profit maximization

In economics, profit maximization is a core concept for businesses. It refers to a firm's goal of producing at a level where its profits are as large as possible. This involves making decisions about how much to produce (outputs) and what resources to use (inputs).1

There are different layers to this decision-making:
* Short-run cost minimization: Deciding the cheapest way to produce a specific quantity with existing facilities.1
* Short-run profit maximization: Determining the most profitable output quantity for a given plant.1
* Long-run profit maximization: Deciding the most profitable size and equipment for a plant over time.1

A key principle is that a firm will produce at the output level where its marginal cost equals the market price of its product. If marginal cost is lower than the price, increasing output can raise profits. Conversely, if marginal cost exceeds the price, reducing output can increase profits. In a perfectly competitive market, profits are driven down to a normal return on investment over time. However, profits can arise from innovation, unexpected changes in demand (windfall profits), or by restricting output to maintain higher prices (monopoly profits).12