Question

"Cost minimization and profit maximization are two sides of the same coin.” Discuss in the light of your personal observation as a rational person or firsthand experience as a manager.

Answer 1

In my opinion, the above statement: "Cost minimization and profit maximization are two sides of the same coin" is true.

Firms always aim at maximizing their profits. This can be achieved either by increasing the revenue or reducing the cost.

Profit function = P.Q - C(Q)

Total revenue = P.Q and cost = C(Q). A profit-maximizing firm produces at a point where MR = MC.

A firm can increase its revenue either by increasing P or Q. However, since the demand curve is inverse;y related to price, any change in P correspondingly results in a fall in Q. Thus, P and Q cannot be increased indefinitely. To increase profits, input costs (C(Q)) will have to be minimized.

[Sometimes the firms operate in losses in the short run but continue to operate as long as it is able to earn its average variable cost]