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What is Profit Maximization and what are its limitations as a financial goal?
What is Profit Maximization?
As the term suggests, Profit Maximization is a philosophy to maximize the profits from a business concern. In the free economy, there is always profitability if the goods and/or services are good. So, firms selling good products and services increase the prices of goods to generate more revenues and profits. After the market competition for such service providers, however, a point is reached where the maximum profit halts.This is the point of profit maximization.
Note − To maximize profits, one must produce quality goods or services.
The underlying cause of profit maximization is efficiency. This helps the companies to produce good products in unit time or products with good qualities more than others. Therefore, the profits earned by dominating companies are through their efficiency. Efficient organizations usually have the advantage to fix the price, although it would eventually come to a saturated level one day.
Limitations of Profit Maximization
Profit maximization was considered an ideal concept in the early 1900s when businesses were owned by one person who usually paid for everything and asked all the staff to work so that the firms could earn as much as possible. The structure of the firms allowed the owners to do so.
Note − Profit maximization may seem to be a good idea but it does not fit the modern ideas of entrepreneurship and doing business.
Nowadays, the structure of business houses is completely different and this structure is not built around only profit maximization concept. The idea of a company has also changed over time. Now, an efficient company is one that can take good care of its stakeholders without having any scrutiny about their work ethics.
Profit maximization can also lead to the production of too many of a particular product that is of no use. This will create wastage destroying the raw materials and stuffing the landfills. Therefore, producing efficiently is more acceptable than maximizing the profit only.
Profit maximization has also been termed to be vague, and it ignores the risks and returns in a positive manner. The idea of profit maximization is not self-sustaining in nature and it is not built to target a market. That is why it does not consider the risks and returns as commonly as it should.
Note − The Profit Maximization principle was predominant in the early 19the century. Nowadays, it is considered outdated.
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