$1000 on utilities and office expenses. Sonya owns a cash register, which she bought for $2000 from her savings accounts. At the end of the year, Sonya was offered $1600 for her cash register machine. Calculate Sonya’s: (a) Explicit (b) Implicit (c) Economic profit Goals of Firms Profit Maximization An assumption in classical economics is firms seek to maximize profits. Profit = Total Revenue Total Costs Therefore, profit maximization occurs – at the biggest gap between Total revenue and total costs. A firm can maximize profits if it produces at an output where Marginal revenue (MR) = Marginal cost (MC) Diagram of Profit Maximization To understand this principle, look at the above diagram. If the firm produces less than Q1, MR is greater than MC. Therefore, for this extra output, the firm is gaining more revenue than it is paying in costs. Total revenue will increase. Close to Q1, MR is only just greater than MC, therefore, there is only a small increase in profit. But, profit is still rising. However, after Q1, the marginal cost of the output is greater than the marginal revenue. This means the firm will see a fall in its profit level. Usually, in economics we assume firms are concerned with maximizing profit. Higher profit means: Higher dividends for shareholders. More profit can be used to finance research and development. Higher profit makes the firm less vulnerable to takeover. Higher profit enables higher salaries for workers Alternative Aims of Firms
$1000 on utilities and office expenses. Sonya owns a cash register, which she bought for $2000 from her savings accounts. At the end of the year, Sonya was offered $1600 for her cash register machine. Calculate Sonya’s: (a) Explicit (b) Implicit (c) Economic profit Goals of Firms Profit Maximization An assumption in classical economics is firms seek to maximize profits. Profit = Total Revenue – Total Costs Therefore, profit maximization occurs at the biggest gap between Total revenue and total costs. A firm can maximize profits if it produces at an output where Marginal revenue (MR) = Marginal cost (MC) Diagram of Profit Maximization To understand this principle, look at the above diagram. If the firm produces less than Q1, MR is greater than MC. Therefore, for this extra output, the firm is gaining more revenue than it is paying in costs. Total revenue will increase. Close to Q1, MR is only just greater than MC, therefore, there is only a small increase in profit. But, profit is still rising. However, after Q1, the marginal cost of the output is greater than the marginal revenue. This means the firm will see a fall in its profit level. Usually, in economics we assume firms are concerned with maximizing profit. Higher profit means: Higher dividends for shareholders. More profit can be used to finance research and development. Higher profit makes the firm less vulnerable to takeover. Higher profit enables higher salaries for workers Alternative Aims of Firms