profitmaximisation

Profit maximisation is the process by which firms aim to achieve the greatest possible profit given their cost and revenue structures. Profit is defined as total revenue minus total costs, including fixed and variable costs. In neoclassical economic analysis, firms select output and input levels that maximize profit subject to technology, input costs, and market constraints.

In mathematical terms, profit is π(Q) = TR(Q) − TC(Q). The standard result is that the profit-maximizing quantity occurs where marginal revenue equals marginal cost (MR = MC). In the short run, a firm will operate if its revenue at the chosen output covers variable costs. In perfectly competitive markets, price equals marginal revenue, so the condition simplifies to P = MC. In imperfect markets, the firm faces downward-sloping demand and MR lies below price; the profit-maximizing output is still found where MR = MC, with price determined from the demand curve.

Profit maximisation is often contrasted with other objectives such as revenue maximisation, growth, or market share. It assumes rational decision-making and the ability to adjust output and factors of production. Real firms face uncertainty, adjustment costs, capital constraints, taxes, regulation, and strategic considerations, which can lead to deviations from the simple MR = MC rule.

Limitations: The standard model abstracts from ethical, social, and environmental costs; externalities may be ignored; managers may have non-financial goals; and long-term profitability can be affected by factors not captured in a short-run MR = MC framework.