Home > Profit maximization
4 Modes of Operation
It is assumed that all firms are following rational decision-making, and will produce at the profit-maximizing output. Given this assumption, there are four categories in which a firm's profit may be considered.
A firm is said to be making an economic profitA firm is said to be making an economic profit when its average total cost is greater than the price of the product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total when its average total cost is greater than the price of the product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.
A firm is said to be making a normal profit when its economic profit equals zero. This occurs where average total cost equals price at the profit-maximizing output.
If the price is between average total cost and average variable cost at the profit-maximizing output, then the firm is said to be in a loss-minimizing condition. The firm should still continue to produce, however, since its loss would be larger if it was to stop producing. By continuing production, the firm can offset at least its fixed cost and part of its variable cost, but by stopping completely they would lose equivalent to their fixed cost.
If the price is below average variable cost at the profit-maximizing output, the firm is said to be in shutdown . Losses are minimized by not producing at all, since any production would not generate returns significant enough to offset any fixed cost and part of the variable cost. By not producing, the firm loses only its fixed cost.
- See also: Supply and demandsupply and demand model describes how prices vary as a result of a balance between product availability and demand. The graph depicts an increase in demand from D to D along with the consequent increase in price and quantity required to reach a new equili, Market formIn economics, the main criteria by which one can distinguish between different market forms are: the number and size of producers and consumers on the market, the type of goods and services being traded, and the degree to which information can flow freelys, MicroeconomicsMicroeconomics is the study of the economic behaviour of individual consumers, firms, and industries and the distribution of production and income among them. It considers individuals both as suppliers of labour and capital and as the ultimate consumers o, pricing, production, costs, and pricing
4.1
Economics
