Profit maximization an actual or theoretical objective

An Actual or Theoretical Objective?

Profit maximization an actual or theoretical objective

Assumptions and Criticisms Economics Article shared by: In the neoclassical theory of the firm, the main objective of a business firm is profit maximisation. The firm maximises its profits when it satisfies the two rules: Maximum profits refer to pure profits which are a surplus above the average cost of production.

It is the amount left with the entrepreneur after he has made payments to all factors of production, including his wages of management. In other words, it is a residual income over and above his normal profits.

The profit maximisation condition of the firm can be expressed as: The two marginal rules and the profit maximisation condition stated above are applicable both to a perfectly competitive firm and to a monopoly firm.

The profit maximisation theory is based on the following assumptions: The entrepreneur is the sole owner of the firm. Tastes and habits of consumers are given and constant. Techniques of production are given. The firm produces a single, perfectly divisible and standardised commodity.

The firm has complete knowledge about the amount of output which can be sold at each price. New firms can enter the industry only in the long run. Entry of firms in the short run is not possible. The firm maximises its profits over some time-horizon. Profits are maximised both in the short run and the long run.

Profit Maximisation under Perfect Competition Firm: Under perfect competition, the firm is one among a large number of producers. It cannot influence the market price of the product. It is the price-taker and quantity-adjuster. It can only decide about the output to be sold at the market price.

Therefore, under conditions of perfect competition, the MR curve of a firm coincides with its AR curve. The MR curve is horizontal to the X-axis because the price is set by the market and the firm sells its output at that price. The equilibrium of the profit maximisation firm under perfect competition is shown in Figure 1 where the MC curve cuts the MR curve first at point A.

It does not pay the firm to produce the minimum output when it can earn larger profits by producing beyond OM. It will, however, stop further production when it reaches the OM level of output where the firm satisfies both conditions of equilibrium.

If it has any plans to produce more than OM1 it will be including losses, for the marginal cost exceeds the marginal revenue after the equilibrium point B. Thus the firm maximises its profits at M1 B price at the output level OM1.

Profit Maximization

Profit Maximisation under Monopoly Firm: There being one seller of the product under monopoly, the monopoly firm is the industry itself. Therefore, the demand curve for its product is downward sloping to the right, given the tastes and incomes of its customers.

It is a price-maker which can set the price to its maximum advantage. But it does not mean that the firm can set both price and output. It can do either of the two things.In the neoclassical theory of the firm, the main objective of a business firm is profit maximisation.

Profit Maximization An Actual Or Theoretical Objective Essay - Words

The firm maximises its profits when it satisfies the two rules: (ii) MC curve cuts the MR curve from below. Maximum profits refer to pure profits which are a surplus above the average cost of.

Profit maximization an actual or theoretical objective

In order to make profits, firms must put operational strategies into place in order to ensure that the set business goals and objectives are met both in the short run and in the long run. The answer to this question is that while profit maximization expresses the general nature of the objective of firms it is not profit per se that firms should try to maximize.

Instead firms want to maximize the value of their equity holdings.

Profit Maximization Essays and Research Papers - arteensevilla.com According to this theory, profits must be earned by business to provide for its own survival, coverage of risks, growth and expansion. It is a necessary motivating force and it is in terms of profits that the efficiency of a business is measured.
Instructions for Profit Maximization College Essay Examples Profit maximization theory of directing business decisions is encouraged because of following advantages associated with it.

Jul 27,  · Profit Maximization: An Actual or Theoretical Objective? Profits are necessary to day both for the capitalist socialist and any type of economy to survive. Multinationals and giant companies have the profit motive and therefore maximizing profit as the base of their operations.

Profit maximization basic objective of firm? A firm's main objective should be to make decisions that maximize the value of the company for its owners, and as the owners of a company are its shareholders, the main financial objective should be 'the maximization of shareholder wealth'.1/5(1).

Profit maximization an actual or theoretical objective

This paper confirms that there is not a single weighting between profit and win objectives within professional sport league, and a team can switch from one orientation to another from year to year due to uncertain nature of sports industry.

Profit Maximisation Theory: Assumptions and Criticisms| Economics