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    Profit Maximization

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    Mary Pauline Ayo
    Profit maximization is the process companies use to determine optimal output and price levels to maximize profits. It involves analyzing factors like production costs, sale prices, output levels, competition, and economic growth. The general rule for profit maximization is that a firm should produce the quantity where marginal revenue equals marginal cost (MC=MR). At this point, any increase in output would result in marginal costs exceeding marginal revenues, reducing profits. While a useful concept, profit maximization has limitations in practice as marginal costs and revenues can be difficult to precisely calculate.

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    Profit Maximization

    Uploaded by

    Mary Pauline Ayo
    10 views20 pages
    Profit maximization is the process companies use to determine optimal output and price levels to maximize profits. It involves analyzing factors like production costs, sale prices, output levels, competition, and economic growth. The general rule for profit maximization is that a firm should produce the quantity where marginal revenue equals marginal cost (MC=MR). At this point, any increase in output would result in marginal costs exceeding marginal revenues, reducing profits. While a useful concept, profit maximization has limitations in practice as marginal costs and revenues can be difficult to precisely calculate.

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    PROFIT-MAXIMIZATION-PPT

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    Profit maximization is the process companies use to determine optimal output and price levels to maximize profits. It involves analyzing factors like production costs, sale prices, output levels, competition, and economic growth. The general rule for profit maximization is that a firm should produce the quantity where marginal revenue equals marginal cost (MC=MR). At this point, any increase in output would result in marginal costs exceeding marginal revenues, reducing profits. While a useful concept, profit maximization has limitations in practice as marginal costs and revenues can be difficult to precisely calculate.

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    © All Rights Reserved
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    10 views20 pages

    Profit Maximization

    Uploaded by

    Mary Pauline Ayo
    Profit maximization is the process companies use to determine optimal output and price levels to maximize profits. It involves analyzing factors like production costs, sale prices, output levels, competition, and economic growth. The general rule for profit maximization is that a firm should produce the quantity where marginal revenue equals marginal cost (MC=MR). At this point, any increase in output would result in marginal costs exceeding marginal revenues, reducing profits. While a useful concept, profit maximization has limitations in practice as marginal costs and revenues can be difficult to precisely calculate.

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    of 20

    Profit Maximization

    What is Profit
    Maximization?

    that companies undergo to


    determine the best output and price
    levels in order to maximize its return.

    2
    1 The Influential Factors
    These are the factors that affect Profit Maximization.

    3
    These are the influential factors:

    ◉ Production costs ◉ Economic growth


    ◉ Sale prices ◉ Market share
    ◉ Output levels ◉ Exchange Rate
    ◉ Competition ◉ Etc.

    4
    Profit Maximization Rule
    MC = MR
    5
    MC=MR (The Profit Maximization Rule)

    Wherein:
    is the change is the change
    in total cost that occurs when in total revenue that occurs when
    one additional unit of output one additional unit of output is
    is produced. produced.

    6
    7

    The general rule is that the firm maximizes


    profit by producing that quantity of output
    where marginal revenue equals marginal
    cost.

    “
    Why is the output chosen at
    MC=MR?
    ◉ At A, MC is less than MR, then for
    each extra unit produced, revenue
    will be higher than the cost so that
    you will generate more.
    ◉ At B, MC is greater than MR, then
    for each extra unit produced, the
    cost will be higher than revenue so
    that you will create less.

    Thus, optimal quantity produced


    Proof of MC=MR should be at MC = MR
    8
    Assume that this is a
    PRICE = $20

    (Variable Cost + Fixed Cost)

    0 $20 - -

    1 $30 $10 $20

    2 $35 $5 $20

    3 $45 $10 $20

    4 $60 $15 $20

    5 $90 $30 $20

    6 $130 $40 $20

    9
    20 – 30 = 10 45 – 60 = 15 PXQ
    30 – 35 = 5 60 – 90 = 30 4 X 20 = $80
    35 – 45 = 10 90 – 130 = 40

    (MR = Price in Perfect Competition)


    In this case it is $20 TR – TC = Profit
    80 – 60 = $20

    We are going to produce until the 4th quantity since it is


    where the Marginal Cost and Marginal Revenue is almost
    equal (15 = 20) * it is the

    MR = MC is just a concept it is not literally equal


    Chose the amount where the MR and MC almost meets

    We will NOT produce quantity 5 and 6 since the Marginal


    Cost exceeds the Marginal Revenue 10
    1.

    2.

    3.

    11
    – (occurs only in the short run)

    Equipment, Rent, Wages of employees whose number cannot be


    increased or decreased in the short run and the general upkeep

    Materials consumed during production, the wages of employees who


    can be hired and laid off in the short – run span of time under consideration
    12
    Production cost per unit of output,
    computed by dividing the total of fixed costs and variable
    costs by the number of total units produced (total output)

    A cost already paid and cannot be


    recovered - not included in future decisions.

    13
    - is the monetary costs a firm pays out and
    the revenue a firm receives.

    - is the difference between the revenue a


    firm earns from sales and the firm's total opportunity costs.

    - most ideally used in competitive markets -


    minimum level of economic profit a company needs to stay in
    business. 14
    APPLICATION

    The MC = MR rule is quite versatile so that firms


    can apply the rule to many other decisions.
    ◉ It can be applied to hours of operation.
    ◉ It can be applied to advertising.
    LIMITATIONS OF PROFIT MAXIMIZATION:

    1. In the real world, it is not so easy to know exactly your Marginal


    Revenue and Marginal Cost of the last products sold. For example, it is
    difficult for firms to know the price elasticity of demand for their good –
    which determines the MR.
    2. The use of the profit maximization rule also depends on how other
    firms react. If you increase your price, and other firms may follow,
    demand may be inelastic. But, if you are the only firm to increase the
    price, demand will be elastic.
    LIMITATIONS OF PROFIT MAXIMIZATION:

    3. It is difficult to isolate the effect of changing the price on demand.


    Demand may change due to many other factors apart from price.

    4. Increasing price to maximize profits in the short run could encourage


    more firms to enter the market. Therefore firms may decide to make less
    than maximum profits and pursue a higher market share.
    Credits

    ◉ Presentation template by SlidesCarnival


    ◉ Information retrieved from: Profit Maximization Rule by Prateek
    Agarwal, How to Maximize Profit Margin Considering Margins by
    Robert J. Graham, What is the Profit Maximization Rule by Van
    Thompson, Profit Maximization by Tevjan Pettinger
    ◉ Photographs and Graphs by Unsplash, BrainHive Business
    Planning, Economics Help, Intelligent Economist

    18
    LINK FOR THE VIDEO:

    ◉ https://www.youtube.com/watch?v=UWImfFa
    x8Ew

    19
    Thanks!
    Any questions?

    20

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