Profit Maximization

We have explained that there are various alternative objectives suggested by various economists. However, the profit maximization by the firm is still believed to be the most important assumption on which economists have built price and production theories.
The conventional theory assumes profit maximization as the only objectives of business firms. It as the objective of business firms has a long history in economic literature. This objective is regarded as the most reasonable and analytically most productive business objective. The strength of this assumption lies in the fact that this assumption has never been unambiguously disproved.
Besides, profit maximization assumption has a great predictive power. It helps in predicting the behavior of business firms in the real world and also the behavior of price and output under different market situations. Different alternatives hypothesis formulated so far can not explain and predict the behavior of firms better than the profit maximization assumption. Here we shall derive general conditions of equilibrium (profit maximization) which are valid under all types of market. An old method of explaining the equilibrium of the firm is to draw the total revenue (TR) and total cost (TC) curves of the firm and locate the maximum profit point. But with the development of the approach of marginal analysis, equilibrium of the firm in modern micro-economic theory is explained with the aid of marginal revenue and marginal cost curves. We shall explain below the equilibrium of the firm in both these ways.