4.1.4.7 ~ Profit

• Profit maximisation: (MC=MR)

  Why? Because you want output to be as high as possible but don’t want MR to be lower than MC

  
• How do you reduce the risk of profit satisficing?

  • Pressures from the stock market

  • Regular meetings with shareholders (e.g. AGM)

  • Performance related pay (to provide incentives)
• Normal profit:

  AR=AC
• Abnormal profit:

  AR > AC
• Why is normal profit referred to as profit:

  Because firms will count imputed costs (value of the next best alternative) meaning that AC's are overestimated
• Abnormal profit:

  • AR > AC

  
• Normal profit:

  AR = AC