Profit Maximization Theories Applicable to Firm - Micro economics Term Paper

Profit Maximization Theories Applicable to Firm - Micro economics - Term Paper Example In accounting a negative difference implies a loss, whereas a positive one implies a profit. Mathematically, calculating profit shall be: Total revenue is the total value expected and received by a firm from the sales of its goods and services. Total revenue on the other consists of all factors of production and other operational considerations. In economics, there are other types of costs that come into play, for instance, opportunity cost, and not specifically those costs that involve explicit monetary payments. The accounting profit implies the monetary values reported in the books, whereas the economic profit includes other factors such as the non quantifiable opportunity costs, implicit and explicit resources employed. Firms face certain constrains in the process of maximizing their profits. The main constraints face by profit maximizing firms include: technology, prices of factors of production and the demand for a firms product. According to Hall and Marc (201), a firm’s total revenue is the total inflow of receipts from selling output. Theoretically firms can be grouped from two extremes; perfectly competitive firm and monopoly, each facing different demand curves. The concept of demand is closely related to the understanding of profit maximization. A perfectly competitive firm has a horizontal demand curve implying high elasticity. A monopolist demand curve on the other hand faces the whole market demand curve, which is highly inelastic. Understanding the concept of profit maximization, graphical and mathematical analysis becomes imperative. If an assumption of perfect market is made for a profit maximization firm. Where p is the unit price for each product from the organization and q is the total number of quantities sold by the firm. Conventionally, small q are used instead of the capitalized version, Q as it is used to imply the whole market. From figure 1, an increase in