Goals of the Firm - Profit Maximisation

Unit 1 > Module 2 > Topic 1

The goals of the firm are basically what the firm aims to do by staying in business; it’s their purpose. A firm may have several goals, but typically has a main thing they strive for, some popular aims are:

1. Profit Maximization

• Normal Profit - This is the minimum amount of profit necessary to entice the firm to keep producing. Typically it’s determined by the amount of money the entrepreneur is foregoing by setting up his own business. It’s the amount of money he could be making working the next best job.  So if someone makes $5000 a month working as a clerk and they decide to set up their own store they need to make at least $5000 in profit or else they might as well go back to being a sales clerk since it’s more profitable.

• Abnormal Profit - This is anything in excess of the normal profit, it’s the extra. 

This is typically the main thing that keeps a firm in business; entrepreneurs try to make largest profit they can as a reward for the risk of entrepreneurship. It serves as motivation to the firm to stay in business and naturally you’ll try to make the biggest profit you can. There are two types of profit:

The profit maximization level is the point where profits cannot be increased further, at this point marginal revenue is equal to marginal cost.

retarded MS paint graph *shame*

q1 = MR > MC at this point the revenue from producing one more unit is greater than the cost of producing one more unit so the firm should there increase production to maximise profit until you get to point q

q2 = MR < MC at this point the cost of producing another unit is higher than the revenue you make from it, you’re making a loss and should therefore cut back production until you get to point q

q = MR = MC profit maximisation! this is the optimum point where you’re making as much profit as you can and you shouldn’t change a thing cause you’ll mess it up.