Major expenses in building are for land, materials, and labour. In each case they are high when the commodity is scarce and low when it is abundant, and they influence planning more directly when they become restrictive. Definition No one has ever succeeded in neatly defining the scope of economics. Perhaps the only foolproof definition is that attributed to Canadian-born economist Jacob Viner:
According to traditional economic theory profit maximisation is the sole objective of business firms. Profit maximisation means the largest absolute amount of money profits in given demand and supply conditions.
Conventional price theory is based upon profit maximisation hypothesis. Profit maximisation hypothesis helps not only in predicting the behaviour of business firms but also the price-output behaviour under different market conditions.
No other hypothesis can explain and forecast the behaviours of firms better than this hypothesis. Under perfect competition individual firms have to maximise their profits at price determined by industry. Under imperfect competition firms search their profit maximising price output as they are price makers.
The profit can be defined as the difference between total revenue and total cost.
A firm will maximise its profit at that level of output at which the difference between total revenue and total cost is maximum. Generally conventional price theory determines profit maximising price-output in terms of marginal cost MC and marginal revenue MR.
Marginal revenue is the addition to total revenue from the sale of an additional unit of a commodity. Marginal cost is the additional unit cost of the commodity.
The two profit maximising conditions are: Let us explain these two conditions. We take first condition. Now we take the second condition. The first condition though a necessary but not a sufficient condition to maximise profits. Therefore, fulfillment of second condition is also necessary.
It is illustrated by Fig. The Second condition of profit maximisation requires that MC be rising at the point of its intersection with the MR curve. This means that the MC curve must cut MR curve from below i. At point E both the conditions are satisfied i. This approach is based on the following assumptions: The world is one of certainty.
The firm knows with certainty its demand and cost function. The firm acts with a time horizon which depends on various factors such as the rate of technological progress, the capital intensity of the method, of production, the nature and gestation period of the product etc.
The firm aims at the maximisation of its profits over this time horizon. The goal of the firm is long-run profit maximisation.Profit has several meanings in economics. At its most basic level, profit is the reward gained by risk taking entrepreneurs when the revenue earned from selling a given amount of output exceeds the total costs of Supernormal profit is also called economic profit, and abnormal profit, and is earned when total revenue is greater than the.
Home > Micro-economics > Costs > Economics – profit and revenue. Economics – profit and revenue. Total revenue (TR): This is the total income a firm receives. Profit maximisation. In classical economics, it is assumed that firms will seek to maximise their profits.
Economic cycle – Recession reduces demand for normal goods. Likewise, if there is negative economic profit, then firms will exit the market to take advantage of opportunities elsewhere until economic profit again equals zero.
However, in the short run it is possible for a perfectly competitive firm to make a positive economic profit, an instructors will commonly ask where the profit maximizing point is.
A firm could sell good1 for $4 and sell 30 of them with a cost of $40 and make a profit maximization profit of $ Out of the approaches, this method, while the simplest to calculate, it is inefficient to work out each possible set.
and international in scale. Whether the economics news relates to direct economic transactions such as. ADVERTISEMENTS: Profit Maximisation Hypothesis of Traditional Economic Theory!
According to traditional economic theory profit maximisation is the sole objective of business firms.
Profit maximisation means the largest absolute amount of money profits in given demand and supply conditions. Conventional price theory is based upon profit .
Get Full Text in PDF. Table of Contents. Introduction; Tools and Measures; Measures of National Income; Need for New Theory; Measures and Indicators; Characteristics of a Successful Indicator.