Profit Maximization Definition:
Profit Maximization is defined as producing at the quantity where a firm’s marginal cost equals marginal revenues i.e. MC = MR.
Profit Maximization Example Explanation:
Profit maximization is assumed to be the business objective of most firms in Economics unless specified otherwise. Let’s say you sell rubber bath ducklings. Marginal revenue is the revenue you gain from selling an extra duck. Marginal cost is the cost you incur by producing one extra duck. If marginal revenue is higher than marginal cost (MR > MC), it would mean selling an extra duck will make you a profit of (MR – MC). Hence you will want to produce more, until the point where MC = MR. If marginal cost is higher than marginal revenue (MC > MR), it would mean selling an extra duck will make you a loss in profit of (MR – MC). Hence you will want to produce less, until the point where MC = MR. Therefore firms maximise profits by producing at MC = MR for all market structures.
Profit Maximization Notes with Diagrams/Graphs:
Want a closer look? Download these profit maximization notes.
The left video explains profit maximization, the right explains various business objectives including profit, revenue and sales maximization as well as satisficing.