This increases the government spending and consequently the income and money flow in the economy. (Beamer, 2000) Thus profits are not merely a function of MR & MC
Ricardo was a vehement critic of this acquiesces and Ricardo maintained that the equilibrium will be reached, no matter what surplus seems to exist in the short run. (Brown, 2004) The profit maximizing firm keeps the activity level at where the Marginal Revenue will equal Marginal Cost (MR=MC)
So the measure becomes in terms of services cost and fund budgets to meet the cost. (Cutt; Murray, 2000) That organizations can exist without making a profit is a challenge to the theory but then the costs of such firms are created by benevolence and grants and the expenditure done on the allocation of the resources at the optimum
This is sought to be achieved by better production process and standardization and other management parameters and not based merely on economic considerations. (Eckes, 2001) One of the interesting models that have been propounded as the alternate is the biological models that would be inconceivable normally in the case of the business firm
This is critical and for this firms tend to take up better production methods that cut costs and always try to increase revenue by cutting costs. (Hirschey, 2009) Therefore a firm strives to achieve the optimum sale and the least cost remaining within the equilibrium
There is a 'profit factor' that is shown to be a reward for entrepreneurial labor. (Obrinsky, 1983) These were the seeds that later became the classical theory of profits, by beginning from the theory of wages and rent
One of the key elements that determine the profitability of the small firm is often the industry's long-run profit potential and the adopting of proper profitable strategies. (Reid; et al
Though in sum and substance the marginal analysis cannot be rejected, it is argued that all theories proposed so far have their own flaws. (Vromen, 1995) The difference in the estimate of profit maximization came with the macroeconomic concepts
Richard Nelson and Sidney Winter were responsible for this, by, in 1982, combining the earlier Alchian-Becker arguments with the new institutionalists' theories of the firm. Afterwards, profit maximization theory was linked to utility theory and decision theory (Haring & Smith, 1959)
They presented the idea that "business firms maximize profit as a means to maximize the utility of their owners. In a word: businessmen maximize profit as a means to maximizing utility, so profit maximization follows from utility maximization" (Ormazabal)
Therefore the consumers in this market have no choice but to buy from that one firm or not at all. For this reason, the monopolist is known as a price-maker because it has the opportunity to set prices at any desired level (Mankiw, 2000)
These are barriers to entry, such as legal restrictions and patents and cost advantages of large-scale operation. With these barriers, the monopolist is able to set a level of output that is in accordance with the rule of profit maximizing (Pindyck & Daniel, 2000)
This is because the government may not harbor any intent to earn profit. As a result, it would provide a good even when there is no profit at a very low price so that the good remains available to the consumer (Varian, 2003)
An increase in the level of production supplements extra cost than revenue and this in turn implies the decrease in profit. On the other hand, a decrease in the level of production takes away extra revenue than cost which also implies that the profit level decreases (McConnell, Brue, and Flynn, 2012)
Therefore, = TR -- TC with TR being total revenue and TC being total cost In order to maximize profits, must be equal to zero. But, and Therefore, MR = MC at the profit maximization level of output (Mudinda, 2003)