THEORIES OF PROFIT

1. Risk-Bearing
According to this theory, above-normal profit (i.e., economic profit) are required
by firms to enter and remain in such fields as petroleum exploration with above-
average risks.
2. Frictional Theory of Profit
This theory stresses that the profits arises as a result of friction or disturbances
from long-run equlibrium.
3. Monopoly Theory of Profit.
Some firms with monopoly power can restrict output and charge higher prices than
under perfect competition, thereby earning a profit.
4. Innovation Theory of Profit
The innovation theory of profit postulates that (economic) profit is the reward for
the introduction of a successful innovation.
5. Managerial Efficency Theory of Profit
This theory rests on the observation that if the average firm tends to earn only a
normal return on its investment in the long run, firm that are more effiscient than
OPTIMIZATION TECHNIQUES

2.1 Methods of Expressing Economic Relationship

Economic relationships can be expressed in the
form of equation, tables, or graph. When the
relationship is simple, a table and/or graph may
be sufficient. When relationship is complex,
however, expressing the relationship in equational
form may be necessary.

For Example : TR = 100Q-10Q2

2-2 Total, Average, and Marginal Relationship
Q TR AR MR Q TC AC MC PROFIT

0 0 $ 20

1 1 140

2 2 160

3 3 180

4 4 240

5 5 480

For Example : TR = 100Q-10Q2

2-3 Optimization Analysis
Optimization analysis can best be
explained by examining the process by
which a firm determines the output level at
which it maximizes total profits.
1. Profit maximization by TR dan TC
Approach.
2. Optimization by Marginal Analysis
BREAK EVEN ANALYSIS
Break even analysis is in some respects a
simplification of profit maximization analysis.
In typical brake even problem, a constant
price, a constant average variabel cost, and a
specific level of fixed cost are assumed; and
the resulting level of output (or dales)
necessary for the firm to cover its cost (to
break even) pr to cover its total costs and
achieve a target level of income is the
obtained.
 BEP FORMULA

TFC
Q-bep = ----------------------
(P – AVC)

TFC = Total Fixed Cost

Q-bep = Quantity BEP
P = Price
AVC = Average Variable Cost
 EXAMPLE

Assume the MAGIC S is fast food retaurant that

specializes in sandwich. Magic S has fixed cost
per month of $20,000. Most of revenue this firm
is derived from featured meal-a hot submarine
sandwich, and small drink, for $1.50. The
average variable cost of meal is approximately
constan at $0.70 over the relevant range
production.