Profit Maximisation | A-Level Economics Model Paragraph

Profit maximisation can benefit shareholders. It can be achieved at the point q1 where marginal costs equal marginal revenue. At any quantity below q1, each extra unit of output generates more revenue than it costs. This incentivises them to produce more output. Alternatively at any level of output above q1, marginal cost exceeds marginal revenue. This suggests that producing one extra unit will cost the firm more than it generates in additional revenue. This incentivises firms to cut back on output. Therefore Q1 is the quantity which maximises profit. Profit is beneficial to a firm for two reasons. First, it satisfies shareholders. Secondly, it allows firms to re-invest, especially in capital, which can lead to c0st-saving and greater productivity. Re-investment also enables innovation and dynamic efficiency gains.

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