In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue -- total cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue -- marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost. Face-to-face trading interactions on the New York Stock Exchange trading floor. ... In economics and business, the price is the assigned numerical monetary value of a good, service or asset. ... This article or section does not cite any references or sources. ... In microeconomics, Marginal Revenue (MR) is the extra revenue that an additional unit of product will bring a firm. ... In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. ... Perfect competition is a model in economic theory. ...

Basic Definitions

Any costs incurred by a firm may be classed into two groups: fixed cost and variable cost. Fixed costs are incurred by the business at any level of output, including zero output. These may include equipment maintenance, rent, wages, and general upkeep. Variable costs change with the level of output, increasing as more product is generated. Materials consumed during production often have the largest impact on this category. Fixed cost and variable cost, combined, equal total cost. For other uses, see Corporation (disambiguation). ... Fixed costs are expenses whose total does not change in proportion to the activity of a business, within the relevant time period or scale of production. ... Variable costs or direct costs are expenses that change in direct proportion to the activity of a business. ... This page is a candidate for speedy deletion, because: it does not contain meaningful content If you disagree with its speedy deletion, please explain why on its talk page or at Wikipedia:Speedy deletions. ...

Revenue is the total amount of money that flows into the firm. This can be from any source, including product sales, government subsidies, venture capital and personal funds. For the tax agency in Ireland of the same name, see Revenue Commissioners. ... In economics, a subsidy is generally a monetary grant given by a government to lower the price faced by producers or consumers of a good, generally because it is considered to be in the public interest. ... Venture capital is a general term to describe financing for startup and early stage businesses as well as businesses in turn around situations. ...

Marginal cost and revenue, depending on whether the calculus approach is taken or not, are defined as either the change in cost or revenue as each additional unit is produced, or the derivative of cost or revenue with respect to quantity output. It may also be defined as the addition to total cost as output increase by a single unit. For instance, taking the first definition, if it costs a firm 400 USD to produce 5 units and 480 USD to produce 6, the marginal cost of the sixth unit is approximately 80 dollars, although this is more accurately stated as the marginal cost of the 5.5th unit due to linear interpolation. Calculus is capable of providing more accurate answers if regression equations can be provided. In physics, the term renormalization refers to a variety of theoretical concepts and computational techniques revolving either around the idea of rescaling transformations, or around the process of removing infinities from the calculated quantities (see also regularization). ... For other uses, see Calculus (disambiguation). ... This article is about derivatives and differentiation in mathematical calculus. ... Linear interpolation is a process employed in mathematics, and numerous applications including computer graphics. ... Generally, regression is related to moving backwards, and the opposite of progression. ...

Total Cost-Total Revenue Method

Profit Maximization - The Totals Approach

To obtain the profit maximizing output quantity, we start by recognizing that profit is equal to total revenue minus total cost. Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph. Finding the profit-maximizing output is as simple as finding the output at which profit reaches its maximum. That is represented by output Q in the diagram. profit maximization -the totals approach File links The following pages link to this file: Profit maximization Categories: GFDL images ... profit maximization -the totals approach File links The following pages link to this file: Profit maximization Categories: GFDL images ...

There are two graphical ways of determining that Q is optimal. Firstly, we see that the profit curve is at its maximum at this point (A). Secondly, we see that at the point (B) that the tangent on the total cost curve (TC) is parallel to the total revenue curve (TR), the surplus of revenue net of costs (B,C) is the greatest. Because total revenue minus total costs is equal to profit, the line segment C,B is equal in length to the line segment A,Q.

Computing the price at which to sell the product requires knowledge of the firm's demand curve. The price at which quantity demanded equals profit-maximizing output is the optimum price to sell the product.. The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...

Marginal Cost-Marginal Revenue Method

Profit Maximization - The Marginal Approach

If total revenue and total cost figures are difficult to procure, this method may also be used. For each unit sold, marginal profit equals marginal revenue minus marginal cost. Then, if marginal revenue is greater than marginal cost, marginal profit is positive, and if marginal revenue is less than marginal cost, marginal profit is negative. When marginal revenue equals marginal cost, marginal profit is zero. Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue. This is because the producer has collected positive profit up until the intersection of MR and MC (where zero profit is collected and any further production will result in negative marginal profit, because MC will be larger than MR). The intersection of marginal revenue (MR) with marginal cost (MC) is shown in the next diagram as point A. If the industry is competitive (as is assumed in the diagram), the firm faces a demand curve (D) that is identical to its Marginal revenue curve (MR), and this is a horizontal line at a price determined by industry supply and demand. Average total costs are represented by curve ATC. Total economic profits are represented by area P,A,B,C. The optimum quantity (Q) is the same as the optimum quantity (Q) in the first diagram. profit maximization - the marginal approach File links The following pages link to this file: Profit maximization Categories: GFDL images ... profit maximization - the marginal approach File links The following pages link to this file: Profit maximization Categories: GFDL images ... Average total cost is the cost of making all of the widgets divided by the number of widgets made. ...

If the firm is operating in a non-competitive market, minor changes would have to be made to the diagrams.

See also

• Supply and demand
• Market forms, Microeconomics
• pricing
• production, costs, and pricing
• corporation
• business organization

The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... In microeconomics, the main criteria by which one can distinguish between different market forms are: the number and size of producers and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely. ... Microeconomics (or price theory) is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold. ... This article does not cite any references or sources. ... In microeconomics, production is the act of making things, in particular the act of making products that will be traded or sold commercially. ... For other uses, see Corporation (disambiguation). ... Business organizations is an area of law that covers the broad array of rules governing the formation and operation of different kinds of entities by which individuals can organize to do business. ...

External links

• Pricing To Maximize Total Profits

References