In economic analysis the most common objective that firms are regarded pursuing is profit maximization. It best explains the normal behavior of the firm. The profit maximization model is based on the assumption that each firm seeks to maximize its profit under certain constraints (technical and market).
Propositions of the Model:
By employing certain techniques of production, a firm converts various inputs into outputs of higher value. •
Each firm aims to earn maximum profit.
A firm operates under given market conditions.
Alternative course of actions are selected to maximize consistent profits. •
Attempts are made by the firms to change its prices, input and output quantity in order to maximize profit.
Profit Maximization Model:
Profit-maximization implies earning highest possible amount of profits during a given period of time. A firm has to generate largest amount of profits by building optimum productive capacity both in the short run and long run depending upon various internal and external factors and forces. There should be proper balance between short run and long run objectives. In the short run, a firm has its own technical and managerial constraints whereas in the long run, a firm will have adequate time and ample opportunity to make all kinds of adjustments and readjustments in production process and in its marketing strategies.
Assumptions of the Model:
The profit maximization model is based on three important assumptions. They are as follows:- •
Profit maximization is the main goal of the firm.
Rational behavior on the part of the firm to achieve its goal of profit maximization. •
The firm is managed by owner-entrepreneur
Determination of Profit:
Profit maximization can be explained in two different ways:
Total Revenue (TR) and Total Cost (TC) Approach: Profits are estimated by comparing TR and TC, where profit is the difference between TR and TC (Profit=TR-TC). •
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