5 What are the constraints that each firm faces?

How does each constraint limit the firm’s profit? Three features of a firm’s environment limit the maximum profit it can make. They are:

◆ Technology constraints

◆ Information constraints

◆ Market constraints Technology Constraints Economists define technology broadly. A technology is any method of producing a good or service. Technology includes the detailed designs of machines. It also includes the layout of the workplace and the organisation of the firm. For example, the shopping centre is a technology for producing retail services. It is a different technology from catalogue shopping, which in turn is different from the high street stores.

It might seem surprising that a firm’s profits are limited by technology. Every year we learn about the latest technological advances that will revolutionise future production and consumption. Technology is advancing, but to produce more output and gain more revenue with current technology, a firm must hire more resources and incur greater costs. At any point in time, the increase in profit that the firm can achieve is limited by the technology currently available. For example, using its current plant and workforce, BMW can produce some maximum number of cars per day. To produce more cars per day, BMW must hire more resources, which increases BMW’s costs and limits the increase in profit that BMW can make by selling the additional cars.