What do you understand by the term least-cost solution and in what sense is it a "solution"?

Essay by mohit007University, Bachelor'sA+, April 2004

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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 - TC

Profit = Total Revenue ¡V Total Costs

Total Income from Sales Variable Costs + Fixed Costs

Firms 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...