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Maximisation of Profits

Here we understand what does profit maximisation mean and its assumptions in detailed.

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Maximisation of Profits
First we understand meaning of profit maximisation-
Profit Maximisation is assumed to be sole objective of the firm whatever may be the type of market. It means, whether the market is perfectly competitive, imperfectly competitive or monopolistic, the firm will conduct its business activity keeping in view the single goal of profit maximisation.
Several economists have supported this assumptions, and their arguments as follows-
  1. It is argued in long run, only the fittest firms can survive in the competitive markets. The firms wich maximise profit are able to generate resources which they use for their expansion. Non profit maximising firms will fail to generate enough resources and will therefore get eliminated in the long run.
  2. According to Milton Friendman, a theory is to be judged not on the basis of realism of its assumptions, but on the basis of its predictions. The traditional theory of the firm based on the assumption of profit maximisation has offered good predictions.
According to Prof. W.J.Baumol, modern business firm aims at sales - revenue maximisation rather than profit maximisation. This is because (i) Top managers in large firms are interested in maximising their own earnings and this is possible by maximising sales revenue rather than profits.
(ii) Large sales growing continuously enhance the prestige of the managers while profits are appropriated by share holders.
(iii) The banks and other financial institutions are impressed by turnover of firms and are willing to provide finance to the firms with large turnover.
(iv) In competitive market, firms with large sales have greater power to adopt competitive tactics, and the firms with low sales will have to adjust to these tactics.
(v) Firms with large and growing sales can offer higher earnings and better service conditions to their employees inducing them to work whole heartedly.
Utility or satisfaction is the ultimate end which an individual aspires to get. According to Prof. Benjamin Higgins, Melvin Reder and Tibor Scitovsky argued that in case of small uncorporated firms, the entrepreneur who is owner and manager both, pursues the objective of utility maximisation in which liesure is also desirable apart from money profit.
According to these economists, quiet life is an essential ingredient of an individual's welfare. More work will mean less liesure. Here, the preference for liesure must be incorporated into analysis of the behaviour of an entrepreneur who aims at maximisation of satisfaction. It means, when liesure enters into preference function of the enterpreneur may fix the level of output below profit maximising level of output.
According to american economist J. K. Galbraith who has made an indepth study of modern corporation has found that managers, which he refer as technostructure, pursue multiple goals in which, alongwith sales maximisation and utility maximisation, the objective of achieving highest possible growth of output is paramount. According to him, these managers are highly skilled persons. They are able to pursue multiple goals because they can influence the consumers through effective advertising on a large scale. If managers think that their salaries related to the rate of growth of output they will make evrey effort to ensure the highest possible growth rate of output.
According to Prof. H. A. Simon suggested that instead of maximising profits, firms aim at satisfactory rate of profit. Means, in large scale corporate type of business firms, there are various groups whose interests may conflict with each other. The top management has a responsibility not only to share holders but also to employers, employees, customers, creditors, etc. The managers pursuing the goal of satisfactory rate of profit strike a balance among the claims of share holders for higher devidends, demands of employees for higher wages, pressure from customers for low price and better quality. Thus, the satisfactory rate of profit hypothesis is impressive, but the problem with this is that it does not provide clear definition of satisfactory rate of profit.
The goal of profit maximisation is achieved at the output -
(i) where the gap between total cost and total revenue is maximum or
(ii) Where marginal cost is equal to marginal revenue.
What is Profit Maximisation?
Sales Revenue Maximisation
Growth Maximisation
Satisfactory Rate of Profit
Maximisation of Utility
Maximisation of Profits
Tech writer at NewsandStory