Profit Maximization - An Actual or Theoretical Objective Essay

Profit Maximization - An Actual or Theoretical Objective - Essay Example For example, rice farmed and thrashed by the farmer is sold for a particular value to companies. These companies in turn process the rice, separating quality grains and packing them with their label, thereby increasing the value of rice. The transporters and stores extract their profit by integrating it in the cost of the rice. In the end, the consumer pays a multifold monetary worth for the rice along with comparable value for money. Some organizations tend to get carried away with their profit-making motives, ending up reaping unjustly high profits. Such organizations tend to lose their loyal customers for two major reasons: not being able to provide comparable value for money and with the entry of competition into their market. Profit Maximization is now a general trend, which had earlier been a typical phenomenon for monopolistic competition – where the absence of competition enables these organizations to charge unjustly high prices for their offerings. Hence it is said t hat free competition is the â€Å"invisible hand† for controlling market prices naturally (Smith). When companies are allowed to compete without regulatory interventions like government policies etc, the resultant market provides both buyers and sellers with best opportunities in terms of exchanges. Buyers and sellers benefit alike from the competition. Profit Maximization: Profit Maximization is a basic Economics concept, which implies extracting highest possible profits through production and sales processes. Profit is the difference between total revenue and the total cost. Total revenue implies the total amount an organization receives from business whereas the total cost means the total investment the organization makes to produce and sell the goods and services. At different activity levels, the cost incurred and the revenue earned tend to be different (as shown in the diagram). From: Sparknotes.com The above graph clearly shows varied profitability at different activit y levels. However, the highest profitability is at the point marked â€Å"profit maximization†. At this point, the difference between costs and revenue is the greatest. At all activity levels below and above this point, the profit is lower in comparison with this point. Profit Maximization can be devised through numerous methods. The aforesaid theory is the Total Cost-Total Revenue methodology for determining the profits. Marginal Revenue-Marginal Cost method is also used to determine maximum profitability activity level. However, the base line for both methods is the same – revenue minus cost equals profit. Theoretically, Profit Maximization is often explained as an unethical practice on behalf of business owners, focusing extensively on monetary gains and overlooking other factors. On this note, it is important to remark that profit maximization does not necessary include unethical practices regarding pricing. However, â€Å"it fails to take adequate account of alte rnative desires of the businessmen, for power, leisure, social prestige, and similar non-monetary rewards† (Koplin). Some critics do not agree that Profit Maximization is the underlying objective for business operations since it does not take into account other factors important in the eyes of the investors. Most businesses do not operate for profit reasons only – some businesses like certain blood banks and hospitals work for societal welfare that cannot be weighed in monetary terms. But some critics maintain the importance of Profit Maximizati