Theory of Firm/Profit Maximization

2.  The theory of the firm has been developed on
the basis of the assumption that rational firm
will have the objective of profit maximisation,
subject to the technical & market constraints.

3. 1. Firm is a unit which transforms valued inputs into outputs
of a higher value using the given state of technology.
2. The primary concern of this model is to analyze changes in
the prices & quantities of inputs & outputs.
3. The firm strives towards the achievement of its goal-profit
maximisation.
4. The market conditions (like competition, monopoly) for a
firm to operate are given.
5. While choosing between alternatives, the firm prefers the
alternative which help it to consistently achieve profit.

4. 1. The firm has a single goal- to maximise
profit.
2. The firm acts rationally to pursue its goal.
Rationally implies prefect knowledge of all
relevant variables at the time of decision
making.
3. The firm is single ownership one.

5.  Short Run
◦ Short run is defined as a period where adjustments
to changed conditions are partial.
 Long Run
◦ Long run is defined as a period where adjustments
to changed circumstances is complete.

6.  Assumption of independence of periods
◦ Short run period has no effect which link this period
to next period.
 Assumption of period-linkages
◦ Each short run period is linked to the next period.

7.  Condition 1 -
Marginal revenue (MR)= Marginal Cost (MC).
ð(TR) = ð(TC)
ðX ðX
 Condition 2
This implies that the slope of MR curve is less
than the slope of MC curve.
ð²(TR) < ð²(TC)
ðX² ðX²

9. Presented By :-