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LONG RUN, MICROECONOMICS: In terms of the microeconomic analysis of production and supply, a period of time in which all inputs in the production process are variable. The long run is primarily used to analyze production decisions for a firm and is also referred to as the planning horizon. The long run is a period of time in which a business can change the quantities of ALL resource inputs--labor, capital, land, and entrepreneurship. Nothing is fixed. If your factory is to small, well then, build a bigger one. The long-run analysis of production is used to better understand economies of scale, diseconomies of scale, and long-run market supply.

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PROFIT MAXIMIZATION:

The process of obtaining the highest possible level of profit through the production and sale of goods and services. The profit-maximization assumption is the guiding principle underlying production by a firm. In particular, it is assumed that firms undertake actions and make the decisions that increase profit. The profit-maximization assumption is the production counterpart to the utility-maximization assumption for consumer behavior.
Profit is the difference between the total revenue received from selling output and the total cost of producing that output. The profit-maximization assumption means that firms seek a production level that generates the greatest difference between total revenue and total cost. If a firm maximizes profit, then it is generating the highest possible reward for entrepreneurship resources.

The Profit Maximizing Choice

Consider how profit maximization might work for The Wacky Willy Company. Suppose that The Wacky Willy Company generates $100,000 of profit by producing 100,000 Stuffed Amigos. This profit is the difference between $1,000,000 of revenue and $900,000 of cost.
  • If profit falls from this $100,000 level when The Wacky Willy Company produces more (100,001) or fewer (99,999) Stuffed Amigos, then it is maximizing profit at 100,000.
Alternatively, if profit can be increased by producing more or less, then The Wacky Willy Company is NOT maximizing profit.
  • Suppose, for example, that producing 100,001 Stuffed Amigos adds an extra $11 to revenue but only $9 to cost. In this case, profit can be increased by $2, reaching $100,002, by producing one more Stuffed Amigos. As such 100,000 is NOT the profit maximizing level of production.

  • In contrast, suppose that producing 99,999 Stuffed Amigos reduces cost by $11 but only reduces revenue by only $9. In this case, profit can also be increased by $2, reaching $100,002, by producing one fewer Stuffed Amigos. As such, 100,000 is NOT the profit maximizing level of production.
While this assumption has numerous questions concerning its validity in the real world (do firms ACTUALLY try to maximize profit?), it does provide an excellent method of economic analysis.

Marginal Equality

The economic analysis of short-run production reveals that firms maximize profit by producing a quantity that equates marginal revenue with marginal cost. This equality holds regardless of the market structure (perfect competition, monopoly, monopolistic competition, or oligopoly) under study. While the implications of profit maximization for different market structures also differ, the process of maximizing profit is the essentially the same.

Other Objectives

On a day-to-day basis most firms likely pursue goals other than profit maximization. Three most noted objectives are sales maximization, personal welfare, and social welfare.
  • Sales Maximization: Many firms make decisions designed to increase or maximize production and the amount of output sold. More sales means more revenue, but not necessarily more profit.

  • Personal Welfare: Firms are occasionally motivate to increase the personal welfare of owners or employees, especially the employees who control the operation of the firm. Profit is usually sacrificed in the process.

  • Social Welfare: Some firms are also inclined to take actions that they deem will improve the overall well-being of society. These actions also tend to reduce profit.

Natural Selection

Natural selection is the notion that firms best suited to the economic environment on the ones that tend to survive. Those firms that approximate the goal of profit-maximization, whether intentionally or accidently, are the ones most likely to survive and remain in business. This provides justification for presuming that business firms seek to maximize profit, even though they might pursue other goals on a day-to-day basis. Even if firms do NOT actively, consciously pursue the profit-maximization goal, assuming they do is not necessarily unreasonable.

<= PROFIT CURVEPROGRESSIVE TAX =>


Recommended Citation:

PROFIT MAXIMIZATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: September 1, 2014].


Check Out These Related Terms...

     | firm objectives | natural selection | legal business organizations | ownership liability | firm | company | enterprise | plant | factory | industry |


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