takes into account the future needs of any business unit.
All that expenditure that the business might incur in the near future is to be reckoned with so that in future one has not to alter the size and manner of production. If the future needs are not taken into consideration, a business unit may never be able to achieve its optimum size.
The average cost per unit should be minimum. The average cost can be calculated by dividing the aggregate cost by the total output achieved in different units.
Sometimes, it’s wrongly assumed that profitability is the sole criterion for the determination of optimum size. This is a wrong assumption because many a time it happens that a company records immense profit, but is still far away from its optimum size.
It may also be kept in mind that optimum size is always relative for any business firm because the existing factors play a decisive role in its determination. For example, an upgrading of the business may lead to variation in its optimum size to a considerable extent.
Author - DeeKay
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