Profit Maximization?

• If, for example, the revenue received by a firm from producing one more unit of a good exceeds the cost, then the firm produces more and in so doing increases profit. The firm continues to increase production until profit no longer increases.


• Alternatively, if the cost incurred by a firm from producing one more unit of a good exceeds the revenue received, then the firm produces less and in so doing also increases profit. The firm then continues to decrease production until profit no longer increases.

But do firms actually seek to maximize profit? Some probably do. Many probably seek other objectives.

Other Objectives

• Sales Maximization: Many firms make decisions designed to increase or maximize production and the amount of output sold. More sales mean more revenue, but not necessarily more profit.


• Personal Welfare: Firms are occasionally motivate to increase the personal welfare of owners or employees, especially the employees who control the operation of the firm. Profit is usually sacrificed in the process.


• Social Welfare: Some firms are also inclined to take actions that they deem will improve the overall well-being of society. These actions also tend to reduce profit.

The Strongest Survive

Suppose, for example, the Shady Valley zucchini growing industry has 10,000 producers, most of whom are like Phil Gardener, who grows zucchinis in his backyard. Phil is a complete novice when it comes to making business decisions. Phil plants a bunch of seeds, irrigates the field, removes the weeds, throws on a little fertilizer, does his harvesting thing, then sells zucchinis to market. Phil is clueless when in comes to tabulating total production cost, let alone concepts like marginal cost that assist in the profit maximizing decision. And while he knows the price buyers are willing to pay for his zucchinis, the phrase marginal revenue, which is useful for the profit maximizing decision, has never entered his mind. He has no idea how to calculation the profit maximizing quantity of zucchini production.

Needless to say, Phil and the other 9,999 Shady Valley zucchini growers generally maximize profit ONLY by accident, NOT by design.

The end result, however, is that those zucchini growers who DO come close to maximizing profit will be the ones remaining in business. They will be encouraged by the monetary success of their zucchini activity to produce more in coming years. Those zucchini growers who DO NOT come close to maximizing profit, who produce too many or too few zucchinis, will find their zucchini growing endeavors unrewarded. They will likely leave zucchini production in favor of alternative activities (growing kumquats, sewing Wacky Willy Stuffed Amigos for The Wacky Willy Company, attending college, or whatever).