Maximizing Output Is Not the Way to Maximize Profits

Maximizing Output is not the Way to Maximize Profits

Competitive firms may want to increase their total revenues. The strategy would be to generate much output as possible. Maximizing the total revenue is not the objective. Hence firms try to maximize the total profits and not the total revenue. Profit is the difference between the total costs during production and total revenues. Therefore, firms must not only focus on revenues but at costs as well. When output is increases then the total revenues increase similar to the total costs.

The total costs begin above the total revenue because of fixed costs,. Fixed costs are simply costs that are incurred even when no output is produced. These costs exceed revenues at low levels of output hence losses are incurred. However, as production rises the revenues increases faster than costs, making the production profitable. Though profits not always keep growing at some point, costs may increase overtaking revenues, causing losses again. Therefore, a business is only profitable with a particular range of output.

The total revenue increases as the output expands. Profits are realized depending on how fast the revenues grow in relation to total costs. The range of output where the revenues exceed the total costs is also considered. This is because it is what renders the business profitable. Firms that are competitive find a single rate of output that maximizes total profit.

We advance further toward the objective of maximum profits using the rule of thumb. An additional unit of output is added only when it collects more revenue than costs. We consider the rule by evaluating the revenue side of production and the side of cost. In terms of price, it is easy to determine the revenue generated from a unit of output. Competitive firms are price takers, they take whatever the prices are given to them from the market. The firms determine the value of their product by looking