PROFIT MAXIMIZATION  Marginal revenue – marginal costs (MR-MC) method

Profit MR = MC
 the difference that arises when a firm’s total revenue is greater that of its total Figure1.0 when TR exceeds TC
cost.
TR/TC TC
Economic profit
b
Can be viewed in terms of:
TR
 the return accruing to enterprise owners(entrepreneurs) after the payment
of all explicit costs and all implicit costs. a
 residual return to the owner (s) of a firm (an individual entrepreneur or group
of shareholders) providing capital and for risk bearing d
 the reward to entrepreneurs for organizing productive activity , for innovating
new products, etc. and for risk taking.
c Q
 The prime mover of a private enterprise economy serving to allocate
Q1 Q2
resources between competing end users in line with consumer demands.
Qe TP
Accounting profit MR/ MC
MC
 Only takes into account explicit costs..

Profit maximization

 is the process by which a firm determines the price and output level that
returns the greatest profit.
D
 Firms seek to establish that price-output combination which yields the
maximum amount of profit. MR Q
Several Approaches: Qe

 Total revenue – total cost (TR-TC) method figure 2.0 when MR equals MC

Profit = TR – TC

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