Question

what is profit maximization model? can you kindly explain it in simplest way that i can understand it and give an example of it?

Answer 1

Every firm’s aim is to maximise their profit which is the difference between total revenue and total cost. Higher the total revenue and lower the total cost result a firm can earn maximum profit. A profit-maximizing model of the firm provides very useful guidelines for the decision making regarding optimum resource management. The calculation for profit maximization is illustrated in given Figure below:

In Figure where TR curve represents total revenue earned from selling or output of a product. TC curve shows total costs at different levels of output. It will be seen from the upper part of Figure at OM level of output, total revenue equals total costs. Therefore, point B at which the TR curve cuts TC curve is called break-even point.

Beyond this level of output profits start accruing to the firm and it increases till output level OQ is reached. It will be seen from the upper part of Figure that at output OQ, the difference between total revenue and total cost is maximum; here JH is the largest distance between the TR and TC curves. After point Q if the firm will increase the production then its per unit profit will decrease, so it’s not beneficial for any firm.

Therefore, JH is the maximum profits that can be earned by the firm, given the total revenue and total cost conditions. Every firm should produce their output accordingly.

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