What Do You Understand By The Term Least Cost Solution And In What Sense Is It A "Solution"?

1180 words - 5 pages

The term least-cost solution does not describe one specific principle in economics. Least-cost solution covers a wide diversity of economical topics that help form an ultimate solution.The term can be introduced in the context of a firms aim and objectives e.g. "profit maximization". In many cases firms may have other objectives such as providing quality to customers and thus may adopt techniques such as total quality management (TQM). Organizations such as Banks often prefer to focus on providing efficient services. Occasionally firms abide by aims and objectives other than profit maximization to encourage and enhanced operational techniques and image.Ultimately most firms override aims to concentrate on maximizing profits. At this point a firm will operate accordingly to reduce costs and maximize return in order to acquire full financial benefit from the output. When a firm adopts such an aim it is categorized as the usual theory of supply, hence is also known as "theory of the firm".A firm calculates its profits by subtracting the total costs of production from the total revenue generated from the sales of that produced amount. (See Figure 1)Figure 1"¨ = TR - TCProfit = Total Revenue ¡V Total CostsTotal Income from Sales Variable Costs + Fixed CostsFirms must first eliminate unnecessary costs and increase sales performance to generate maximum profit. The firm should minimize costs that do not have a direct influence on sales and output.A firms inputs and their expenditure (Factors of Production) have a strong influence on the cost of a firms output. If a firm increases its production due to a rapid increase in demand, there may be a delay in acquiring the necessary inputs/resources. For example a firm can employ more labour to manufacture more produce. However due to a limiting factor such as machinery and land storage space. The firm may not be able to increase its output therefore employing additional workers will result in an opportunity cost. In turn this increased cost will inversely affect the profits of the organization.From this we can devise the meaning of fixed and variable factors. A fixed factor is an input that cannot be increased within a given time period (e.g. land and machinery). A variable factor is one that can be fluctuate over a given time period (e.g. Labour). Once we understand these concepts we can begin to distinguish between short run and long run.The short run is where at least one factor remains fixed over a period of time, in which case output can be increased using more variables. For example an airline company may want to carry more passengers. It can increase staffing and the amount of journeys made. However it cannot buy or build another aeroplane in a short period. The long run is a time period that is long enough to allow for all inputs to be varied. For example in the long run a firm may be able to build more machines and buy more land for storage.The term "least-cost solution" is used by firms who...

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