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Tanima Dutta, Lovely Professional University Unit-18: Profit Maximization and Full Cost Pricing Theories

Notes
Unit-18: Profit Maximization and Full Cost
Pricing Theories

CONTENTS
Objectives

Introduction

18.1 Profit Maximization Theory

18.2 Theory of Full-Cost or Average Cost Pricing
18.3 Summary

18.4 Keywords

18.5 Review Questions
18.6 Further Readings

Objectives

After studying this unit, students will be able to:
• Understand Full Cost Pricing Theories.
• Know Profit Maximization regarding perfect competition.
• Explain the criticisms of Full Cost Pricing Theories.
• Understand Theory of Average Cost Pricing.

Introduction

The main objective of Firm’s new-classical theory is Profit maximization. But more of experiences
certificates indicate another objective of firm as sales maximization, production maximization,
satisfaction maximization, utility maximization etc. Some of the theories will be analyzed in next
chapter. This chapter analysis in the form of first research of Firm’s new-classical theory, and Theory
of Full-Cost or Average Cost Pricing by Hall, Hich and Andruz.

18.1 Profit Maximization Theory

The main objective is full cost pricing of any commercial firm in firm’s new classical theory. Firm
maximizes the profit when it satisfies two rules (1) MC = MR and (2) MR curve is cut by MC curve
from bottom. The meaning of profit maximization is accurate profit which is greater than the average
cost price of a product. This is the amount which is left with the producer after making the entire
payment, it also contains the wages of management. In other words, it is Residual income, which is
more from average profit. The condition of profit maximization of firm is described through—

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