Chapter 11: Profit Maximization

Michaele Bradley

Profit maximization Mainstream microeconomics generally assumes that firms seek to maximize economic profit, the difference between total revenue and total economic costs. This, like many others in economics, is an unrealistically simple picture of the way that firms actually make decisions. Economists make many such unrealistic assumptions that abstract from and simplify the “real world” to explain economic phenomena and generate empirically testable predictions. Assuming that firms act rationally to maximize profit is critical for analyzing and explaining the firm's choices of outputs of goods and factor inputs. The theory of production and cost collapses without assuming profit maximization or some other maximizing assumption. For example, a production function determines a single output from each bundle of factor inputs, but technology and resource quality define only the maximum output that can be produced with a given bundle of inputs, and there is nothing to prevent firms from producing less than ...

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