Profit Maximization by Ali Roshaan

How to maximize the profit

1. Profit Maximization Profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit. The goal of a competitive firm is to maximize profit, which equals total revenue(TR) – total cost(TC)

2. Do firms maximize profit? This is a goal that all businesses for profit set. Profit maximization is the most money a firm can make after expenses are paid. Firms that do not come close to maximizing profit are not likely to survive. Firms need to make long run profit maximization one of their highest priorities to survive.

3. The point of profit maximizing and loss minimizing is called MR = MC Marginal Revenue (MR): The change in total revenue generated by the sale of one additional unit of production. Marginal Cost (MC): The cost incurred on the last unit produced.

4. Shutdown vs. Exit Shutdown: A short-run decision not to produce anything because of market conditions. [Still has to pay Fixed Cost (FC)] Exit: A long-run decision to leave the market. (Zero costs)

5. Is shutdown beneficial for a firm? If the price is less than ATC, but greater than AVC, all variable costs are being paid with revenue, and there is a bit left over to apply towards fixed cost. But if the firm stops the production, it would have no revenue to apply towards the fixed cost (FC). So the firm should continue it’s production instead.

6. Q P TR AR MR ATC TC MC Total Profit Marginal Profit 172 100 -100 1 162 162 162 162 190 190 90 -28 72 2 152 304 152 142 135 270 80 34 62 3 142 426 142 122 113.3 340 70 86 52 4 132 528 132 102 100 400 60 128 42 5 122 610 122 82 94 470 70 140 12 6 112 672 112 62 91.6 550 80 122 -18 7 102 714 102 42 91.4 640 90 74 -48 8 92 736 92 22 93.7 750 110 -14 -88 9 82 738 82 2 97.7 880 130 -142 -128 10 72 720 72 -18 103 1030 150 -310 -168 All Firms Should Produce at MR = MC I f they move to the left or right, total profit would drop

7. The optimal point of production is at the point MR=MC. This point is where marginal revenue equals marginal cost, meaning that cost does not exceed revenue and revenue does not exceed cost.

8. Created by: Syed Ali Roshaan Raza