Question

Advantages and disadvantages of profit maximisation

Answer 1

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Answer 2

Profit maximization refers to an economic act by businesses and firms to achieve a production level at a given price which their total profit level(total revenue-total cost) is maximum.

Explanation:

Advantages of Profit Maximization:

• Profit maximization is an important way to earn money in short term.It is considered to be an optimal outcome for every business or firm implying that they are operating at an efficient level in terms of resource utilization.
• Profit maximization enables a more desirable business operation as in a competitive market setting, every firm will engage in profit maximizing behavior. They will try to reduce costs and expenses and focus on enhancing current and potential revenue.
• Profit maximizing theory is a simple way to analyze firm behavior.According to the Neoclassical Production Theory in Microeconomics,it is assumed that a rational firm or producer will always engage in profit maximizing activities, which makes the firm analysis simple and generalized.

Disadvantages of Profit Maximization:

• Long term profit maximization requires accurate estimation of consumer demand which enables the firms to correctly predict future inventory backup. Often times, it is difficult to obtain an accurate measurement of consumer demand for respective goods and services and therefore,inventory management becomes difficult.
• Continuous tendency towards profit maximization can evidently make a firm or company too much greedy and profit oriented.Such kind of undesirable motivation can lead firms to engage in unethical conducts such as labor exploitation,misappropriation of resources,destruction of natural and environmental resources, decline in product quality etc.
• Sometimes firms focus excessively on high demand regular customers to maximize revenue and in the process,ignores less frequent or low demand customers, which is contradictory to professional courtesy.