Monday, 25 October 2010

Profit Maximisation

Profit Maximisation

This is the point where the highest level of profit is achieved.

Why do firms profit maximise? [Assume all firms profit maximise unless told]

1. Reward stakeholders (this provides motivation and encouragement for enterprise)

2. To re-invest in Research and Development. This way we can discover new, gain market share and diversify risk.

3. Attract top employees. Profit tends to indicate the level of pay a firm can provide so obviously if it is high all the top professionals will want to work there and firms need that in order to become more efficient.

What does the diagram look like?

Why MC=MR?
1. Because if MC>MR then the firm will be making a loss [no profit at all].
2. Because if MR>MC they will be making a profit on that unit but they will still be capable of achieving more till MC=MR which is the limit.
Why the biggest difference between TR and TC?
1. Profit = TR-TC so when TR is at its highest point and TC is at its lowest point the higehst level of profit is achieved.
2. From 0 to Qx the firm is making a loss. From output Qy onwards the firm is again making a loss because of the law of diminishing returns.
3. At Qx and Qy the firm is at break-even points.

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