Profits "...are equal to total revenues minus total costs. Profit
maximization requires that the firm must manage its internal
operations efficiently (prevent waste, encourage worker morale, choose
efficient production processes, and so forth) and make sound decisions
in the marketplace (buy the correct quantity of inputs at least cost
and choose the optimal level of output)."
So, profit maximization is the acquisition of the maximum amount of
revenue at the lowest possible cost.
"Why would a firm want to maximize profits? Profits are like the net
earnings or take-home pay of a corporation. They represent the amount
a firm can reinvest in new plant and equipment, use to buy other
firms, or employ to make financial investments. All these activities
increase the value of the firm to its owners." Pages 140-141
"If a firm is reckless in making its cost, revenue, and profit
decisions, then market forces will eventually eliminate that firm, or
its managers, from the scene. And this is particularly true in
competitive markets. Hence, to survive, a firm must pay some
attention to the profitability of its actions." Page 187
Page 187 goes on to discuss why firms may not maximize profits. Two
reasons are given:
"Bounded rationality denotes conduct in which firms or consumers
choose not to optimize their actions to the last degree. This
behavior is often rational because in reality people have limited
resources and information and are therefore forced make imperfect
decisions. Consumers cannot spend all day looking for the
lowest-priced head of lettuce. Searching for the absolute maximum of
profits would take too much time. Decisionmaking, like all other
valuable commodities, must be rationed out."
"A second reason why firms may not single-mindedly maximize profits is
that managers may have alternative goals....Shareholders are mainly
interested in high dividends and stock price increases while managers
may want to earn high salaries or run a large business empire."
I hope the above information was helpful in explaining profit
maximization.
Sincerely,
Wonko
Source: "Economics" 14th Edition, by Paul A. Samuelson and William D.
Nordhaus, McGraw-Hill Inc., 1992 |
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