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Profit maximisation - Essay Example

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Profit maximisation

A monopolist maximises his profit at the level of output where the marginal cost equals the marginal revenue. That is MR=MC. In order to determine the profit maximising level of production, the monopolist supplements its information about the prices and market demand for data on the costs of production at different levels of output. A monopolist cannot maximise profit by charging the highest price possible (market price yielding maximum benefits). Rather, it will maximise profit at the level where the Total Revenue minus the Total Cost is the highest. The difference between TR and TC is a function of price and the quantity sold. Profit maximisation in a pure monopoly structure is presented in the figure below.
The monopoly cannot maximise its profits at the points where the MC is equal to the demand or where the average total cost equals the marginal cost. At these levels of output, the revenue generated would only be sufficient to cater for the cost of production. Rather, profit is maximised at the level of output where MR=MC.
An oligopolistic market structure is characterised by few but large firms in the market. In making their economic decisions, firms in this market structure consider the behaviour of other firms in the market. The reason for such consideration is because any slight changes in the prices, output or expansion may have significant effects on the profitability of the firms in the market. In an oligopolistic market, profits will be maximised at the point where the price p intersects with the marginal revenue and the marginal cost curves (Baumol and Blinder, 2012). At this point, the MC=MR and MC cut the MR in its vertical portion. Profit maximisation thus occurs at price p. When the MC shifts in the vertical part of the MR, price P does not change. The movement of MC under the oligopolistic market makes insignificant price effects and hence consumers do ...Show more

Summary

As applied in economics, profit maximisation refers to the long run or short run process by which the firms in the market determine the output level and price at which they would make the greatest profits. While firms strive to maximise their total revenues and minimise the…
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