Page 309 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Maximize π(Q)

Where π(Q) = R(Q) – C(Q)
Where π(Q) is profit, R(Q) arrival, C(Q) cost, and Q is the sold units of production.
Above description about rules and condition of profit maximization are applied to perfect competition
firm and monopoly’s firm.

Its Assumptions

The profit maximization theory is based upon following points:
1. The purpose of firm is profit maximization where the difference between arrival and cost profit.
2. Producer is owner of his own firm.
3. Interests and habits of consumers are constant.
4. The technologies of production are given.
5. Firm produces goods which are perfectly individual, separated and full of standardization.
6. Firm has the complete knowledge i.e. on how much cost and quantity of a product can be sold.
7. Firm has certain knowledge about demand and cost.
8. New firm can enter with long time period in industry. In short time, it is not possible.
9. Firm makes profit maximization in some time horizon.
10. Firm makes profit maximization in both short-term period and long-term period.

Self Assessment

Fill in the blanks:
1. The main objective of a firm’s new classical theory is ......................... maximization.
2. The mean of profit maximization is accurate profit which is ......................... than the average cost
pricing of product.
3. Firm ......................... its profits.

Profit Maximization Under Perfect Competition

In perfect competition, the firm is one of the units from the more production unit. It can’t influence the
market price. It is the only Price Taker and Quality Adjuster. It takes decision of only of those products
which are to be sold, so that it sells on market price. Therefore, the MR curve of firm is similar with
AR curve under perfect competition. MR curve is parallel to x-axis. Because the price is decided by
the market and the firm can sell the product on same price. In this way the firm is balanced when MC
= MR = AR (price). The balance of firm’s profit maximization is shown in Fig. 18.1, where MR curve
cuts the MC curve at the first A point MC = MR. But it is not the point of profit maximization, because
MC curve is sloping down from MR curve after “A”. For a firm, the minimum production OM is not
profitable because firm can take more advantage by doing more production from OM. But the firm
stops the production when it reaches on OM . OM is the particular level of production where the both
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conditions of balancing are fulfilled. If firm wants to make more production from OM it will have to
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bear losses. Because maximum cost is increased from marginal arrival after balancing point B. So the
firm maximizes the total profit in the cost of M B and the level of production OM .
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