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 in supply. Total profit (TII) = TR-TC
Approach-2: Marginal cost, Average cost & Marginal -Revenue, Average Revenue curves: (This is complicated but very useful to compare profit maximization under different market condition) Stage-1: To find profit maximizing output, we use MC& MR curves. To maximize profit Marginal Revenue mist be equal to Marginal Cost. i.e. MR=MC Why profit maximize when MR=MC? To find out the answer to this question, observe when MR=/= (not equal to) MC.
MC MR 1 3 2 5 3 10 4 Profit is maximum at the output level of 3, where MR=MC
Output Below3: MR exceeds MC; It means by additional production output higher additional revenue then MC Therefore Total profit can increase by increasing production . Output above3: MC exceeds MR; It adds more to the cost then revenue hence reduce profits. Therefore profit can increase by cutting back on production .
Although profit maximization remains the main hypothesis in economic analysis, there is no reason to believe that profit maximization is the only objective that the firms persue. Modern organizations , in fact, follow multiple objectives as the various economists have also postulated in their theories.