Profit Maximization: The role of profit maximization is central both to firm decision making as well as to the modeling of firm behavior.  In discussing the mathematics of profit maximization, it is important to emphasize the role of marginal analysis.  The fact that total profit is maximized when marginal profit (marginal revenue – marginal cost) is zero is the primary result.  There are numerous ways to make this point – graphically, via a numerical example, or, if appropriate, with a bit of calculus.

 

The second big idea in this section is the determination of a shutdown rule.  The bottom line for firms that face a situation with some fixed costs is that they should shut down if they cannot pay their variable expenses.  If, however, they can at least cover variable cost, they should operate, even at a loss, because to shutdown will cause them to lose an amount equal to their fixed costs.