Edexcel A Level Economics A:复习笔记3.2.1 Business Objectives

Profit & Revenue Maximisation

Profit Maximisation

  • Most firms have the rational business objective of profit maximisation
    • Profits benefit shareholders as they receive dividends & also increase the underlying share price
      • An increase in the underlying share price increases the wealth of the shareholder
  • To achieve profit maximisation firms, follow the profit maximisation rule
    • When marginal cost (MC) = marginal revenue (MR) then no additional profit can be extracted by producing another unit of output
    • When MC < MR additional profit can still be extracted by producing an additional unit of output
    • When MC > MR the firm has gone beyond the profit maximisation level of output
      • It is making a marginal loss on each unit produced beyond the point where MC = MR
  • In reality, firms may find it difficult to produce at the profit maximisation level of output
    • They may not know where this level is
    • In the short term they may not adjust their prices if the marginal cost changes
      • Marginal costs can change regularly and regular price changes would be disruptive to customers
    • In the long-term firms will seek to adjust prices to the profit maximisation level of output
    • Firms may be forced to change prices by the Competition Commission
      • The profit maximisation level of output often results in high prices for consumers
      • Changing prices changes the marginal revenue

3-2-1-profit-maximisation-image_edexcel-al-economics

The profit maximisation level of output occurs at Q1 where MC = MR resulting in a market price of P1

 

Diagram Analysis

  • This firm has market power as the MR and average revenue (AR) curve are downward sloping
  • At the profit maximisation level of output (MC = MR)
    • The selling price is P1
    • The average cost is C1
    • The supernormal profit =