Topic: Profit Maximization of a Firm.
Economics 101 Project
Topic: Profit Maximization of a firm.
Profit maximization has always been considered the primary goal of firms.The firm's owner is the manager of the firm, and thus, the firm's owner-manager is assumed to maximize the firm's short-term profits (current profits and profits in the near future).Today, even when the profit maximizing assumption is maintained, the notion of profits has been broadened to take into account uncertainty faced by the firm (in realizing profits) and the time value of money. In this more complete model, the goal of maximizing short-term profits is replaced by goal of maximizing long-term profits, the present value of expected profits, of the business firm. The expected profit in any one period can itself be considered as the difference between the total revenue and the total cost in that period.
A firm maximizes profits, in general, when its marginal revenue equals marginal cost. If the firm produces beyond this point of equality between the marginal revenue and marginal cost, the marginal cost will be higher than the marginal revenue. In other words, the addition to total production beyond the point where marginal revenue equals marginal cost, leads to lower, not higher, profits. While every firm's primary motive is to maximize profits, its output decision (consistent with the profit maximizing objective), depends on the structure of the market it is operating under.
As mentioned earlier, firms' profit maximizing output decisions take into account the market structure under which they are operating. There are four kinds of market organizations: perfect competition, monopolistic competition, oligopoly, and monopoly.
Perfect Competition
Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. For a market structure to be deemed “Perfectly Competitive”, it needs to have the following characteristics: 1)
Topic: Profit Maximization of a firm.
Profit maximization has always been considered the primary goal of firms.The firm's owner is the manager of the firm, and thus, the firm's owner-manager is assumed to maximize the firm's short-term profits (current profits and profits in the near future).Today, even when the profit maximizing assumption is maintained, the notion of profits has been broadened to take into account uncertainty faced by the firm (in realizing profits) and the time value of money. In this more complete model, the goal of maximizing short-term profits is replaced by goal of maximizing long-term profits, the present value of expected profits, of the business firm. The expected profit in any one period can itself be considered as the difference between the total revenue and the total cost in that period.
A firm maximizes profits, in general, when its marginal revenue equals marginal cost. If the firm produces beyond this point of equality between the marginal revenue and marginal cost, the marginal cost will be higher than the marginal revenue. In other words, the addition to total production beyond the point where marginal revenue equals marginal cost, leads to lower, not higher, profits. While every firm's primary motive is to maximize profits, its output decision (consistent with the profit maximizing objective), depends on the structure of the market it is operating under.
As mentioned earlier, firms' profit maximizing output decisions take into account the market structure under which they are operating. There are four kinds of market organizations: perfect competition, monopolistic competition, oligopoly, and monopoly.
Perfect Competition
Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. For a market structure to be deemed “Perfectly Competitive”, it needs to have the following characteristics: 1)