Profit maximization - In economics profit maximization is the process by which a firm determines the price and output level that returns the

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In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. The total revenue -- total cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue -- marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost. Any costs incurred by a firm may be classed into two groups: fixed cost and variable cost. Fixed costs are incurred by the business at any level of output, including zero output. These may include equipment maintenance, rent, wages, and general upkeep. Variable costs change with the level of output, increasing as more product is generated. Materials consumed during production often have the largest impact on this category. Fixed cost and variable cost, combined, equal total cost. Revenue is the total amount of money that flows into the firm. This can be from any source, including product sales, government subsidies, venture capital and personal funds. Marginal cost and revenue, depending on whether the calculus approach is taken or not, are defined as either the change in cost or revenue as each additional unit is produced, or the derivative of cost or revenue with respect to quantity output. It may also be defined as the addition to total cost as output increase by a single unit. For instance, taking the first definition. Total Cost-Total Revenue Method
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This note was uploaded on 03/31/2010 for the course ECONOMICS 322 taught by Professor H during the Spring '08 term at Kadir Has Üniversitesi.

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Profit maximization - In economics profit maximization is the process by which a firm determines the price and output level that returns the

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