Essays on The Methodology of Profit Maximization Case Study

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The paper “ The Methodology of Profit Maximization” is a cogent variant of the case study on finance & accounting. Profit Maximisation  is whereby a firm can determine and allocate the  price  and  output  level that generates the highest profit yield for the firm (Samuelson & Marks, ). Before tackling the methods that deal with profit maximization several concepts must be taken into account which is Revenue, Costs, and Marginal Revenue and Cost. Costs are the expenditures the firm incurs during operation and also when idle, costs are divided into two distinctions which are Fixed and Variable Costs.

Fixed costs are costs that are incurred regardless of production status for example rent and salaries, while Variable Costs that are dependent upon the amount of quantity produced by the firm for example the cost for raw materials used in which if there is a low amount of production then there is a lesser amount of raw material used as compared to a production facility operating at a high capacity whereby higher costs will accumulate due to greater use of raw materials (Varian, Hal R. Intermediate Microeconomics: A Modern Approach 1999).

Revenue is the amount of money that a firm receives from its economic activities such as money from the sale of services and goods. Marginal Cost and Revenue in simple is defined as the difference in cost or revenue for every additional unit added to production (Wiley 2003)There are two methods that tackle the concept of profit maximization which are the Total Revenue (TR) – Total Cost (TC) method and the Marginal Revenue (MR) =Marginal Cost (MC) method. The TR-TC method is based upon the simple calculation of profit that is that Profit equals total revenue minus the total cost.

While the MR-MC method uses the concept that in a perfectly competitive market total profit reaches its maximum when Marginal Cost equals Marginal Revenue. For the profit maximizing output quantity using the TR-TC method, we start by taking into consideration that profit is equal to total revenue (TR) minus total cost (TC). This method is illustrated by the following diagram: The output quantity is whereby TR-TC gives the highest amount as can be seen in the diagram where at CQ intersects the TC curve at point B.

References

Anderson, WL., & Ross, RL. (2005). The methodology of profit maximization: An Austrian alternative. Quarterly Journal of Austrian Economics, 8(4): 31-44.

Arnold Kling. (n.d.). Producers and profit maximisation. [Online] Available at: http://arnoldkling.com/econ/markets/producer.html Accessed April 28, 2010.

Bamford, C. (2002). Economics. Cambridge: Cambridge University Press

Grant, S. (2000). Introductory Economics. Essex: Longman.

Hart, S. (2006). Robert Aumann’s game and economic theory. Scand. J. of Economics. 108: 185-211.

Hu, S. (2008).An equilibrium analysis of the revenue-maximizing multinational enterprise. Frontiers of Economics in China, 3(3): 482-495.

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