Profit Maximization
PROFIT MAXIMIZATION: REALITY OR A THEORETICAL OBJECTIVE?
Research Compiled for The Paper Store, Inc. by Amy Sorter 3/2009
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Introduction
Though many people equate economics with finance and accounting, it 's actually a social science, a study of behavior and how rational people behave when it comes to allocation of resources. Within the study of that social science are many theories in which economists attempt to explain the movement of prices and production, goods and services. In determining this, economists come up with many theories, but some don 't have a very good connection with the real world.
One of the more prevalent topics under discussion has been that of profit maximization. Economists use this theory to explain how firms set prices for particular goods or services. The idea behind profit maximization is that a company in business to maximize profits will need to know how much labor and capital to use to obtain the most profit from a venture. Once the input costs are realized, the company can then charge the right amount to take into account the costs, plus a reasonable profit.
Profit, in its most basic term, is defined as the difference between a company 's total revenue and total opportunities costs – while total revenue is the amount of income that is earned through selling products or services (Skaggs, 2008). Meanwhile, total opportunity costs involve input costs into the production processes as well as the value of highest-valued alternatives to which resources can be dedicated (Skaggs, 2008). On when a firm understands the marginal costs of producing a good or service, as well as demand elasticity, can price be set for profit maximization. Or at least, this is the theory.
Most theorists believe that profit maximization is a real objective of a company. The belief here, in fact, is that companies will focus solely on costs when it comes to setting prices
Research Compiled for The Paper Store, Inc. by Amy Sorter 3/2009
For More Information on This Paper, Please Visit www.paperwriters.com/aftersale.htm
Introduction
Though many people equate economics with finance and accounting, it 's actually a social science, a study of behavior and how rational people behave when it comes to allocation of resources. Within the study of that social science are many theories in which economists attempt to explain the movement of prices and production, goods and services. In determining this, economists come up with many theories, but some don 't have a very good connection with the real world.
One of the more prevalent topics under discussion has been that of profit maximization. Economists use this theory to explain how firms set prices for particular goods or services. The idea behind profit maximization is that a company in business to maximize profits will need to know how much labor and capital to use to obtain the most profit from a venture. Once the input costs are realized, the company can then charge the right amount to take into account the costs, plus a reasonable profit.
Profit, in its most basic term, is defined as the difference between a company 's total revenue and total opportunities costs – while total revenue is the amount of income that is earned through selling products or services (Skaggs, 2008). Meanwhile, total opportunity costs involve input costs into the production processes as well as the value of highest-valued alternatives to which resources can be dedicated (Skaggs, 2008). On when a firm understands the marginal costs of producing a good or service, as well as demand elasticity, can price be set for profit maximization. Or at least, this is the theory.
Most theorists believe that profit maximization is a real objective of a company. The belief here, in fact, is that companies will focus solely on costs when it comes to setting prices
References: Levitt, Steven D. (2006) An Economist Sells Bagels: Profit Maximization in Practice. Capital Ideas. University of Chicago, Booth School of Business. Retrieved 2009, March 11 from http://www.chicagobooth.edu/capideas/may07/5.aspx. Lucas, Mike (1999, June). The Pricing Decision: Economists Versus Accountants. Management Accounting, 77(66), 34-35. McKinney, Robert A. (2008). Pricing to Maximize Total Profits: Gross Profit Margin vs. Net Profit. Retrieved 2009, March 11 from http://www.robert-mckinney.com/Documents/Pricing_To_Maximize_Total_Profit.pdf. Shmanske, S. (Winter 2006). The Monopoly Nonproblem: Taking Price Discrimination Seriously. Independent Review, 10(3), 337-351. Skaggs, Neil (2008). Profit Maximization. Illinois State University, Department of Economics. Retrieved 2009, March 11 from http://www.econ.ilstu.edu/ntskaggs/eco105/readings/profit-max.htm.