Presented by: ABHISHEK SHRINGI ABHIMANYU MATHUR DIMPLE CHOUHAN

Two Important Concepts Of Profit : Accounting Profit Profit is the surplus of revenue over and above all paid-out costs.Profit is the making of gain in Business activity for the benefit of the owners of the business. including both manufacturing and overhead expenses.  Economic Profit . It is the difference between a Company s total revenue and its opportunity cost.

‡ Measure Of Performance ‡ Premium To Cover Costs Of Staying In Business ‡ Ensuring Supply Of Future Capital .

Profit Maximization is the process by which a firm determines the Price and Output level that returns the greatest Profit. Approaches To Profit Maximization :  Total Revenue ± Total cost Method Marginal Revenue ± Marginal Cost Method .

Types Of Profit  SuperNormal Profit  Normal Profit  Negative Profit or Loss .

 Preventing Entry Of Competitors  Projecting A Favourable Public Image  Restraining A Trade Union Demand  Maintaining Customer Goodwill .

the firm calculates Profit = TR ± TC at each output level . Approach-1: By using Total Cost & Total revenue Curves (This is simple approach) Profit maximization under short run (by using total curves): This is the period in which one or more factors are fixed in supply. In the total revenue and total cost approach.METHOD OF PROFIT MAXIMISATION (in short run): There are 2 Approaches.

Because total revenue minus total costs is equal to profit. . Secondly.C) is at its greatest.Q First.Q. the line segment C. the profit curve is at its maximum at this point (A).B is equal in length to the line segment A. meaning that the surplus of revenue net of costs (B. at the point (B) the tangent on the total cost curve (TC) is parallel to the total revenue curve (TR).

Average cost & Marginal -Revenue. i. MR=MC Why profit maximize when MR=MC? To find out the answer to this question. .Approach-2: Marginal cost. marginal profit (Mp) equals marginal revenue (MR) minus marginal cost (MC). we use MC& MR curves. observe when MR=/= (not equal to) MC.e. Average Revenue curves: (This is complicated but very useful to compare profit maximization under different market condition) An alternative argument says that for each unit sold. Stage-1: To find profit maximizing output. To maximize profit Marginal Revenue must be equal to Marginal Cost.

C. .Total economic profit are represented by area P.A.B.

the correct intersection of MC and MR will occur when: . It means by additional production output higher additional revenue then MC Therefore Total profit can increase by increasing production.Output Below A: MR exceeds MC. Output above A: MC exceeds MR. It adds more to the cost then revenue hence reduce profits. Therefore profit can increase by cutting back on production. In calculus terms.

FUNDAMENTALS: y PROFIT = TR-TC y Total Revenue (TR): This is the total income a firm receives. if such total cost is divided by the quantity produced. y Total cost: refers to the total expense incurred in reaching a particular level of output. y MARGINAL REVENUE:IS THE CHANGE IN REVENUE WHICH COMES FROM SELLING AN ADDITIONAL UNIT OF OUTPUT. average or unit cost is obtained. y MARGINAL COST:IS THE CHANGE IN COST WHICH COMES FROM PRODUCING AN ADDITIONAL UNIT OF OUTPUT. .

Y C O S T & R E V E N U E THE FOLLOWING FIG SHOWS : ‡AC AND AR ARE THE AVERAGE COST AND REVENUE COST CURVES. ‡WHEN OUTPUT REACHES OM.MARGINAL REVENUE EQUALS MARGINAL COST AT E. MC P E S R MR O M OUTPUT A R X Q AC ‡MC IS THE MARGINAL COST AND MARGINAL REVENUE. ‡THUS PROFITS ARE MAXIMUM WHEN MR=MC. ‡HENCE PQRS IS THE PROFIT. . ‡BEYOND OM OUTPUT .THE MC CURVE IS HIGHER THAN MR CURVE WHICH INDICATES LOSSES.

 Divorce of ownership from control:  Difficulties in pursuing profit maximisation:  Problems in the measurement of profit:  Social responsibility of the firm:  Deliberate limitation of profits:  Aversion for business expansion: .

y Profit is indispensable for a Firm s survival y Achieving other objectives depends on firm s ability to make profits y Evidence against Profit Maximization is ambiguous y Profit Maximization objective has greater Predicting Power y Profit is a more reliable measure of firm s efficiency .

Indeed. the monopolist must know market demand. But the monopolist's supply decisions do not depend on marginal cost alone. regardless of the market structure in which the firm is operating.The profit maximizing level of output is found by equating its marginal revenue with its marginal cost. the monopolist's market supply will not be independent of market demand. In order to determine marginal revenue. which is the same profit maximizing condition that a perfectly competitive firm uses to determine its equilibrium level of output. Therefore. . The monopolist looks at both the marginal cost and the marginal revenue that it receives at each price level. the condition that marginal revenue equal marginal cost is used to determine the profit maximizing level of output of every firm.

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