Profit is the making of gain in Business activity for the benefit of the owners of the business.Two Important Concepts Of Profit :- Accounting Profit – Profit is the surplus of revenue over and above all paid-out costs, including both manufacturing and overhead expenses. Economic Profit – It is the difference between a Company’s total revenue and its opportunity cost.
• Measure Of Performance• Premium To Cover Costs Of Staying In Business• Ensuring Supply Of Future Capital
Profit Maximization is the process by which a firm determines the Price and Output level that returns the greatest Profit.Approaches To Profit Maximization :- Total Revenue – Total cost Method Marginal Revenue – Marginal Cost Method
Types Of Profit SuperNormal Profit Normal Profit Negative Profit or Loss
Preventing Entry Of Competitors Projecting A Favourable Public Image Restraining A Trade Union Demand Maintaining Customer Goodwill
METHOD OF PROFIT MAXIMISATION(in short run):There are 2 Approaches;Approach-1:By using Total Cost & Total revenue Curves(This is simple approach)Profit maximization under short run (by using total curves):This is the period in which one or more factors are fixed insupply.In the total revenue and total cost approach, the firm calculatesProfit = TR – TC at each output level
QFirst, the profit curve is at its maximum at this point (A). Secondly, at the point (B) thetangent on the total cost curve (TC) is parallel to the total revenue curve (TR), meaningthat the surplus of revenue net of costs (B,C) is at its greatest. Because total revenueminus total costs is equal to profit, the line segment C,B is equal in length to the linesegment A,Q.
Approach-2:Marginal cost, Average cost & Marginal-Revenue, Average Revenue curves:(This is complicated but very useful to compare profitmaximization under different market condition)An alternative argument says that for each unit sold,marginal profit (Mp) equals marginal revenue (MR) minusmarginal cost (MC).Stage-1: To find profit maximizing output, we use MC& MRcurves.To maximize profit Marginal Revenue must be equal toMarginal Cost. i.e. MR=MCWhy profit maximize when MR=MC?To find out the answer to this question, observe whenMR=/= (not equal to) MC.
Total economic profit are represented by area P,A,B,C.
Output Below A:MR exceeds MC; It means by additional production outputhigher additional revenue then MCTherefore Total profit can increase by increasing production. Output above A:MC exceeds MR; It adds more to the cost then revenuehence reduce profits.Therefore profit can increase by cutting back on production.In calculus terms, the correct intersection of MC and MR will occur when:
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:IS THE CHANGE IN REVENUE WHICH COMES FROM SELLING AN ADDITIONAL UNIT OF OUTPUT. MARGINAL COST:IS THE CHANGE IN COST WHICH COMES FROM PRODUCING AN ADDITIONAL UNIT OF OUTPUT.
YCO THE FOLLOWING FIG SHOWS :S •AC AND AR ARE THE AVERAGE COST ANDT MC REVENUE COST CURVES.& Q P •MC IS THE MARGINAL COST ANDR ACE E MARGINAL REVENUE.V SE R •WHEN OUTPUT REACHES OM,MARGINAL A REVENUE EQUALS MARGINAL COST AT E.N MR RU •HENCE PQRS IS THE PROFIT.E O M X •BEYOND OM OUTPUT ,THE MC CURVE IS HIGHER THAN MR CURVE WHICH INDICATES LOSSES. OUTPUT •THUS PROFITS ARE MAXIMUM WHEN MR=MC.
Divorce of ownership from control: Difficulties in pursuing profit maximisation: Problems in the measurement of profit: Social responsibility of the firm: Deliberate limitation of profits: Aversion for business expansion:
Profit is indispensable for a Firm’s survival Achieving other objectives depends on firm’s ability to make profits Evidence against Profit Maximization is ambiguous Profit Maximization objective has greater Predicting Power Profit is a more reliable measure of firm’s efficiency
The profit maximizing level of output is found by equating its marginal revenue with its marginal cost, which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output. Indeed, the condition that marginal revenue equal marginal cost is used to determine the profit maximizing level of output of every firm, regardless of the market structure in which the firm is operating.But the monopolists supply decisions do not depend on marginal cost alone. The monopolist looks at both the marginal cost and the marginal revenue that it receives at each price level. In order to determine marginal revenue, the monopolist must know market demand. Therefore, the monopolists market supply will not be independent of market demand.