Microeconomics For Dummies

Chapter 8

Squeezing Out Every Last Drop of Profit

In This Chapter

Examining whether a firm is a profit maximizer

Looking at how a firm maximizes profits in the short and long run

Understanding how firms minimize costs

Economists tend to begin their analysis of firms with the assumption that the firm is a profit maximizer — that is, the firm’s ultimate aim is making the most profit it can. Although microeconomics doesn’t stop there (and has produced a number of more in-depth analyses of managerial motivation and results that don’t rely on this assumption), the profit-maximizing firm is the basic building block of microeconomic analysis.

In this chapter we justify the idea that a firm is in practice a profit maximizer. We also look at profit maximization more closely, showing how it rests at the heart of economists’ conception of efficiency and how profit-maximizing firms choose the optimum amount of stuff to produce. In addition, we also discuss the opposite approach to achieving the same end: minimizing costs while maintaining the desired output.

Take a moment to catch your breath. You have quite a ride ahead!

Asking Whether Firms Really Maximize Profits

In most cases, economists ...