Advantages and disadvantages of profit maximization
Answers
Explanation:
Advantages of Profit-Maximization Hypothesis:
1. Prediction:
The profit-maximization hypothesis allows us to predict quite well the behaviour of business firms in the real world. It does not matter that few firms are maximizers in reality.
What matters is that they behave without too much difficulty and with reasonable accuracy. Further Arguments for the Profit-Maximization Hypothesis.
2. Proper Explanation of Business Behaviour:
The economist relies on the profit- maximization hypothesis because it is useful in explaining and predicting business behaviour.
3. Knowledge of Business Firms:
Profit motive is the most pervasive force that governs the behaviour of business firms. In the case of small firms facing strong competition from others, they are forced to act as profit maximizers. They must do everything possible to increase sales and reduce costs in order to survive in their competitive environment.
4. Simple Working:
The profit-maximization hypothesis is simple, and there are well- developed mathematical tools of analyzing maximization or minimization problems.
5. More Realistic:
Profit maximization is the single best assumption available and introduction of more “realistic” assumptions complicates the analysis considerably without adding much to the predictive power of the model.
Disadvantages of Profit Maximization/Attack on Profit Maximization:
1. Ambiguity in the Concept of Profit:
It has been pointed out that in the assumption of profit maximization; the concept of profit has never been unambiguously stated. Is it rate of profit, total or net profits that a firm tends to maximize? The three concepts have entirely different implications for price theory.
2. Multiplicity of Interests in a Joint Stock Company:
It is argued that with the ushering in of corporate form of enterprise, profit maximization goal has a considerably reduced edge; other goals have come to the fore.
3. No Compulsion of Competition for a Monopolist:
As far as a monopolist goes he has no compulsions to maximize his profit. Since the monopolist ordinarily earns above-normal returns, why should he maximize? In imperfectly competitive industries where barriers to entry are effective, the firm ordinarily does not have to walk the tightrope of zero economic profits. Instead, the existence of monopoly power provides wider range of various alternatives than order conditions of perfect competition.
4. Separation of Ownership from Control:
Under the impact of managerial revolution, there has been a considerable divorce of ownership and control. In modern, gigantic corporations little attempt is made either by individuals or by the groups to maximize profits.
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