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Concept
Profit maximization
Summary
In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit (or just profit in short). In neoclassical economics, which is currently the mainstream approach to microeconomics, the firm is assumed to be a "rational agent" (whether operating in a perfectly competitive market or otherwise) which wants to maximize its total profit, which is the difference between its total revenue and its total cost.
Measuring the total cost and total revenue is often impractical, as the firms do not have the necessary reliable information to determine costs at all levels of production. Instead, they take a more practical approach by examining how small changes in production influence revenues and costs. When a firm produces an extra unit of product, the additional revenue gained from selling it is called the marginal revenue (), and the additional cost to produce that unit is called the marginal cost (). When the level of output is such that the marginal revenue is equal to the marginal cost (), then the firm's total profit is said to be maximized. If the marginal revenue is greater than the marginal cost (), then its total profit is not maximized, because the firm can produce additional units to earn additional profit. In other words, in this case, it is in the "rational" interest of the firm to increase its output level until its total profit is maximized. On the other hand, if the marginal revenue is less than the marginal cost (), then too its total profit is not maximized, because producing one unit less will reduce total cost more than total revenue gained, thus giving the firm more total profit. In this case, a "rational" firm has an incentive to reduce its output level until its total profit is maximized.
There are several perspectives one can take on profit maximization.
Official source
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