The main function of a manufacturing firm is no doubt the production of goods. Decisions concerning production depend on the time period in question. There are two time periods which that determine and influence production decisions; the short run and long run period.
The short run period is one over which the quality of at least one factor of production cannot be varied, the other term they are also called fixed factors. In this period of time, output can be increased either by increasing the qualities of variable factors or by improving the efficiency of the production process.
In the short run period production the profit maximization level is the point at which marginal cost increase until they equal the revenue gained from selling the extra unit. Thus marginal costs must equal marginal revenue. If the revenue gained by selling an additional unit is greater than the cost of producing the additional unit then it pays to produce that extra unit as it will increase profits.
Therefore, in the short run, as long as marginal revenue is greater that the cots, the firm can increase it’s profits by producing and selling more units.
As for the long run period, all quantities of all factors of production can be varied. Output can hence be increased by adding the amounts of all inputs. Profits can hereby be maximized in different ways such as diversification of the product in order to reach more areas of the market.
Also in long run production, more brands can be created such as different flavorings, colors and packaging so as to increase sales. The firm can also choose to operate at the optimum level; this is where the marginal cost is equal to the lowest average costs.