Profit maximization

Profit Maximization

1. THE PRINCIPLE OF PROFIT MAXIMIZATION Submitted by :- Saurabh Bhambhani 15-AEM-10|GI-9230 Aligarh Muslim University

2. Profit Profit is the making of gain in Business activity for the benefit of the owners of the business. Profit = Total Revenue – Total Cost

3. Profit = Total Revenue - Total C ost Total Cost The cost of all factors of production. Total Revenue The total amount of money that the firm receives from sales of its product or other sources.

4. T wo I mportant Concepts of Profit A ccounting P rofit = Total Income – Total Expenses Profit is the surplus of revenue over and above all paid-out costs, including both manufacturing and overhead expenses. E conomic P rofit = Accounting Profit – Opportunity Cost It is the difference between a Company’s total revenue and its opportunity cost.

5. Functions of Profit M easurement Of P erformance P remium To C over C osts Of S taying In B usiness E nsuring S upply Of F uture C apital

6. Types of Profit Supernormal Profit (S1) Normal Profit (S2) Negative Profit or Loss (D)

7. Reasons for Aiming at Reasonable P rofit Restraining A Trade Union Demand P reventing Entry Of Competitors Projecting A Favorable Public Image Maintaining Customer Goodwill

8. Profit Maximization A monopolist maximizes profit by choosing a quantity where marginal revenue equals marginal cost A process that companies undergo to determine the best output and price levels in order to maximize its return. Approaches To Profit Maximization Total Revenue Total cost Method Marginal Revenue Marginal Cost Method

9. Profit Maximization Fundamentals PROFIT = TR-TC Total Revenue (TR): This is the total income a firm receives. Total cost : refers to the total expense incurred in reaching a particular level of output; if such total cost is divided by the quantity produced, average or unit cost is obtained. MARGINAL REVENUE : THE CHANGE IN REVENUE WHICH COMES FROM SELLING AN ADDITIONAL UNIT OF OUTPUT. MARGINAL COST : THE CHANGE IN COST WHICH COMES FROM PRODUCING AN ADDITIONAL UNIT OF OUTPUT.

10. MC AC AR MR Y P O X S M R Q E OUTPUT COST&REVENUE AC AND AR ARE THE AVERAGE COST AND REVENUE COST CURVES. MC IS THE MARGINAL COST AND MARGINAL REVENUE. WHEN OUTPUT REACHES OM,MARGINAL REVENUE EQUALS MARGINAL COST AT E. HENCE PQRS IS THE PROFIT. BEYOND OM OUTPUT ,THE MC CURVE IS HIGHER THAN MR CURVE WHICH INDICATES LOSSES. THUS PROFITS ARE MAXIMUM WHEN MR=MC. PROFIT MAXIMISATION IS ILLUSTRATED AS

11. Limitations of Profit Maximization Haziness of the concept “Profit” Ignores Time Value of Money Ignores the Risk Ignores Quality

12. Thank You