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Why is Wealth Maximization considered superior to Profit Maximization?
Although Profit and Wealth Maximization sound pretty similar, there are some major differences between them. While profit maximization aims at increasing the profit of a firm, wealth maximization has a larger role to play and it deals with the wellbeing of the stakeholders as a whole.
Profit Maximization Vs Wealth Maximization
Here are some major differences between profit maximization and wealth maximization in brief.
Profit and wealth maximization deal in different subjects and hence they are defined differently. Profit maximization refers to the management of a firm's resources and utilities to maximize profit. On the other hand, wealth maximization refers to managing the financial and managerial resources for the wellbeing of the stakeholder community as a whole.
Note − Wealth maximization plays a larger role in business than profit maximization.
The main focus of profit maximization is on increasing the profit of the company while wealth maximization deals in raising the value of stakeholders in the company. The profit maximization theory is centered around the profit motive while wealth maximization looks at the wellbeing of all stakeholders.
The risk and its effects on financials of the company are a core part of the wealth maximization process, while there is no focus on risk in the profit maximization theory. Therefore, in practice, profit maximization is not a complete theory in itself while wealth maximization is much more cohesive and inclusive in nature.
Profit maximization is actually a concept that is basically related to day-to-day business profits. Wealth maximization is a more complex process of increasing the overall wealth of the company that is reflected in the increased price of shares in the market.
Note − Profit maximization does not cover the risk factors associated with finance and operations but wealth maximization does.
Profit maximization is an older theory and hence it lacks the modern approaches towards business and profitability. Wealth maximization is a new concept that deals with a larger subject area and includes as many factors as possible. Therefore, wealth maximization is a better approach than profit maximization.
Profit maximization was a very relevant theory during the early 19th century, while the wealth maximization concept is a newer concept in business. So, wealth maximization is more complex and inclusive in practice in general.
Note − Profit maximization is a theory of the past, while wealth maximization is a modern theory.
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