Many economists have argued that profit maximization has brought about many disparities among consumers and manufacturers. In case of perfect competition it may appear as a legitimate and a reward for efforts but in case of imperfect competition a firm’s prime objective should not be profit maximization. In olden times when there was not too much of competition selling and manufacturing goods were primarily for mutual benefit. Manufacturers didn’t produce to earn profits rather produced for mutual benefit and social welfare. The aim of the single producer was to retain his position in the market and sustain growth, thereby earning some profit which would help him in maintaining his position. On the other hand in today’s time the production system is dominant by two tier system of ownership and management. Ownership aims at maximizing profit and management aims at managing the system of production thereby indirectly increasing the income of the business.
These services are used by customers who in turn are forced to pay a higher price due to formation of cartels and monopoly. Not only have the customers suffered but also the employees. Employees are forced to work more than their capacity. they is made to pay in extra hours so that production can increase.
Many times manufacturers tend to produce goods which are of no use to the society and create an artificial demand for the product by rigorous marketing and advertising. They tend to make the product so tempting by packaging and labeling that its difficult for the consumer to resist. These happen mainly with products which aim to target kids and teenagers. Ad commercials and print ads tend to provide with wrong information to artificially hike the expectation of the product.
In case of oligopoly where the nature of the product is more or less same exploit the customer to the max. Since they form cartels and manipulate prices by giving very less flexibility to the consumer to negotiate or choose from the products available. In such a scenario it is the consumer who becomes prey of these activities. Profit maximization motive is continuously aiming at increasing the firm’s revenue and is concentrating less on the social welfare.
Government plays a very important role in curbing this practice of charging extraordinary high prices at the cost of service or product. In fact a market which experiences a high degree of competition is likely to exploit the customer in the name of profit maximization, and on the other hand where the production of a particular product or service is limited there is a possibility to charge higher prices is greater. There are few things which need a greater clarification as far as maximization of profit is concerned
Profit maximization objective is a little vague in terms of returns achieved by a firm in different time period. The time value of money is often ignored when measuring profit.
It leads to uncertainty of returns. Two firms which use same technology and same factors of production may eventually earn different returns. It is due to the profit margin. It may not be legitimate if seen from a different stand point.
Advantages & Disadvantages
When a firm applies profit maximization, it is basically saying that its primary focus is on profits, and it will use its resources solely to get the biggest profits possible, regardless of the consequences or the risk involved. Profit maximization is a generally short-term concept. Application usually lasts less than one year, although some companies employ this strategy exclusively, constantly jumping on the next big trend.
Risk
Pursuing a profit maximization strategy comes with the obvious risk that the company may be so entrenched in the singular strategy meant to maximize its profits that it loses everything if the market takes a sudden turn. For example, a company may find that it gets the most profit selling the Wii gaming system, so instead of keeping a balanced inventory, it invests solely in buying Wiis to sell. If the Wii goes out of favor or the makers of the Wii begin to limit the price that can be charged for the system, the company that relied solely on its investment in Wiis could lose everything. Similarly, if a company focuses only on maximizing its profit, it may miss opportunities for investment and expansion.
Expectation and Goodwill
You also need to consider consequences of profit maximization. If a company pursues a profit maximization strategy, it creates an environment where price is a premium and cutting costs is a primary goal. This, in turn, creates a perception of the company that could lead to a loss of goodwill with customers and suppliers; for instance, a company may win subsequent contracts with a client by bidding the first job low. It also creates an expectation of shareholders to see immediate gains, rather than realizing profits over time.
Cash Flow
For all its drawbacks, profit maximization carries the big advantage of creating cash flow. When maximizing profit is the primary consideration, investments, reinvestments and expansions are typically tabled. The company simply makes do on what it has. This can create a more cost-efficient environment. In the mean time, the profits keep building, producing a healthy bottom line and increasing the firm’s amount of available cash. Sometimes profit maximization is used entirely to create an influx of cash so the firm can reduce its debt or save up for expansion.
Financing and Investors
Some degree of profit maximization is always present. The goal of a company is to create profits. It has to profit from its business to stay in business. Moreover, investors and financiers in the company may require a certain level of profits to secure funds for expansion. Further, a company has to perform well for its shareholders; they expect a return on their investments. As such, maximizing that profit is always a consideration to some extent.
These services are used by customers who in turn are forced to pay a higher price due to formation of cartels and monopoly. Not only have the customers suffered but also the employees. Employees are forced to work more than their capacity. they is made to pay in extra hours so that production can increase.
Many times manufacturers tend to produce goods which are of no use to the society and create an artificial demand for the product by rigorous marketing and advertising. They tend to make the product so tempting by packaging and labeling that its difficult for the consumer to resist. These happen mainly with products which aim to target kids and teenagers. Ad commercials and print ads tend to provide with wrong information to artificially hike the expectation of the product.
In case of oligopoly where the nature of the product is more or less same exploit the customer to the max. Since they form cartels and manipulate prices by giving very less flexibility to the consumer to negotiate or choose from the products available. In such a scenario it is the consumer who becomes prey of these activities. Profit maximization motive is continuously aiming at increasing the firm’s revenue and is concentrating less on the social welfare.
Government plays a very important role in curbing this practice of charging extraordinary high prices at the cost of service or product. In fact a market which experiences a high degree of competition is likely to exploit the customer in the name of profit maximization, and on the other hand where the production of a particular product or service is limited there is a possibility to charge higher prices is greater. There are few things which need a greater clarification as far as maximization of profit is concerned
Profit maximization objective is a little vague in terms of returns achieved by a firm in different time period. The time value of money is often ignored when measuring profit.
It leads to uncertainty of returns. Two firms which use same technology and same factors of production may eventually earn different returns. It is due to the profit margin. It may not be legitimate if seen from a different stand point.
Advantages & Disadvantages
When a firm applies profit maximization, it is basically saying that its primary focus is on profits, and it will use its resources solely to get the biggest profits possible, regardless of the consequences or the risk involved. Profit maximization is a generally short-term concept. Application usually lasts less than one year, although some companies employ this strategy exclusively, constantly jumping on the next big trend.
Risk
Pursuing a profit maximization strategy comes with the obvious risk that the company may be so entrenched in the singular strategy meant to maximize its profits that it loses everything if the market takes a sudden turn. For example, a company may find that it gets the most profit selling the Wii gaming system, so instead of keeping a balanced inventory, it invests solely in buying Wiis to sell. If the Wii goes out of favor or the makers of the Wii begin to limit the price that can be charged for the system, the company that relied solely on its investment in Wiis could lose everything. Similarly, if a company focuses only on maximizing its profit, it may miss opportunities for investment and expansion.
Expectation and Goodwill
You also need to consider consequences of profit maximization. If a company pursues a profit maximization strategy, it creates an environment where price is a premium and cutting costs is a primary goal. This, in turn, creates a perception of the company that could lead to a loss of goodwill with customers and suppliers; for instance, a company may win subsequent contracts with a client by bidding the first job low. It also creates an expectation of shareholders to see immediate gains, rather than realizing profits over time.
Cash Flow
For all its drawbacks, profit maximization carries the big advantage of creating cash flow. When maximizing profit is the primary consideration, investments, reinvestments and expansions are typically tabled. The company simply makes do on what it has. This can create a more cost-efficient environment. In the mean time, the profits keep building, producing a healthy bottom line and increasing the firm’s amount of available cash. Sometimes profit maximization is used entirely to create an influx of cash so the firm can reduce its debt or save up for expansion.
Financing and Investors
Some degree of profit maximization is always present. The goal of a company is to create profits. It has to profit from its business to stay in business. Moreover, investors and financiers in the company may require a certain level of profits to secure funds for expansion. Further, a company has to perform well for its shareholders; they expect a return on their investments. As such, maximizing that profit is always a consideration to some extent.
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