Profit Maximisation Flashcards
What is profit maximisation?
It is the output at which the difference between total revenue (TR) and total cost (TC) is greatest, or price minus cost per unit, multiplied by quantity, is greatest.
Why do firms aim to maximise profits?
Profit is the reward for risk taking, so it is rational that the risk taker will want to get the greatest reward possible.
What does MR = MC signify?
This is the point at which the revenue gained from selling one more unit is exactly equal to the cost of producing that unit.
What happens when marginal profit is positive?
If a firm sells one more unit and gets more money coming in than it costs to make that unit, it is rational for the firm to produce and sell that unit.
What is total revenue (TR)?
TR is the price multiplied by the quantity sold.
What is total cost (TC)?
TC is the cost of producing a given level of output, calculated by adding total fixed cost to total variable cost.
What is marginal revenue (MR)?
MR is the change in TR from selling one more unit of output; it is the gradient of the TR curve.
What is marginal cost (MC)?
MC is the extra cost of making one more unit of output; it is always positive and is the gradient of the total cost curve.
What is marginal profit?
Marginal profit is the extra profit gained from selling one more unit. When marginal profit is zero, the firm is maximising profit.
Does maximum revenue mean maximum profit?
No, profit maximisation does not mean that the firm is making the most amount of revenue possible; that is a different objective called revenue maximisation.
In which market structures is profit maximisation assumed to be the objective?
Profit maximisation is initially assumed to be the objective of firms in different market structures, i.e., perfect competition, monopolistic competition, monopoly, and oligopoly.
