We need to understand this according to the syllabus:

  • Distinction between normal (zero) and supernormal (abnormal) profit
  • Profit maximization in terms of total revenue and total costs, and in terms of marginal
    revenue and marginal cost
  • Profit maximization assumed to be the main goal of firms but other goals exist (sales volume maximization, revenue maximization, environmental concerns)

First review the difference between normal and supernormal (or abnormal) profit explained in this video by mjmfoodie:

Then, mjmfoodie also introduces us to profit maximisation “in terms of total revenue and total costs, and in terms of marginal revenue and marginal cost” (IB Economics syllabus):

The MC=MR is a golden rule which you really need to understand and remember. See it action in this fast-aced example by ACDCLeadership:

For a light hearted recap, SpongeBob Squarepants and Mr Crab discuss these principles (thanks to EdwardBahaw):

We must remember however, that profit maximisation is assumed to be the number one goal of firms. What about other goals?

Research / Discuss what other goals a firm might have – share them with others in your class.

Now, for each of the additional goals, discuss whether or not they in fact do in some way link to profict maximisation.

pajholden demonstrates that the profit maximising level can be different from output maximising level. Watch the video here:

objectives of firms