a level economics 25 mark essay, can anyone please look at my essayWatch
Profit maximisation occurs when Marginal revenue = marginal costs.
As profits is revenue - costs, a firm could maximise profits by increasing revenue and minimising costs.
To some extent, all firms are aiming to maximise profits for many reasons. Profit making organisations such as Apple will look to maximise profits in order to maximise dividend for owners and increase retained profits for any future expansions. A firm would maximise profits by producing at where Marginal costs = marginal revenue producing at output Qm and setting a price at Pm. At this level of output Qm, firms are able to make supernormal profits. This supernormal profit allows a business to be able to benefit from dynamic efficiency in the long run as in the future they can be able to invest in research and development such as investing in more training schemes for employees. Apple is known for innovating new phones every year, which the supernormal profits they make enable them to do so. Research and development enables a business to also benefit in the long run from economies of scale, as they can be able to cut down their average costs as output increases, which is shown by the sloop down wards curve in the economies of scale diagram. As more training and advanced machinery can help to increase their productivity therefore increasing output which can increase profits as they can be able to meet demand levels. Firms such Apple if they are profit maximising they are able to prevent getting loans and paying interests, which would increase costs and their gearing ratio for the business. Apple for instance is able to benefit from monopsony power in the market also, such as being able to exploit suppliers and forcing them to offer better discounts and deals in order to cut down costs and also they can be able to exploit workers and employees by offering them low wages and salaries therefore enabling them to cut down costs. Many firms aren’t looking to maximise profits by for instance increasing their prices or cutting down costs as they are too small or new to the market but look for other means to find ways to do so in the future. Which is why many firms choose to maximise profits.
Firms would also maximise profits in order to survive for instance. If a firm is predicting a future recession like the one that had occurred in 2008 financial crisis, demand levels and sales is expected to be low, which can lead to potential cashflow problems for the business not being able to pay their liabilities and debts. If a business had previously been maximising profits this wouldn’t have a massive effect on the business as they could use their retained profits to manage the crisis. Without being forced to leave the market.
However, firms that profit maximise aren’t allocatively and productively efficient. This is because they don’t produce at the lowest points in the average costs curve. Which could actual mean that Apple has higher costs than competitors such as Google or Samsung that might have a lower average costs. As the price charged is greater than marginal costs, producers are seen to be over rewarded, and as supply is restricted the product will be under consumed. Which a deadweight welfare loss could also occur between QM to Qc. Maximising profits can be prevented by the CMA with firms being charged up to 10% of their annual revenue. Which is why many firms don’t maximise profits and look at other objectives such as being ethical or profit satificing. Business that are seen ethical tend to have a greater reputation than those that aren’t seen as ethical , for instance JD sales had decreased when people had found out that children had been exploited and used for labour in factories in china. Firms that are ethical aren’t looking to maximise profits might aim to help the local environment and community. Like Greggs for instance that use fair trade, making sure that farmers are paid extra allowing their standards of living to increase. A firm might also profit satisfy by ensuring key stakeholders benefit for instance, ensuring that workers are given a fair wage but at the same time pleasing shareholders with enough dividend, given a balance.
Overall, we can see that most firms aim to maximise profit, as by doing so can come with a lot of benefits such as having monopoly power, it can enable to make supernormal profits and invest in research and development. There are more advantages in maximising profits than there is in choosing any other alternative such as being ethical. However being able to maximise profits would depend on the type of market that the firm operates in.