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

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?=?
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