Methods for Profit Maximisation

Profit maximisation is essential for all enterprises as, without profit, the company will not be able to sustain itself in the competitive market. All the enterprises need to think about their progress. In order to maximise the profit, a company needs to have a look at its total cost and total revenue.

In other words, the process through which all the enterprises regulate their manufacturing cost and output level in order to generate the greatest profit can be defined as profit maximisation.

Methods for profit maximisation

Difference between total revenue and total cost

As we already know, the difference between total revenue and the total cost is an enterprise’s total profits. Therefore by increasing the sales of the component at a particular price, total revenue can be increased. That means total profits will keep on increasing as long as total revenue begins to exceed the change in the total cost of production. 

In this scenario, it can be said that the firms in perfect competition can figure out the exact quantity of commodities needed to be sold to earn higher profits.

Profit Maximisation through profit maximising output level (i.e. Difference between marginal revenue and marginal cost)

An alternative to the above-discussed concept is comparing marginal revenue and marginal cost. The profit can be maximised using the MR MC approach. 

According to it, the change in the total cost of production and the manufacturing of additional units is called MC (marginal cost). It can be represented as the change in total cost over the change in quantity. 

A firm operating in a perfectly competitive market is considered to be perfectly elastic. That means MR is considered equal to the demand curve. This means that every time there is a demand for additional units that a company produces, then the revenue of the company will be increased by the exact amount equal to the current market price.

Marginal revenue does not change with the increase in production units. The marginal cost tends to change a lot with the increase in quantity production.

Profit maximisation through producers equilibrium

The concept of profit maximisation level can be understood through the producer’s equilibrium.

According to this concept, for the business to achieve maximum profit, it must attain a state of equilibrium. A particular firm that produces is said to be in equilibrium when its level of output gives rise to the maximum difference between total cost and total revenue. There must be no disposition in order to change its existing level of production. The state is considered to be the reflection of minimising losses or maximising profits.

Producer in a perfect competition market

In order to attain profit in a perfectly competitive market, the organisation must be clear with the number of units it needs to manufacture or sell. It must do that at a price fixed by the industry an enterprise belongs to. This way, the consumers can buy several units of units they wish at the unfiltered market price. At this point, the company has a perfectly elastic demand curve for the production services.

When the company decides the number of commodities, it wishes to produce. Then the quantity and the prices of input and output govern the total cost of production, total revenue, and total profits of the enterprises.

Conclusion

In order to produce additional units, the per-unit cost is known as marginal cost. Marginal costs can come from the cost of production, including both fixed and variable costs. The fixed costs are calculated when there is a requirement to expand the production of an enterprise. In comparison, the variable costs remain included in the marginal cost.