INTRODUCTION

• Firm objectives are crucial to understand equilibrium. A firm is in equilibrium when it achieves its objectives and has no incentive to change its output level.
• Like consumers, firms are assumed to behave rationally, implying that firms aim to maximise profits.
• Traditionally, profit maximisation was seen as the primary objective of firms, but modern theories suggest other possible objectives.
• Profit maximisation assumption is a foundational idea in economic theory and suggests that rational entrepreneurs aim to maximise their profits, akin to how consumers maximise satisfaction.
• The entrepreneur’s income consists of two elements:
  • Wages for routine management and supervision, paid to the entrepreneur, are considered part of the total costs.
  • Total costs also include the costs of hired factors and the entrepreneur’s own wages.
• Profit maximisation means maximising the difference between total revenue and total costs (including the entrepreneur’s management wages).
• Normal rate of return on capital is included in the cost of production, calculated based on its opportunity cost (often the market rate of interest).
• The entrepreneur’s residual income is the net profit after all costs (including wages for management and supervision) are accounted for. This residual income is the true profit the entrepreneur aims to maximise.
• Marshall’s distinction:
  • Normal profits are wages for management and normal return on capital.
  • Super-normal profits (or economic profits) are the residual income, which the entrepreneur maximises.
• Normal profits are the minimum required income for the entrepreneur to stay in business, and they are included in costs. They do not contribute to the maximisation objective.
• Super-normal profits are above the normal profits and are considered economic rent.
• Short-run profit maximisation is the traditional focus, typically referring to a one-year period.