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Critically evaluate the assumption
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Excerpt from Essay:
Critically evaluate the assumption of profit maximisation as the basis for the theory of the firm in economic theory
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This concept helps the firm to decide at what point the production must be increased or decreased. This also brings out the relationship between supply and demand. When the supply (the quantity produced) is less than the quantity demanded, the firm incurs profit and when the supply is more than demand, the firm incurs a loss. Based on this, the firm can also decide the right amount of supply that has to be made to the market to get maximum profits
Criticism
Despite the usefulness of this theory, there is also a lot of shortcomings associated with it. First and foremost, this theory assumes that firms operate in perfect competition. In reality, this is far from truth. The firms operate in anything but a perfect environment and in that case, these concepts may fail. In a non-perfect world, profit maximization is computed using game theory and this includes lot more factors like competition, pricing, demand and supply......
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