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Strategies to Profit-Maximization

Autor:   •  November 7, 2018  •  Case Study  •  612 Words (3 Pages)  •  25 Views

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               Strategies to Profit-Maximization

         Hans .O. Emeovrode

          Walden University

   Frank, R. H., Bernanke, B. S., Antonovics, K., & Heffetz, O. (2017) highlights that the economic theory of business behaviour is built on the assumption that the firm’s goal is to maximize its profit. The end goal for every profit-maximizing firm is to maximize its profit it would be helpful for executives to understand the three types of profit so that they can develop strategies that will make them profitable and keep them ahead of their competitors.

        Executives will need to understand the concept of Economic profit, Accounting profit, Normal profit and Pareto efficiency; Frank, R. H., Bernanke, B. S., Antonovics, K., & Heffetz, O. (2017)  describes Economic profit is the difference between the total revenue incurred by a firm and all cost incurred by the firm. Cost here refers to both implicit and explicit cost while accounting profit is the difference between total revenue made by the firm and the explicit cost incurred by the firm. The difference between the economic and accounting profit is that economic profit account for the opportunity cost of the resources supplied by the firm, unlike accounting profit that accounts only for the out-of-pocket cost to the firm (explicit cost). Normal profit is the difference between a firm’s Economic profit and its Accounting profit. The Normal profit is basically the same as the implicit cost or the opportunity cost of the goods or services supplied by the firm.

        The Executive’s decision to continue supplying a good or services rely on the relationship between a firms accounting profit and its economic profit. As long as a firm economic profit is positive or better than zero, it will be better off continuing its regular operation. Executives should discontinue operations if their total profit is less than their normal profit because at this point it is better off engaging in its best possible alternative to the current goods and services. If executive total profit exceeds normal profit they should change their strategy and expand their operations.

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