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Study Notes

Profit Maximisation

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 23 Jul 2021

Profits are maximised at an output when marginal revenue = marginal cost. this is also where marginal profit is zero.

Revision Video: Business objectives including profit maximisation

Profit maximisation for a monopoly - revision video

Profit Maximisation - Revision Video

Benefits from aiming to maximise profits:

  1. Shareholders are likely to benefit from higher dividends (a share of profits)
  2. Employees may gain if some part of their pay is linked to the profitability of the business
  3. Higher profits may lead to increased capital investment spending which will benefit other businesses in industries such as engineering and construction

Drawbacks from aiming to maximise profits:

  1. Higher prices for final consumers which reduces their real incomes / purchasing power and means a lower level of consumer surplus
  2. High profits might act as an incentive for new firms to enter the market – depending on how contestable it is – which in the longer term might reduce the returns to shareholders as competition intensifies
  3. Companies that become overly focused on maximising profits might lose sight of the social / ethical and environmental aspect of businesses to the detriment of local communities.

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