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Last updated 23 Jul 2021
Profits are maximised at an output when marginal revenue = marginal cost. this is also where marginal profit is zero.
Profit maximisation for a monopoly - revision video
Benefits from aiming to maximise profits:
- Shareholders are likely to benefit from higher dividends (a share of profits)
- Employees may gain if some part of their pay is linked to the profitability of the business
- 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:
- Higher prices for final consumers which reduces their real incomes / purchasing power and means a lower level of consumer surplus
- 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
- 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.