Profit maximisation
Topic: Theory of the Firm, Supply and Perfect Competition · NCERT: Class 12, Ch 4 "The Theory of the Firm under Perfect Competition"
Meaning
Profit maximisation is the firm's aim to produce the output at which profit (TR − TC) is the highest. NCERT assumes the firm is a "ruthless profit maximiser" that sells all it produces. For a competitive firm with positive output, three conditions must hold:
- p = MC.
- MC is not falling at that output.
- Price covers the relevant average cost: p ≥ AVC in the short run, and p ≥ LRAC in the long run.
Example
In NCERT Exercise 21, the price is ₹10. Profit is −₹5, −₹5, −₹2, ₹3, ₹9 and ₹12 for 0 to 5 units, then falls to ₹11 at 6 units. So the firm produces 5 units.
Don't confuse with
- Sales (revenue) maximisation: Baumol's view that firms try to maximise revenue, subject to earning a minimum profit, rather than maximising profit itself.