PROFIT MAXIMIZATION

Profit Maximization



[Professor's Name]

Profit Maximization

Introduction

The profit maximization is the process by which companies determine the price and production volume, which gives the maximum profit. There are many different approaches to this problem, and it also depends on what kind of market the company operates(Santos, Vega & Barkoulas, 2007).

Profits can be defined as total revenue minus total costs. Profit maximization implies therefore either a minimization of costs or maximization of revenue.

For companies in a perfect market is it that P = AR = MR, as they are price takers. Since marginal costs are increasing at the same time (see cost function ) is the maximum profit in one of the points where marginal cost equals marginal revenue. In all other respects it would be worthwhile for the company to increase output either up or down, as a smaller unit or a unit more will increase profits(Kesenne, 2010).

If P = MC = MR in two places the company shall select the point where profits are greatest. Even if it maximized profit is negative it can, under certain assumptions worthwhile for the company to continue production. As the company in the short term can not avoid the fixed costs, the company itself with a negative profit, assuming you believe in better times, continue production if:

R T> W C

This can be obtained by dividing the Q forsimples to:

T R / Q> V C / Q -> P> A V C

The company must then remain on the market if the price (P) is greater than average variable cost (AVC) as this will minimize the loss (Isaac, 1997).

Entire market in the long term - zero-profit condition

One of the characteristics of a perfect market is that firms can freely enter and exit the market. It creates a dynamic where companies will come to a market as long as there is a positive profit, which is constantly pushing profits down and step out of the market as long as there is a negative profit, which pushes up profit.

At long will certainly profit therefore surprising be zero. The price will then be equal to minimum average total cost.

The reason it is still worthwhile for companies to stay in the market is, is that in the total costs are taken into account all opportunity costs. So it is still the best action for the company. Zero-profit condition therefore has the consequence that a rise in prices caused by increased demand will eventually be neutralized (as the market would be attractive for several companies) and the rate returning to its starting point (Patel, 2010).

In many industries will supply curve nevertheless in the long run still be upward. Firstly, because of several companies within the market including will make inputs more expensive, and secondly because the premise that all businesses have the same costs are not generally applicable, and it is typically the most efficient that came first into the market.

Once a company has monopoly switches from being ...