A familiar saying about the American economy was, as the fortunes of General Motors go, so goes the rest of the nation. However, because of recent downturn in the demand for some their major products, such as SUVs, GM is trying to cut its costs of production, to make the selling of each individual unit more profitable. In other words, if labor costs are cheaper, even if demand declines slightly, the firm can reap a larger profit from the goods it does sell.

             In economics, usually, the more products a firm sells, the better, so long as the price is unaffected by the number of units the firm sells. In other words, if the firm does not need to hire new workers or make new factories or pay workers for overtime, the added profit or marginal revenue of selling an additional unit such as a car will be its price, or the change in total revenue due to each extra unit sold.

             However, at some point, the firm will need to hire more workers, pay workers more to work overtime, or build new factories. This adds to the costs of producing new units, and eventually the firm, even if demand is high, will stop producing so many more cars, for example, because it is too costly to add to the costs of production.

             How does the firm attempt to balance the costs of production with the attractive increasing demand of the marketplace? Or how does a firm like GM, balance a decrease in demand with its costs of production? The equilibrium of a profit maximizing competitive firm is the output for which price the price marginal cost, and any output below this level implies that the firm can increase profits by producing more, and any output above this level implies that the firm can increase profits by producing less output. If demand is high, in other words, in the short term, and the firm cannot hire more workers or make new factories fast enough in a way that meets its budget, it makes sense to raise prices, as consumers will pay more, but if demand is low and this is not an option, a firm can cut the costs of production.