Question

Explain the reasons why a loss-making firm may continue to produce.

Firms & Industry

Answer

1. Understand the concept of a loss-making firm: Before answering the essay question, it is important to have a clear understanding of what a loss-making firm is and how it operates. This will help you to identify the reasons why a firm may continue to produce despite operating at a loss.

2. Provide specific examples: To support your arguments, it is important to provide specific examples of firms that have continued to produce despite operating at a loss. This will help to illustrate the different reasons why a firm may choose to continue producing and make your essay more convincing.

3. Consider the different perspectives: When answering the essay question, it is important to consider the different perspectives that a firm may have when deciding whether to continue producing despite operating at a loss. For example, a firm may be focused on short-term profitability or long-term growth, or it may have non-profit objectives. By considering these different perspectives, you can provide a more comprehensive answer to the essay question.

STEPS TO WRITE ESSAY 💡MAIN POINTS💡OVERVIEW

I. Introduction
A. Explanation of the concept of a loss-making firm
B. Thesis statement outlining the two reasons why a loss-making firm may continue to produce

II. Reason 1: Expectation of future improvement
A. Explanation of why a firm may not expect the loss to last
B. Discussion of how a firm may think demand will rise or costs will fall in the future
C. Examples of firms that have continued to produce despite losses due to this reason

III. Reason 2: External factors
A. Explanation of how a firm may be subsidised by the government
B. Discussion of how a firm may lower prices to drive out competitors or increase market share
C. Examples of firms that have continued to produce despite losses due to external factors

IV. Other reasons for a loss-making firm to continue to produce
A. Explanation of how a firm may accept losses in the short-term to expand in the long-term
B. Discussion of how a firm may have high retained profits to cover losses
C. Explanation of how a new firm may be in the process of growth or trying to survive
D. Discussion of how a firm's main objective may not be profit maximisation

V. Conclusion
A. Recap of the two reasons why a loss-making firm may continue to produce
B. Final thoughts on the importance of understanding why firms continue to produce despite losses.

A loss-making firm is a firm that is operating at a loss, meaning its expenses exceed its revenue. While in most cases, it would be rational for a firm to shut down or reduce production in such a situation, there are several reasons why a loss-making firm may choose to continue producing. Here are some possible reasons:

➡️ Future expectations:

The firm may not expect the losses to continue in the long run. It could be that the firm expects demand for its product to increase or for its costs to decrease in the future, which would allow it to return to profitability. In this case, the firm may choose to continue production in the short term, with the expectation of being profitable in the future.

➡️ Government subsidies:

In some cases, a loss-making firm may receive subsidies from the government, which could make it financially viable for the firm to continue production. For example, a government may subsidize a firm to promote social welfare, encourage the consumption of merit goods, increase exports or respond to dumping by other countries. This may allow the firm to continue producing even if it is not profitable.

Competitive strategy: A loss-making firm may choose to continue producing in order to drive out competitors or increase market share. This strategy may involve lowering prices to make the product more attractive to customers. In the short run, the firm may accept losses, but if successful, it could later raise prices and become profitable.

➡️ Long-term growth:

A loss-making firm may choose to continue producing in the short term to expand in the long term. This could involve investing in research and development, new technology, or expansion into new markets. While this may result in losses in the short term, the firm may expect to be profitable in the long run.

➡️ Retained profits:

A firm with high retained profits may choose to continue producing even if it is operating at a loss. This is because the retained profits can be used to cover losses and allow the firm to continue operating until it returns to profitability.

➡️ Non-profit objectives:

A firm's primary objective may not be profit maximization. For example, a firm may be a charity, provide public goods or services, or be focused on increasing market share. In these cases, the firm may continue to produce even if it is not profitable.

In conclusion, there are various reasons why a loss-making firm may choose to continue producing. Some reasons may be short-term strategies aimed at increasing market share, while others may be focused on long-term growth and sustainability. It is important for firms to carefully evaluate their options and choose a strategy that is appropriate for their unique circumstances.