Profit Maximization Theory

1. PROFIT MAXIMIZATION

2. PROFIT MAXIMIZATION
Profit maximization refers to a tendency of
business firms to maximize profits in the short
or long run by using the most efficient
methods and equalizing the marginal cost and
revenues. Its main purpose is to increase the
level of production of a firm or business that
will grant it the maximum profit on selling
goods and services.

3. PROFIT
MAXIMIZATION
PERFECT COMPETITION
MARKET

4. PERFECT COMPETITION
ALL FIRM sell identical products, market share does not influence price,
companies are able to enter or exit without barriers, buyers have perfect or full
information, and companies cannot determine prices
Characteristics of Perfectly Competitive Markets
1) PRICE TAKER
2) Product homogeneity
3) Large Numbers of Buyers & Sellers
4) Free entry and exit
5) Complete Information

5. Price Taking
The individual firm sells a very small
share of the total market output and,
therefore, cannot influence market
price.
The individual consumer buys too small
a share of industry output to have any
impact on market price.
The demand curve will be perfectly
elastic because they’re selling perfect
substitutes to other suppliers. Prices
will be high when supply is low and
demand is low, and vice versa

6. PERFECT
COMPETITION

7. Q P TR AR MR
0 4 0 0 4
1 4 4 4 4
2 4 8 4 4
3 4 12 4 4
4 4 16 4 4
5 4 20 4 4
6 4 24 4 4
7 4 28 4 4
8 4 32 4 4
9 4 36 4 4
10 4 40 4 4
PERFECT COMPETITIONS : REVENUE
RULES 1 : P * Q = TR
RULES 1 : P * Q = TR
RULES 1 : P * Q = TR
RULES 2 : P = AR = MR
RULES 2 : P = AR = MR
RULES 2 : P = AR = MR

8. HOW ABOUT COST?
COST WILL HAVE SAME TREND AS REVENUE?

9. Q TC AC MC
0 3 0 -
1 8 8 5
2 11 5.50 3
3 13 4.33 2
4 14.5 3.63 1.5
5 16 3.20 1.5
6 18 3 2
7 21 3 3
8 26 3.25 5
9 34 3.78 8
10 46 4.60 12
PERFECT COMPETITIONS : COSTS

10. PERFECT COMPETITIONS : COSTS
1 : AC FALLS, AC > MCL
1 : AC FALLS, AC > MCL
1 : AC FALLS, AC > MCL
2 : AC MINIMUM, AC = MC
2 : AC MINIMUM, AC = MC
2 : AC MINIMUM, AC = MC
3 : AC RISE, AC < MC
3 : AC RISE, AC < MC
3 : AC RISE, AC < MC
4 : MC ALWAYS INTERSECT
4 : MC ALWAYS INTERSECT
4 : MC ALWAYS INTERSECT
AC CURVE AT MINIMUM
AC CURVE AT MINIMUM
AC CURVE AT MINIMUM
POINT
POINT
POINT

11. In perfect competition, the market is the sum of all of the individual firms. The market is modelled by the
standard market diagram (demand and supply) and the firm is modelled by the cost model (standard
average and marginal cost curves). The firm as a price taker simply 'takes' and charges the market price
(P* in Figure 1 below). This price represents their average and marginal revenue curve. Onto this we
superimpose the marginal and average cost curves and this gives us the equilibrium of the firm.
PERFECT COMPETITIONS : MARKET EQUILIBRIUM

12. DO PERFECT
COMPETITION GIVE
PROFIT?
IM A PHARMACEUTICAL ADZ SDN BHD........ CAN WE BE IN
THE MARKET?
ADIK ABG PENING ENTERPRISE.......... SHALL WE OPERATE A
DELIVERY SERVICES?
MOON CAKE BROTHERS.......... HOW ABOUT WE INVEST IN
NEW HAWKER FOOD ?

13. However, it happens under two conditions
First-order
It mandates that input’s marginal cost
(MC) equals marginal revenue (MR).
mathematically: MR = MC
Second-order
According to it, one must fulfill the first order if the
marginal revenue decreases and the marginal cost
increases. In other words, when marginal cost &
marginal revenue are plotted on a graph against the
output, the slope of marginal revenue must always be
less than that of the slope of marginal cost for the
application of second-order profit maximization.
PROFIT??
PROFIT??
PROFIT??

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16. ECONOMIC PROFIT, NORMAL PROFIT & SHUTDOWN

17. SUPERNORMAL PROFIT (ECONOMIC PROFIT )

18. The impact on a market of supernormal profit

19. NORMAL PROFIT
Normal profit is an economic
term that refers to a
situation where the total
revenues of a company are
equal to the total costs in a
perfectly competitive market.
It means that the company
makes sufficient revenues to
cover the overall cost of
production and remain
competitive in its respective
industry

20. LOSS.......SHUTDOWN ????????
BREAK
BREAK
BREAK
EVEN
EVEN
EVEN
POINT
POINT
POINT

21. SHUTDOWN ???????
1
1
1
2
2
2

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23. PRODUCTION
EFFICIENCY
1.
EFFICIENCY
2. ALLOCATION
Productive efficiency level is where
MC=AC
100% utilization of
raw materials to
produce goods at
the minimum cost
ability to fulfill
consumer demand by
distributing goods
and services
proficiently
Socially optimal level of output. It occurs where
MC = AR
SHORT RUN
SHORT RUN
SHORT RUN

24. LONG RUN
EFFICIENCY
OCCURS WHEN
MR = MC
NORMAL
PROFIT

25. TUTORIAL QUESTION
CALCULATING PROFIT IN PERFECT
COMPETITION

26. (A) ECONOMIC PROFIT

27. (B) NORMAL PROFIT BREAK
BREAK
BREAK
EVEN
EVEN
EVEN
POINT
POINT
POINT

28. (B) NEGATIF PROFIT SHUTDOWN
SHUTDOWN
SHUTDOWN
??????
??????
??????

29. PRICE TAKER REVENUE
COST
MARKET
EQUILIBRIUM
PROFIT
SR & LR
EFFICIENCY
TOPIC
COVERAGE :
PERFECT
COMPETITION

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31. PRICE TAKER REVENUE
COST
MARKET
EQUILIBRIUM
PROFIT
SR & LR
EFFICIENCY
MONOPOLY
MONOPOLISTIC
OLIGOPOLY
COMPLETE
EXPLANATION OF
1.
2.
3.
TUTORIAL
TUTORIAL
TUTORIAL
QUESTION
QUESTION
QUESTION

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33. OLIGOPOLY
OLIGOPOLY
OLIGOPOLY
COLLUSION - CARTEL
NON COLLUSION -
'PRISONER'S DILLEMA'

34. OLIGOPOLY
OLIGOPOLY
OLIGOPOLY
P1 = Product Price of the Oligopoly
If a firm raises its price (D1), but the others do not
match the increase, then revenue will decline in
spite of the price increase.
If the firm lowers its price (D2), then the other
firms will match the decrease to avoid losing
market share.
Because there is a kink in the demand curve, there
is a gap in the marginal revenue curve (MR1 - MR2).
Since firms maximize profit by producing that
quantity where marginal cost = marginal revenue,
the firms will not change the price of their product
as long as the marginal cost is between MC1 and
MC2, which explains why oligopolistic firms change
prices less frequently than firms operating under
other market models.

39. QUIZ 2
TQ

40. QUIZ 2