In addition, firms may want to profit maximise and gain supernormal profits because it would attract potential competitors to join their market. This is because companies such as apple, gain too much supernormal profit, it attracts other firms, such as Samsung and Orange, to join their market and share their supernormal profits. So companies may want to sacrifice their profits in the short run to prevent unwanted competitors in joining their market in order to gain supernormal profits in the long run. However this only occurs in imperfect competition because most firms only make supernormal profits in the short run and normal profits in the long run. Also a non- maximising behaviour by a firm is usually disciplined by competition in the capital market rather by competition in the goods or products market. In the capital market, if the shareholders aren’t happy with the firm’s behaviour of non profit maximising, they would sell their shares and, if a firm’s level of profits is too low, the owners may sell their business to a new owner. This would then mean managers may want to
This quote is the best representation of the spirit of this essay, carried through all its parts. The objective is not the critique of neoclassical economic theory in itself, but a starting point towards modernising the economic thought using old-new ways of thinking about capitalism. I felt that I can’t go ahead in research without writing this piece, highlighting some of the fallacies that are best-case misleading. A true progress in social sciences is impossible without
Throughout this task I will do my best to explain how firms determined to maximize profit do just that. Specifically I will delineate how such firms choose the optimum level of production or output for the goods they produce and how they behave with respect to various elevations of marginal revenue. In my attempt it will be appropriate for me to clarify the definitions of various economic terms in order to assure a proper understanding of my thoughts on this topic, I will provide these definitions throughout.
In order for any business to be successful they would need to know how to make the most profit for the goods they are producing and selling.
If a company can make a profit with low expenses, then they have succeeded in profit maximization. Companies strive to make a profit, but if they can reach their profit maximization then that’s even better.
In the short run the perfect competition equilibrium can be found by graphing the marginal cost (MC), average total cost (ATC) and marginal revenue (MR) curves. In perfect competition the price is equal to the average revenue, which is equal to the marginal revenue and these are all constant, giving an infinitely elastic demand curve for the firm. The demand curve is “perfectly price elastic” due to the homogeneity of the products supplied, where each supplier, as a price taker, must focus on a single price. Given this, the only choice a supplier has in the short run is how much to produce. For profit maximisation to occur marginal costs (supply curve) must equal marginal revenue (demand curve). Profit maximisation is assumed to mean the maximisation of normal economic profit (i.e. revenue that covers the
A purely competitive firm is precluded from making economic profits in the long run because:
Decisions will be made by using the concepts of marginal costs and marginal revenue to maximize profit. A mix of pricing and non-pricing strategies will be
A way to determine the quantity of profit maximization is to conclude where marginal revenue equals marginal costs. Rather than computing the profit for all levels of sales; total revenue and total variable costs are considered. Marginal revenues and marginal costs are considered in a similar way like marginal profit, thus defining the amount of change for all sales’ levels (Huter, 2012, p.2).
15. Whatever else you learned about profit-maximization, you should have learned this: Maximum profit is obtained at the production level where
They went on to state that competition would not solve this dilemma. This lead to a re-evaluation of the goal of corporations, from merely maximizing revenues, to maximize the value of the firm, as it was determined in the stock market.
It is essential for a company to know how to make a profit in order to succeed. It makes planning for the future of a company much easier by knowing how much profit it is going to make in the future. This aids in the company knowing how much to sell product for, how many employees are required, when products should be upgraded, and when
In business it is essential for owners to consider important factors when mapping out their business objectives. Economics used as a tool to solve coordination problems. They include what and how much product to produce, how to produce their product, and for whom they are producing. In order to effectively answer these questions, economics is used. Colander (2006) describes economics as “the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society” (p. 4). The foundation of economics is based on several factors that assist in understanding an economy.
Most companies are profit oriented. Companies survive and live on profit. Even governmental institutions, NGO's and NPO's are profit oriented, what they do with profit is different though. Saying this means that companies seek always to be at a position where profit is maximized. As we know by now this happens when MC=MR but this is an always changing point as supply and demand are dynamic, effectively meaning that if firms get it right once they can't just do the same eternally, they still need to adapt to every market factor as a new change is a new reality all together that needs to be studied and addressed. All
To analyze this approach is vital to take into account the concept of capitalism, this is a system in which the main and the only objective is to profit. In capitalism the power and the decision making are based on the ones who own the factors of production, so it depends on what they need or what they want to make changes; changes that are going to bring benefits to