2. 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.
3. • Measure Of Performance
• Premium To Cover Costs Of Staying In Business
• Ensuring Supply Of Future Capital
4. 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
5. Types Of Profit
SuperNormal Profit
Normal Profit
Negative Profit or Loss
6. Preventing Entry Of Competitors
Projecting A Favourable Public Image
Restraining A Trade Union Demand
Maintaining Customer Goodwill
7. 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.
In the total revenue and total cost approach, the firm calculates
Profit = TR – TC at each output level
8. Q
First, the profit curve is at its maximum at this point (A). Secondly, at the point (B) the
tangent on the total cost curve (TC) is parallel to the total revenue curve (TR), meaning
that the surplus of revenue net of costs (B,C) is at its greatest. Because total revenue
minus total costs is equal to profit, the line segment C,B is equal in length to the line
segment A,Q.
9. 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)
An alternative argument says that for each unit sold,
marginal profit (Mp) equals marginal revenue (MR) minus
marginal cost (MC).
Stage-1: To find profit maximizing output, we use MC& MR
curves.
To maximize profit Marginal Revenue must 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.
11. Output Below A:
MR exceeds MC; It means by additional production output
higher additional revenue then MC
Therefore Total profit can increase by increasing production.
Output above A:
MC exceeds MR; It adds more to the cost then revenue
hence reduce profits.
Therefore profit can increase by cutting back on production.
In calculus terms, the correct intersection of MC and MR will occur when:
12. 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.
13. Y
C
O THE FOLLOWING FIG SHOWS :
S •AC AND AR ARE THE AVERAGE COST AND
T MC REVENUE COST CURVES.
& Q
P •MC IS THE MARGINAL COST AND
R AC
E E MARGINAL REVENUE.
V S
E R •WHEN OUTPUT REACHES OM,MARGINAL
A REVENUE EQUALS MARGINAL COST AT E.
N MR R
U •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.
14. 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:
15. 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
16. 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 monopolist's 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 monopolist's market supply will
not be independent of market demand.
