WHAT IS PROFIT MAXIMIZATION?
Profit maximization, in any organization, is the process of identifying the most efficient manner of obtaining the highest rate of return from its production model.
In other words, it is a process that companies undergo to determine the best output and price levels in order to maximize their return.
The company usually adjusts influential factors such as production costs, sale prices, and output levels as a way of reaching its profit goal.
METHODS FOR PROFIT MAXIMIZATION
There are 2 main approaches for profit maximization
Total revenue – Total cost
Marginal revenue – Marginal cost
The total revenue–total cost
perspective relies on the fact that
profit equals revenue minus cost
and focuses on maximizing this
METHODS FOR PROFIT MAXIMIZATION (..Contd.)
The marginal revenue–marginal cost perspective is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost. ADVANTAGES OF PROFIT MAXIMIZATION
Profit maximization theory of directing business decisions is encouraged because of following advantages associated with it :
Economic Survival: Profit maximization theory is based on profits and profits are a must for survival of any business.
Measurement Standard: Profits are the true measurement of viability of a business model. Without profits, the business looses its primary objective and therefore has a direct risk on its survival.
Social and Economic Welfare: The profit maximization objective indirectly caters to social welfare. In a business, profits prove efficient utilization and allocation of resources. Resource allocation and payments for land, labour, capital and organization takes care of social and economic welfare.
LIMITATIONS OF PROFIT MAXIMIZATION
Profit maximization is criticized for some of its limitations which are as follows:
Haziness of the concept “Profit”: The term “Profit” is a vague term....
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