The models that comprise the traditional theory of the firm are based upon the assumption that firms aim to maximise profits
Traditional economic models assume every firm tries to make as much profit as possible. Profit is the money left over after a firm pays all its costs.
Formula
Profit = Total Revenue − Total Costs
Real World
When Amazon was founded in 1994, it deliberately sacrificed short-term profit to reinvest in growth — a strategy that puzzled traditional economists who assumed firms always maximise profits.
Exam Focus
State the assumption explicitly before applying it; examiners award marks for identifying when it may not hold.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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