answersLogoWhite
Investing and Financial Markets
Economics
Management and Supervision

Why is profit maximization by itself an inappropriate goal?


Top Answer
User Avatar
Wiki User
Answered 2016-02-10 18:37:18

The behavior should not be governed by egoistic thinking but rather by an understanding of what has future for the society (for nature, for the planet) as a whole. We can call them moral rules. Also are called ethics.

We have such rules already coded in our emotions as a result of evolutionary selection, because, due to the dependence of the individual from the group, behavior that is beneficial for the group is also beneficial for the individual. If the group did not prosper/survive, the individual did not prosper/survive. Contrary to other social animals we can also derive such rules rationally.

Is "maximizing profit" beneficial for the society? What are its consequences?

It leads to inflation and uneven distribution of wealth, because of non-perfect competition, and many, many tricks.

Unequal distribution distorts the economy, because many will not be able to buy any more, what they need, while others will be able to by luxury products. Economy does not any more satisfy the needs of all society, but of a few only. Since there are fewer consumers, there is also a recession, then an economic crisis and, if without political reaction, also social unrest. We observe these economic cycles. They are faster if the economy does not comply with moral rules.

What we want is a stable economy and a stable society. Maximizing profit is against these goals.

From a business standpoint, profit maximization is not always the primary goal.

  1. A company may be seeking to gain market share by lowering its prices and squashing competition.
  2. It may be seeking to use working capital that might otherwise be used for marketing or expansion to pay back debt thereby lowering its debt-to-income ratio.
  3. it may also be trying to buy back its shares from the public or private market thus lowering potential profits, but increasing profit-per-share to remaining investors. This is what pushes up a company's stock price.

Many would argue that seeking profit maximization IS an appropriate goal. However, there are instances where profit maximization strategies hurt overall public welfare. In the case of a monopoly, a business will overcharge consumers for goods or services. While the monopolist is only seeking to maximize his or her profit, public welfare is actually decreased and many argue that government regulation in this area is desirable.

Maximize your income, minimize your outgo. Maximization of profit is not inappropriate. It is inappropriate to plunder, but this is not maximization of profit because it's plunder and then the so called "profit" becomes theft. It is inappropriate to try and convince people that it is inappropriate for a business to maximize their profits. Maximization of profits is the purpose of doing business.

First off, profit maximization has no meaning for a non-profit organization (though margins do), so I assume this question was aimed at the private, for-profit sector. Assuming that's the case, there are two valid ways of looking at this question. The first, most well-known, and least valid is that a for-profit organization's purpose is to maximize shareholder value. Often, this has nothing to do with profits.

For example, a consulting firm is set up as a corporation with company stock sold only to employees who have reached the level of "principal." At the end of the year, the return on sales is 40%. If all of that is taken as profit, then the company will owe taxes on all of it. Instead, the company distributes some of it as end-of-year bonuses to principals and invests some more in equipment, software, etc. which can be spent or capitalized, reducing return on sales to only 10%. That 10% is run through the books as net operating income (profit, in many cases) and taxes are paid only on that amount. If 6% of sales is left over, that 6% is retained as cash and, along with any investments made in equipment, increases shareholder equity, which increases the share price and, thus, shareholder value. So, as you can see, in this case, maximizing profit would not maximize shareholder value.

There are other examples, as well. For instance, cable companies have long sought to maximize cash flow, and it is cash flow that had the highest relationship to stock price, because cable companies that are expanding are taking on substantial capital costs that can reduce net income to a net loss in the short term, but turn into pure profit in the long term.

The second, and more useful, way to look at organizations is that the real issue is long-term survival. In order to survive, every for-profit company must satisfy all stakeholders, including shareholders, customers, vendors, employees, and society at large. As Peter Drucker says, profit is a cost of doing business. Other costs are attached to satisfying other stakeholders, any of which can kill your business if those stakeholders believe that they are not getting enough value back from what they give to the organization.

This approach to business tends to lead to better long-term decision-making as management balances stakeholder needs and desires against each other.

We definitely have to understand that companies should not operate of maximization of profit reasons only, for profit maximizing only leads to true greed. The reason being is that you will try to compromise on your companies ethics and it also does not solve any problems within the company. The problem of any business is not the maximization but the gain of sufficient profit to cover risk of economic activity and thus to avoid loss.

001
๐Ÿ™
0
๐Ÿคจ
1
๐Ÿ˜ฎ
1
๐Ÿ˜‚
1
User Avatar

Your Answer

Loading...

Still Have Questions?

Related Questions

Profit maximization versus wealth maximization?

what should be goal of a firm


Shareholder wealth maximization is considered to be a more appropriate goal for the firm than profit maximization because?

Shareholder wealth maximization is considered to be a more appropriate goal for the firm than profit maximization


What is the difference between profit maximization and wealth maximization?

what is ultimate goal of firms.


Maximization of shareholder wealth as a goal is superior to profit maximization because?

it is operating cost


Why is profit maximization a primary goal to an organisation?

jhhjfh


The differences between goal of a firm and profit maximization?

A goal of firm isn't always profit driven, it can be any cause. Profit maximization is revenue driven, making more money is it focus.


Is profit maximization a goal of financial management?

offcourse profit maximization is the goal of financial management eventhough it has limitation regard to time value of money,quality and risk.


Why is profit maximizing by itself an inappropriate goal?

The very premise of this question is that profit maximization is not an appropriate goal. However, this assumes that profits exist in a vacuum, that somehow profits exist outside of people and goods and services they create. A business produces and sells goods and services that satisfy a society's needs. In a free society, the way to profit from this is to continuously listen to and address your customers' needs. Therefore, maximizing your profits is in fact an appropriate goal, as it ensures you will address the specific needs of a certain group of people. Profit maximization is therefore an appropriate goal. The ways in which someone achieves that, however, can sometimes be inappropriate, such as bribing government to enact laws favoring your business to keep out competitors.


Is Profit maximization the primary goal of any business enterprise?

Yes, profit maximization is the primary goal of a business. If a business doesn't maximize profits the Board of Directors can request that the CEO leave.


Why is shareholder wealth maximization a more appropriate goal than profit maximization?

Wealth maximization: To stay invested and multiply your invested money. The term is used for long-term investors. Short-term investors work for profit maximization. They sell their shares, as and when they get profit from the market.


What are some of the problems involved with the use of profit maximization as the goal of the firm How does the goal of maximization of shareholder wealth deal with those problems?

Problems involved with the use of profit maximization as the goal of the firm due to numbers of reasons. 1 It ignore the timing of return. 2 It ignores the timing of returns. 3 It ignores the risk.


What are some of the problems involved in the use of profit maximization as the goal of a firm?

Uncertainity and timing are some of the problems


What are some shortcomings of the goal of profit maximization?

Profit maximization includes some shortcomings like it ignores the risk that corresponds to the project's stream of cash flow. The timing of returns are ignored with this objective and it does not have as much relevance to a monopoly firm.


Is profit maximization an appropriate for a business?

Profit maximization is the ONLY appropriate goal for a business. Even under a so-called "social responsibility" regime, a business only engages in such schemes because it thinks it can increase profits by doing so.


Explain the rationale for selecting shareholders wealth maximizatio as the objective of the firm?

Explain the rationare for selecting shareholder wealth maximization as the objective of the firm.Include a consideration of profit maximization as an alternative goal


What is profit maximization of corporation?

Profit Maximization is a process that companies undergo to determine the best output and price levels in order to maximize its return. Companies usually adjust production costs, sale prices, and output levels as a way of reaching its profit goal. Profit maximization is a good thing for a company, but can be a bad thing for consumers if the company starts to use cheaper products or decides to raise prices.


What is meant by the goal of maximization of shareholders wealth?

The goal of maximization of shareholder wealth is meant by; first, in most cases


Why is profit maximization not an appropriate goal of the firm?

A firm cannot survive with mere profit maximization, but must increase long-term security through investment and meeting shareholder expectations. This will increase their productive capacity for the furture as well as encourage the risky capital investment of the shareholders.


What is meant by the goal of profit maximization?

Profit Maximization is an interesting and rather deep issue in Economics. Please understand that this question can be answered from various approach and interpretation. There are other disciplines like Business and Management which offers a slightly different answer.For example, if you are a Finance student, you might use the term to maximize shareholder value. ( which can be different from this goal ). From my understanding, profit maximization alone cannot be an appropriate goal for a firm. When I teach my students, I often ask them, if each of you start a company today, will the reason to do so, just to maximize profit ?. Although many firms do aim to maximize profit in their existence, not all do so. When we say maximize profit, this means to get the most profit in the firm's existence. And there are other firms that don't. Other goals of the firm can be expansion or growth, where they focus on establishing more branches or growing larger, while other firms focus on sales maximization, where they focus on selling more. There are also other firms that put the environment or social issues as their goal. ( although this can be argued if it's a marketing ploy ). Apart from these different goals of firms, we need to understand that different firms have different goals. A small grocery shop will have a different goal than a multinational company. And a different environment can also affect the goals of the company. If the firms operates in a monopolistic environment, then profit maximization is possible, as it's the only firm. If the firm operates in a perfectly competitive environment, the goal of profit maximization is not possible, as profit can be influenced by new firms who enter the environment and old firms who exit it.


How does the goal of maximization of shareholder wealth deal with those problems?

How does the goal of maximization of shareholder wealth deal with uncertainty and timing?


Why is profit maximisation an inappropriate goal of the firm?

Because it does not consider the riskiness of returns and it ignores the timing of returns.


Why is wealth maximization a better operating goal than profit maximization?

Everyone knows that profit is the life blood of every organization. Profit maximization is the primary or main objective of organizations, but under the method of profit maximization the purpose is to increase sales and profit. Less importance is given for consumer interest. Any queries against product or services is not considered and importance will be less per this method. So at the beginning organizations may be successful in its goal of earning high profits, but the organization will definitely suffer loss in future. Wealth maximizing means increasing fame, goodwill or reputations by providing importance to consumer preferences and wealth of society. By providing importance to consumer preferences organizations get queries, the need of changes in products that are innovative activities, after sale services, etc. With this important information product or service quality can be increased. Though sales will increase and demand will increase; goodwill also increases. By this, more of the shareholders, employees will be attracted towards the organization. After that, the lifetime of the company increases also. Organization's like NIKE and REEBOK are examples that are following the wealth maximization method. Wealth maximization is the better goal than profit maximization.


The main goal of the business?

The main and primary goal of the business no matter what kind of nature it has, is only profit maximization. There may also be some secondary purposes such as well being of people or offering services to the society but the primary focus is PROFIT. http://www.aidandtrade.com/


What are the problems involved in the use of profit maximization as the goal of the firm?

There is nothing wrong, if it is one of the goals. If that happens to be the only goal, employee's morale will get affected. Quality may deteriorate. Innovations can take a back seat.


Outline how an agency problem can interfere with the implementation of the goal of shareholder wealth of maximization?

Outline how an agency problem can interfere with the implementation of the goal of shareholder wealth of maximization