Economic Analysis of Profit Maximization

Economic analysis essentially entails the evaluation of costs and benefits. It starts by ranking projects
based on economic viability to aid better allocation of resources. It aims at analyzing the welfare impact
of a project.

Economic Viability – it means that the profit can reasonably be expected to be high enough to justify the
investment.

In economic analysis of decisions and actions of individuals including business firms, the ideal choice is
set when the marginal utility is equal to the marginal cost.

Marginal utility – it is a concept used by the economist to determine how much of an item consumer are
willing to purchase.

Marginal cost – it is the cost added by producing one additional unit of a product or service.

The objective of the firm is to earn profit, which is the difference between revenues and costs. But
beyond earning profit the business firm is interested in reaping maximum profit as an optimal decision
goal.

Profit maximization is a process business firms undergo to ensure the best output and price levels are
achieved in order to maximize its returns. Influential factors such as sale price, production cost and
output levels are adjusted by the firm as a way of realizing its profit goals.

Since the profit is the gap between total revenue and total cost, the maximum level of profit is attained
when profit is no longer increasing or when marginal profit is zero. Thus, the condition for maximum
profit is when marginal revenue is equal to marginal cost.