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Introduction to Business Traditional economic theories of the firm Firms are in the business to make money. Traditional economic theory suggests that firms make their decisions on supply and output on the basis of profit maximisation. The traditional theory (short run profit maximisation), utilises the concept of marginal cost and marginal revenue. Marginal cost is the cost of producing one more unit of output and marginal revenue is the extra revenue gained by selling one more unit per time period. Some criticisms of the traditional theory are that firms don't always use marginal revenue and marginal cost concepts. In order to make even an informed guess about marginal revenue, they must have some idea of how responsive demand will be to a change in price (price elasticity) having time to do market research may help decide if a price change is the right thing to do, which isn't always cost effective....

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