profit maxim is at ion iem lab

8/3/2019 Profit Maxim is at Ion IEM LAB

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Presented by: ABHISHEK SHRINGI

ABHIMANYU MATHUR

DIMPLE CHOUHAN


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Profit is the making of gain in Business activity for thebenefit of the owners of the business.

Two Important Concepts Of Profit :-

Accounting Profit Profit is the surplus of revenue overand above all paid-out costs, including both manufacturingand overhead expenses.

Economic Profit It is the difference between a Companystotal revenue and its opportunity cost.


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Measure Of Performance

Premium To Cover Costs Of Staying In Business

Ensuring Supply Of Future Capital


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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


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SuperNormal Profit

Normal Profit

Negative Profit or Loss

Types Of Profit


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Preventing Entry Of Competitors

Projecting A Favourable Public Image

Restraining A Trade Union Demand

Maintaining Customer Goodwill


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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 calculatesProfit = TR TC at each output level


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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.

Q


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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.


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Total economic profit are represented by area P,A,B,C.


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Output Below A:

MR exceeds MC; It means by additional production outputhigher 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:


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F

UNDAMENTALS:

y PROFIT = TR-TC

y Total Revenue (TR): This is the total income a firm receives.

y Total cost: refers to the total expense incurred in reaching a particularlevel of output; if such total cost is divided by the quantity produced,average or unit cost is obtained.

y MARGINAL REVENUE:IS THE CHANGE IN REVENUE WHICHCOMES FROM SELLING AN ADDITIONAL UNIT OF OUTPUT.

y MARGINAL COST:IS THE CHANGE IN COST WHICH COMES FROMPRODUCING AN ADDITIONAL UNIT OF OUTPUT.


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MC

AC

A

RMR

Y

P

O X

S

M

R

Q

E

OUTPUT

C

O

S

T

&

R

EV

E

N

U

E

THE FOLLOWING FIG SHOWS :AC AND AR ARE THE AVERAGE COST ANDREVENUE COST CURVES.

MC IS THE MARGINAL COST AND

MARGINAL REVENUE.

WHEN OUTPUT REACHES OM,MARGINALREVENUE EQUALS MARGINAL COST AT E.HENCE PQRS IS THE PROFIT.

BEYOND OM OUTPUT ,THE MC CURVE IS

HIGHER THAN MR CURVE WHICHINDICATES LOSSES.

THUS PROFITS ARE MAXIMUM WHENMR=MC.


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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:


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y Profit is indispensable for a Firms survival

y Achieving other objectives depends on firms ability tomake profits

y Evidence against Profit Maximization is ambiguous

y Profit Maximization objective has greater Predicting Power

y Profit is a more reliable measure of firms efficiency


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The profit maximizing level of output is found by equating itsmarginal revenue with its marginal cost, which is the same profitmaximizing condition that a perfectly competitive firm uses todetermine its equilibrium level of output. Indeed, the condition

that marginal revenue equal marginal cost is used to determinethe profit maximizing level of output ofevery firm, regardless ofthe market structure in which the firm is operating.

But the monopolist's supply decisions do not depend on marginalcost alone. The monopolist looks at both the marginal cost andthe marginal revenue that it receives at each price level. In orderto determine marginal revenue, the monopolist must knowmarket demand. Therefore, the monopolist's market supply willnot be independent of market demand.


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profit maxim is at ion iem lab

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