# data[].attributes.attachment_link.readable_text
An assumption in classical economics is that firms seek to maximise profits.

Profit = Total Revenue (TR) - Total Costs (TC). Therefore, profit maximisation occurs at the biggest gap between total revenue and total costs.

A firm can maximise profits if it produces at an output where marginal revenue (MR) = marginal cost (MC)

Diagram of Profit Maximisation

To understand this principle look at the above diagram.

If the firm produces less than Q1, MR is greater than MC. Therefore, for this extra output, the firm is gaining more revenue than it is paying in costs, and total profit will increase.

Close to Q1, MR is only just greater than MC; therefore, there is only a small increase in profit, but profit is still rising.

However, after Q1, the marginal cost of the output is greater than the marginal revenue. This means the firm will see a fall in its profit level because the cost of these extra units is greater than revenue.

Profit maximisation for a monopoly

In this diagram, the monopoly maximises profit where MR=MC - at Qm. This enables the firm to make supernormal profits (green area). Note, the firm could produce more and still make normal profit. But, to maximise profit, it involves setting a higher price and lower quantity than a competitive market.

Note, the firm could produce more and still make a normal profit. But, to maximise profit, it involves setting a higher price and lower quantity than a competitive market.

Therefore, in a monopoly profit maximisation involves selling a lower quantity and at a higher price. see also: Diagram of monopoly

Profit Maximisation in Perfect Competition

In perfect competition, the same rule for profit maximisation still applies. The firm maximises profit where MR=MC (at Q1).
For a firm in perfect competition, demand is perfectly elastic, therefore MR=AR=D.

This gives a firm normal profit because at Q1 AR=AC.

Profit Maximisation in the Real World
Limitations of Profit Maximisation

In the real world, it is not so easy to know exactly your marginal revenue and the marginal cost of last goods sold. For example, it is difficult for firms to know the price elasticity of demand for their good - which determines the MR.

It also depends on how other firms react. If they increase the price, and other firms follow, demand may be inelastic. But, if they are the only firm to increase the price, demand will be elastic (see: kinked demand curve and game theory.

However, firms can make a best estimation. Many firms may have to seek profit maximisation through trial and error. e.g. if they see increasing price leads to a smaller % fall in demand they will try increase price as much as they can before demand becomes elastic

It is difficult to isolate the effect of changing the price on demand. Demand may change due to many other factors apart from price.

Firms may also have other objectives and considerations. For example, increasing price to maximise profits in the short run could encourage more firms to enter the market; therefore firms may decide to make less than maximum profits and pursue a higher market share.

Firms may also have other social objectives such as running the firm like a cooperative - to maximise the welfare of stakeholders (consumers, workers, suppliers) and not just profit of owners.

Profit satisficing. This occurs when there is separation of ownership and control and where managers do enough to keep owners happy but then maximise other objectives such as enjoying work.

Related

# data[].attributes.attachment_link.description
An assumption in classical economics is that firms seek to maximise profits. Profit = Total Revenue (TR) - Total Costs (TC). Therefore, profit maximisation occurs at the biggest gap between total revenue and total costs.

# data[].attributes.attachment_link.readable_text
I would modify Tamana's question a little bit. Isn't the phenomenon of economies of scale typical enough that we should be thinking about a more complex standard marginal cost curve? That is, should a standard marginal cost curve decrease over some portion of its length, before finally increasing again when further economies of scale are no longer possible, and marginal costs increase again? Or is this simply a variation that is covered in more advanced economic analysis, and not really that useful at this introductory level?

Secondly, the page linked by Jarrod claims that "The point at which marginal unit costs no longer decrease is considered the optimal production level." This seems potentially at odds with what we've learned in this lesson. Why wouldn't you want to keep producing more, as long as the marginal revenue still exceeds marginal cost? On the other hand, pure profit maximisation of any given project surely isn't always the best decision for a firm; what the firm really needs to weigh is the opportunity costs.

# data[].attributes.attachment_link.title
Maximizing Profit Under Competition | Microeconomics Videos

# data[].attributes.attachment_link.description
I would modify Tamana's question a little bit. Isn't the phenomenon of economies of scale typical enough that we should be thinking about a more complex standard marginal cost curve? That is, should a standard marginal cost curve decrease over some portion of its length, before finally increasing again when further economies of scale are no longer possible, and marginal costs increase again?

# data[].attributes.attachment_link.title
Maximizing Profit and the Average Cost Curve | Microeconomics Videos

# data[].attributes.attachment_link.description
Being able to predict your company's profit is a very useful tool. In this video, we introduce the third concept you need to maximize profit - average cost.

# data[].attributes.body
Reading on marginal revenue

# data[].attributes.attachment_link.readable_text
Marginal Revenue (MR) is the increase in the Total Revenue (TR) that is gained when the firm sells one additional (marginal) unit of that product. In other words, MR is the revenue obtained from the last unit sold.

Marginal Revenue can remain uniform at a particular level of output. However, the MR will eventually slow down as the production level rises due to the Law of Diminishing Returns.

For example, we assume that when a firm sells 5, 6 and 7 units of a good, the firm's Total Revenue is $20, $25 and $28 respectively. Therefore, when the quantity sold is 5, the firm's Marginal Revenue from selling the extra unit or the 6th unit will be $25 - $20 = $5.

Similarly when the quantity is 6, the MR = $28 - $25 = $3.

# data[].attributes.attachment_link.title
Marginal Revenue | Intelligent Economist

# data[].attributes.attachment_link.description
Marginal Revenue (MR) is the increase in the Total Revenue (TR) that is gained when the firm sells one additional (marginal) unit of that product. In other words, MR is the revenue obtained from the last unit sold. Marginal Revenue can remain uniform at a particular level of output.

# data[].attributes.body
1. Can you determine the profit-maximizing level of output using the optimal output rule?

2. Can you perform marginal analysis?

# data[].attributes.body
Define (using graphs or data as appropriate) the profit-maximizing rule.

Explain (using a graph or data as appropriate) the profit-maximizing level of production.

# data[].attributes.body
To determine the optimal level at which to pursue an activity whose total benefits exceed total cost, rational economic agents compare marginal benefits and marginal costs.

# data[].attributes.attachment_link.title
APMic Unit 3 Lesson 5 - Profit Maximization Flashcards | Quizlet

# data[].attributes.attachment_link.description
Start studying APMic Unit 3 Lesson 5 - Profit Maximization. Learn vocabulary, terms, and more with flashcards, games, and other study tools.

# data[].attributes.body
Firms are assumed to produce output to maximize their profits by comparing marginal revenue and marginal cost.

# data[].attributes.attachment_link.title
Maximizing Profit Practice- Micro Topic 3.5

# data[].attributes.attachment_link.readable_text
If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

# data[].attributes.attachment_link.title
Production, cost, and the perfect competition model | Khan Academy

# data[].attributes.attachment_link.description
This unit covers production and cost analysis and the behavior of firms in perfect competition. Topics include an introdduction to the short-run production function, diminishing marginal returns, the link between productivity and costs, the relationships that exist among cost curves, long-run costs, economies and diseconomies of scale, profit maximization, and the behavior of firms in perfectly competitive markets in the short run and the long run.

# data[].attributes.attachment_link.title
AP Microeconomics: 3.5-3.6 Profit Maximization and Market Decisions