Profit Maximization

If the results are observed to have positive impacts on profits, only then that decision is taken into consideration for further implementation. There is a number of reasons due to which the model of profit maximization receives is encouraged because of undeniable and sustainable advantages which it offers to the business. Some of them include: Measurement Standard For identifying the performance of a firm, the first question is asked whether the firm is yielding profits or incurring losses. The higher the profits are earned, the better the performance of the firm. This phenomenon is not merely theoretical but its implications can be seen in the real world also. For instance, before investing in any specific firm, the first thing that investors examine is whether the firm is earning profits or not. Investors never invest in any loss-making firm and always make a portfolio of firms that are generating higher profits (Kaneda and Matsui, 2003). Survival of Firm Profits are directly linked with a firm’s survival. A company that is incurring losses is more likely to get bankrupt irrespective of its history or past performance (Dwivedi, 2012). The example of Kodak can be quoted here. Despite its experience of 131 years, the company filed for bankruptcy in January 2012. The company could not hold its position and began to incur losses due to which it could not survive and ultimately, collapsed. Economic and Social Welfare Indirectly, the objective of profit maximization caters to economic and social welfare. In businesses, profits account for the allocation of resources and efficient utilization. Making payments and allocating resources such as land, labour, capital, assist in taking care of economic and social welfare (Dwivedi, 2012). A lot of thought has been given to the question of profit maximization by economists. Some large and complex institutions where people of different background work together, the purpose is to maximize profits. In an actual situation, profit maximization is so common that in some cases, it leads to severe ethical concerns. In the lust of earning higher profits, companies tend to shun ethical boundaries and violate ethics for earning greater returns. Some popular brand such as Gap, Nike, Levi’s, Converse, have proved to be guilty of ethical violation. Their customer base and headquarters are located in the United States whereas their production processes are carried out in Asia. therefore they have been criticized for the exploitation of workers. They fail to amend the malpractices at production sites of which they are aware but do not take action to correct them. Profit maximization is the fundamental assumption of economic theory. Although it is undeniably of greatest importance, however, by itself, it is not an ample criterion for effective business management. In practice, there is a number of motivations and considerations that influence the desire for maximum economic efficiency and greatest profit as well as the accompanying assumptions that trigger the firm’s economic theory. Criticism to Profit Maximization Despite such importance in the theoretical and actual context, profit maximization is still criticized due to the number of reasons. It is considered as undesirable on account of the reasons mentioned below.