Having different business objectives is one way of showing the differences in output and its way to use total revenues and total cost curves. The shape of the total cost will depend on what happens to marginal cost. The profit maximizing outputs occurs when at the greatest vertical distance between the TR and TC curves. However, revenue maximization occurs at a higher output level. Any corporation is an organization with several groups like employees, managers, shareholders and customers.
The dominant group will determine in a company the moment in time of whatever they can give a greater emphasis to their own objectives within corporations where there is a clear separation between ownership and control , the managers within the business may use their given powers in deciding on price and output in different segments of the market over which they have some control to meet . Economic Profit In a purely competitive market, companies do not make the same economic profit. Even if they all face the same price for the goods or services they sell.
There are so many variables that a company would consider in order to be competitive with the rest of the companies selling the same goods or services. Economic profit is equal to total revenue less economic costs. “Economic costs are the sum of explicit and implicit costs and include a normal profit to the entrepreneur” (McConnell & Brue, 2005, p. 394). Total profit is the product of profit per unit and the quantity. To maximize profit, quantity is chosen at the point where marginal cost (MR) is equal to marginal revenue (MR) which is where the two graphs intersect. This is the ideal situation to a profit seeking company.
Since price is greater than the Average Total Cost (ATC), for each unit sold the profit per unit is simply the value by which the price exceeds the ATC. Scenario Based on the scenario, three states were compared at the same levels. The quantity produced in the three states were the same at different periods and all yielded different results. The optimal choice where to produce the products will be the State of California. In the case of the State of California in the simulation producing 120,000 units, where MR=MC will result in maximum profit. Any units produced where MC>MR will result in a drop in total revenue due to added cost.
When the price of oranges is lowered the plant will produce at 130,000 unit capacity. At that rate the MC=MR, the MR is above the ATC, the AFC is at its lowest so is the AVC. At 130,000 units the Total Revenue (TR) is greater than the Total Cost resulting in. The Average Variable Cost (AVC) curve will shift downward when the price of oranges is lowered resulting the Average Total Cost (ATC) curve to be lowered too. If the fixed cost has changed we will see an upward move in the Average Fixed Cost (AFC) curve that will lead to an upward shift in the Average Total Cost (ATC) curve.
The unit price goes up as the fixed cost increases. The Total Cost (TC) curve will move upward as the total Revenue (TR) moves downward. Profit Strategy To maximize profit the firm should continue production in the short run at the quantity where MR=MC. A profit maximizing output means every unit of output represents greater marginal revenue than marginal cost of output. The short run is a period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the fixed plant is used.
The firm’s plant capacity is fixed in the short run. However, the firm can vary its output by applying larger or smaller amounts of labor, materials, and other resources to that plant. It can use its existing plant capacity more or less intensively in the short run (McConnell & Brue, 2005, p. 394). When MR=MC occurs where the price is equal to the AVC at this point companies generally will make the decision to shut down in the short run. The losses at this point are exactly equal to the Total Fixed Cost (TFC).
Operating at a price below this price means that the firm would be able to recover a portion of the fixed cost and the losses will be less than the fixed costs. At this price the firm is undecided to continue operations or shutdown. Production Summaries State of California Production Summary | | |QTY ‘000 TONS |Profit (‘000) |QTY (‘000) tons |Profit (‘000) | |Year 2005 |First Half |120,000 |1,066 |120,000 |1,066 | |Year 2005 |Second
Half |130,000 |1,388 |130,000 |1,388 | |Year 2008 |First Half |Shut down |-374 |Shut down |-374 | |Year 2008 |Second Half |90,000 |-205 |90,000 |-205 | |Year 2011 | |100,000 |268 |100,000 |268 | State of Texas Production Summary | |QTY ‘000 TONS |Profit (‘000) |QTY (‘000) tons |Profit (‘000) | |Year 2005 |First Half |120,000 |737 |120,000 |737 | |Year 2005 |Second Half |130,000 |1,120 |130,000 |1,120 | |Year 2008 |First Half |Shut down |-399 |Shut down |-399 | |Year 2008 |Second Half |90,000 |-489 |90,000 |-489 | |Year 2011 | |100,000 |127 |100,000 |127 | State of Florida Production Summary | |QTY ‘000 TONS |Profit (‘000) |QTY (‘000) tons |Profit (‘000) | |Year 2005 |First Half |120,000 |303 |120,000 |303 | |Year 2005 |Second Half |130,000 |681 |130,000 |681 | |Year 2008 |First Half |Shut down |-323 |Shut down |-323 | |Year 2008 |Second Half |90,000 |-246 |90,000 |-246 | |Year 2011 | |100,000 |127 |100,000 |127 | Conclusion
The goal of sales maximization translates by the management’s desire to maintain the company’s competitive position, which is dependent to a large extent on its size. Unlike the shareholders who are interested in profit, the management is interested in sales revenue, either because large sales revenue is a matter of prestige or because its remuneration is often related to the size of the company’s operations than to its profits. While the company is maximizing its revenue from sales. The organization will have to choose that output which will yield adequate profit even through it may not achieve sales maximization. References McConnell, C. R. & Brue, S. L.. (2005). Economics: Principals, problems, and policies. New York: McGraw Hill/Irwin.