In economics, profit maximization refers to the process by which a business assesses the price and output of goods in order to ensure the greatest profit. During the assessment, businesses will determine the expense of fixed and variable costs during production in order to ascertain financial viability. There are two main ways a business achieves this total revenue-total cost and marginal revenue-marginal cost.
The total revenue-total cost model is based on determining the total amount of fixed and variable costs in the production of a product. Fixed costs refer to costs that cannot be changed in the short term, such as equipment, wages and rent. Variable costs can vary according to production, such as the number of employees and materials. A business may choose to factor in the entire cost of making a product in determining the price, leading to a stable conclusion.
The marginal revenue-marginal cost model is based on determining whether the total cost of producing a product changes with every unit. This model takes into account the volume created, demand from consumers, and costs required for increasing production (such as if a business requires new equipment or a new factory). A business using this model may vary the price of their product according to the amount of marginal revenue.