StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Maximizing the Profit - Essay Example

Cite this document
Summary
In the paper “Maximizing the Profit” the author suggests that the farmer is not maximizing his profit because the marginal cost of producing extra pounds is higher than the price. In order to maximize the profit, the farmer needs to produce more so that the average variable cost is reduced…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.8% of users find it useful
Maximizing the Profit
Read Text Preview

Extract of sample "Maximizing the Profit"

The fall in the prices of butter could also be due to the changes in the supply and demand as when the prices started to increase, more and more producers will be willing to supply the butter in the market thus driving down the prices and restoring the equilibrium in the market.Another possible explanation of the same can be found in the substitute goods as when the price of butter is increasing, the demand for the substitute product i.e. margarine may also be increasing. However, when the demand for margarine has started to decrease, the price of butter also fell.

3In perfectly competitive markets there is a large number of sellers and buyers selling homogenous products. Further, everyone has complete information about the market. In such a situation, the economic profit will eventually disappear because when marginal cost equals marginal revenue (equilibrium condition in the perfect markets) the economic profits will be zero. Further, since there are a large number of sellers and buyers therefore if one producer charges higher, more sellers will come into the market and drive the profits down, and eventually, economic profit will disappear.

4The marginal principle states that profits will be maximized when marginal cost is equal to the marginal revenue. When marginal revenue is higher than the marginal cost, the producer will produce more units of goods and will eventually force the prices to come down to the level of marginal cost. Thus producer will decide the production of any good based on the marginal cost i.e. as long as it is lower than marginal revenue, the firm will adjust its production to achieve until both are equal.5No of UnitsPriceMarginal CostVariable CostTotal CostAverage Variable Cost100$22 $45 $2,500 $3,000 $25 The firm shut down point i.e. the point where the firm is indifferent between continuing production and shutting down is achieved when:Price (P) = Average Variable Cost (AVC)In this given situationP= $22AVC = $ 25Since the average variable cost is greater than the price, the firm should shut down its production because it is not even recovering its average variable cost.

The accountant’s statement is flawed in the sense that she is equating total variable costs with the total revenue however; comparison should be between price (marginal revenue) and average variable cost. If the average variable cost is higher than marginal revenue, the firm should shut down to reduce further losses. (Baumol and Blinder)

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Maximizing the Profit Essay Example | Topics and Well Written Essays - 500 words - 1, n.d.)
Maximizing the Profit Essay Example | Topics and Well Written Essays - 500 words - 1. https://studentshare.org/macro-microeconomics/1575867-assignment-microeconomics
(Maximizing the Profit Essay Example | Topics and Well Written Essays - 500 Words - 1)
Maximizing the Profit Essay Example | Topics and Well Written Essays - 500 Words - 1. https://studentshare.org/macro-microeconomics/1575867-assignment-microeconomics.
“Maximizing the Profit Essay Example | Topics and Well Written Essays - 500 Words - 1”. https://studentshare.org/macro-microeconomics/1575867-assignment-microeconomics.
  • Cited: 0 times

CHECK THESE SAMPLES OF Maximizing the Profit

Assignment (Microeconomics)

In that case, the farmer would be Maximizing the Profit.... In that case, the farmer would be Maximizing the Profit.... Now, if the demand for butter drops, producer would cut their production and thus the marginal cost again decreases and they can lessen the price too because now the profit maximizing condition (MR = MC) can be satisfied at the lower price.... This is because if ATC > price (positive profit), more firms will enter and thus absorb the profit and if ATC < price, firms will shut down in long run (as exit is also free in perfect competition) to avoid the economic loss and thus price and ATC again becomes equal – zero economic profit....
2 Pages (500 words) Assignment

What are the key internal factors and external factors to be considered in price decision making

Corporate and marketing objectives of the firm mainly seek to recover the cost elements of all types, to make target returns and to maximize the profit.... Internal Factors Pricing decisions are influenced by a number of internal factors which consist of profit margin, cost of production and other expenses, brand image and expectations of the company, suppliers' and employees' efficiency and responsiveness of the product to the price changes (Kotler, 1997).... Some important examples of other market objectives are survival of the firm in a high competitive atmosphere, current profit maximization, market share leadership and product quality leadership (Munroe, 1990)....
4 Pages (1000 words) Essay

Managing Operations

The reasoning behind this is that, in particular, the decision situations never influences the income, hence minimizing costs will increase the opportunities of Maximizing the Profit (Shim & Siegel, 2002).... Managing Operations Name Institutional Affiliations Introduction The production strategies in most cases are defined by the product and the distribution strategies....
3 Pages (750 words) Essay

Transfer Pricing: Coffee Makers International

Table 1 indicates that Division A's profit would increase by $100,000 if the proposal is accepted.... he information in Table 2 indicates that Division B's profit will increase by $50,000 if the proposal is accepted.... The information in Table 3 indicates that Division C's profit would decrease by $2mn if the proposal is accepted.... This is a very big reduction in profit for Division C and could effectively place the division in a loss position as well as have a negative impact on the company as a whole....
5 Pages (1250 words) Essay

Explain how firms try to extract consumer surplus using two-part tariffs

Figure 1: the figure shows how consumer surplus is obtained when demand is homogeneous; the diagram applies for each consumer In case there are two types of consumers and all the consumers within the same group possess the same demand curve then the only way to capture consumer surplus is through Maximizing the Profit function with respect to the price.... Market power, on the other hand, refers to the firm's ability to raise the price of a commodity in the market over the marginal cost of producing the good in order to increase profit....
4 Pages (1000 words) Essay

Tip Top Accessories - Elements of the Extended Marketing Mix

Low price and product differentiation can be the critical elements in Maximizing the Profit of Tip Top accessories.... Explain how prices for "tip Top Accessories" product should be set to achieve the organization's profit and growth objectives, bearing in mind market conditions....
5 Pages (1250 words) Essay

Differences between Monopolistic Competition and Monopoly

For Maximizing the Profit, a Monopoly increases its output to the level where Marginal Cost (MC) intersects the Marginal Revenue (MR) as shown in the figure 1.... The diagram shows the profit maximization point for a monopolist.... the profit maximization point lies where Marginal Revenue = Marginal Cost.... Keeping in view, a Monopoly always wants to maximize its profit.... The economic profit is the difference between the Demand and ATC curve....
4 Pages (1000 words) Essay

Traditional Methods and Activity-Based Costing

This report explains the traditional methods of cost accounting adopted by the management and the method of activity based costing as an alternative to the traditional methods for better costing of manufacturing and overhead costs. These methods are explained in detail below… the modern method of activity based costing is also explained with brief advantages of the method for a clear estimation and allocation of overhead cost. The method of allocation of cost is suitable when there is a clear separation of the most suitable components on basis of (Accounting Tools) If a company produces 2 different products namely Pi and Chi, the Company has cost of overheads which is 500....
4 Pages (1000 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us