Q. Define Profit maximisation theory?
Profit maximisation theory defines that firms (corporations orcompanies) will establish factories where they see potential to achieve the highest total profit. Company will select a location based upon comparative benefit (where product can be produced the cheapest). The theory draws from characteristics of the location site:labour costs, land price, transportation costs and access, worker unions, environmental restrictions, population etc. Company will then elect the best location for the factory to maximise profits. This is anathema to the idea of social responsibility since firms will place their factory to achieve profit maximisation. They are nonchalant tofair wage policies, environment conservation and exploit the country. The only objective is to earn more profits. In economics, profit maximisation is the process by that a firm concludes the price and output level which returns the greatest profit. There are many approaches to this problem. The total revenue-total cost method depends on the fact that profit equals revenue minus cost. Equating marginal cost and marginal revenue is a better and convenient method for arriving at profit maximising output. It allows firms to check whether they are actually maximising profits at a given level of output by comparing extra revenues and costs produced by the production of an extra unit of output. If this cost of producing an extra unit is less than the addition it makes to total revenue, firm should expand as it would increase total profit. This expansion should continue till MC and MR are equal. Profitsare maximised when this equality is achieved provided marginal cost at this level of output envelops the average cost of the firm. Just in the case MC turns out to be higher than marginal revenue at the point of investigation, firm should contract by decreasing its output to a level where MC equals MR. This method is specifically useful to very large organisations, with multiple divisions and where computation of total cost and total revenue may be a difficult and complex task.