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Why is that profit maximization may not necessary lead to wealth maximization?
Wiki User
∙ 12y ago
Because as the price of a commodity increases, the purchasing power of consumers reduces. Consumers will then shy away and only few people would be able to pay for the extra. Thus, increase in profit may not necessarily mean maximization of wealth.
Wiki User
∙ 12y ago
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Does shareholder wealth maximization benefit society as a whole?
Of course yes, if organization assum objectives of shareholders wealth maximization, it will struggle for profit maximization which will lead to more operations. operations of business needs employees, which will be hired from the society and the unemployment rate will decreased, on the other hand the organization will survive in long run and would meet the demands of the society as whole.... Haleem Graduate school of business University of gothenburg Sweden
What is growth maximisation?
Growth depends on the volume of investment. Investment depends on capital availability. Capital may come from either internal or external source. External source of capital is costly where as internal generation of funds is economical. Generation of internal capital depends on profit making capacity of a firm. Hence, profit maximization would automatically lead to growth maximization
How is the goal of profit maximization affected by ethical considerations?
As a goal "profit maximization" alone is too simple to be meaningful.All goals are filtered by our values. If someone is driven by greed alone then ethics may not be considered. However, that person will still need to consider timescale. If you take the short-term view a manager may put off maintenance on a machine so that it can continue to produce but not have the expense of the maintenance. Thereby increasing profit in that accounting period. But what if doing so causes irreparable damage to the machine that means it will eventually have to be replaced several years earlier than necessary. In the long-term the company's profit is reduced even though it was maximized in the short-term.So even someone who does not value ethical behavior should modify their idea of what the "maximum" acceptable profit is in the short-term giving due consideration to the long-term.When someone's values mean that they bring ethical behavior into the equation you need to plan for the cost of behaving differently. This means that the maximum profit achievable from acting ethically will often in the short-term be lower than from acting unethically. However, in the long-term the profits may be higher.Look at the way banks have behaved in the recent past. The search for maximum profits lead them to act unethically in lending to people who were never going to able to service the debt. A culture of high bonuses fueled this behavior and people never thought that the growth would end.Shame on the bankers, regulators and politicians who believed that profit maximization, without any other considerations, was a good thing.
What are the advantages and disadvantages of profit maximisation?
i dont knowSkip to main content.Subscribe to the Houston Chronicle | Shopping | Classifieds | Obituaries | Place an Ad | La VozRegister | Sign InChron.comWeb Search by YAHOO!Local DirectoryHomeLocalUS & WorldSportsBusinessEntertainmentLifestyleJobsCarsReal EstateSmall Businessby Demand MediaBusiness Technology & Customer Support|Business Communications & Etiquette|Human Resources|Managing Employees|Setting Up a New Business|Advertising & Marketing|Business & Workplace Regulations|Types of Businesses to Start|More »» Business Models & Organizational Structure» Accounting & Bookkeeping» Business Planning & Strategy» Finances & Taxes» Running a Business» Money & DebtSmall Business >Finances & Taxes >ProfitAdvantages & Disadvantages of Profit Maximization by Renee O'Farrell, Demand Media inShare0Share Bit.lyBloggerDeliciousDiggGoogle BookmarkGoogle PlusInstapaperPosterousStumbleuponTumblrYahoo! BookmarkxRSSEmailMaximizing profits as a strategy is fine in the short term, but consequences exist.profit image by Michael Shake from Fotolia.comRelated ArticlesDifference Between Sales Maximization & Profit MaximizationSales Maximization Vs. Profit MaximizationAdvantages and Disadvantages of For-Profit CompaniesRevenue Maximization vs. Profit MaximizationAdvantages & Disadvantages of Retained ProfitThe Advantages & Disadvantages of Economic Order Quantity (EOQ)When a firm applies profit maximization, it is basically saying that its primary focus is on profits, and it will use its resources solely to get the biggest profits possible, regardless of the consequences or the risk involved. Profit maximization is a generally short-term concept. Application usually lasts less than one year, although some companies employ this strategy exclusively, constantly jumping on the next big trend.RiskPursuing a profit maximization strategy comes with the obvious risk that the company may be so entrenched in the singular strategy meant to maximize its profits that it loses everything if the market takes a sudden turn. For example, a company may find that it gets the most profit selling the Wii gaming system, so instead of keeping a balanced inventory, it invests solely in buying Wiis to sell. If the Wii goes out of favor or the makers of the Wii begin to limit the price that can be charged for the system, the company that relied solely on its investment in Wiis could lose everything. Similarly, if a company focuses only on maximizing its profit, it may miss opportunities for investment and expansion. Expectation and GoodwillYou also need to consider consequences of profit maximization. If a company pursues a profit maximization strategy, it creates an environment where price is a premium and cutting costs is a primary goal. This, in turn, creates a perception of the company that could lead to a loss of goodwill with customers and suppliers; for instance, a company may win subsequent contracts with a client by bidding the first job low. It also creates an expectation of shareholders to see immediate gains, rather than realizing profits over time. Cash FlowFor all its drawbacks, profit maximization carries the big advantage of creating cash flow. When maximizing profit is the primary consideration, investments, reinvestments and expansions are typically tabled. The company simply makes do on what it has. This can create a more cost-efficient environment. In the mean time, the profits keep building, producing a healthy bottom line and increasing the firm's amount of available cash. Sometimes profit maximization is used entirely to create an influx of cash so the firm can reduce its debt or save up for expansion. Financing and InvestorsSome degree of profit maximization is always present. The goal of a company is to create profits. It has to profit from its business to stay in business. Moreover, investors and financiers in the company may require a certain level of profits to secure funds for expansion. Further, a company has to perform well for its shareholders; they expect a return on their investments. As such, maximizing that profit is always a consideration to some extent. ReferencesSan Jose State University Department of Economics; Is Profit Maximization the Proper Objective for Firms in a Market Economy?; Thayer WatkinsResourcesBlackwell Publishing; Understanding Financial Management; H. K. Baker and G. E. Powell; 2005About the AuthorRenee O'Farrell is a freelance writer providing valuable tips and advice for people looking for ways to save money, as well as information on how to create, re-purpose and reinvent everyday items. Her articles offer money-saving tips and valuable insight on typically confusing topics. O'Farrell is a member of the National Press Club and holds advanced degrees in business, financial management, psychology and sociology.Photo Creditsprofit image by Michael Shake from Fotolia.comMore ArticlesGraphic Ways to Depict Profit MaximizationThe Advantages & Disadvantages of the Beef Production IndustryLimited Liability Partnership Advantages & DisadvantagesAdvantages & Disadvantages of Using Computer Technology in Decision MakingAlso ViewedHow to Calculate Profit MaximizationThe Difference Between Profit & Revenue MaximizationAdvantages & Disadvantages of a Nonprofit StatusThe Advantages of Profit-Sharing PlansAdvantages and Disadvantages of a Marketing StrategyAdvantages and Disadvantages of StakeholdersRelated TopicsOther Finances & TaxesHow to Claim Taxes When You Open Your Own BusinessTaxes Payable vs. Payroll TaxesKey Tools for Planning FinancesHow to Write Off My Cellphone as a Business Expense on My Tax FormsSmall Business IndexPowered by Demand MediaLocalUS & WorldSportsBusinessEntertainmentLifestyleJobsCarsReal EstateThe Houston Chronicle is the premier local news provider for the country's 4th largest city.Currently the nation's sixth-largest newspaper, the Houston Chronicle is a multimedia company publishing print and online products in English and Spanish that reach millions of people each month. The Houston Chronicle is owned by the Hearst Corporation.Advertise With UsPurchase ads for web, social media, and print via Hearst Media ServicesPlace a classified ad in the paper or onlinePlace a targeted ad in a speciality section such as a weekly or neighborhood publicationSubscriber ServicesGet home delivery, manage your subscription, pay your bill with EZ Pay, and set a vacation hold for the paperLocal Business DirectoryAbout UsCorporate HomeAbout the Houston ChronicleCareersCommunityLegal NoticesContestsAd ChoicesContact UsCustomer ServiceNewsroom ContactsEditions & AppsiPadiPhoneAndroidBlackberryMobile WebsiteeEdition Demo | Today's eEditionChronicle in EducationChron.com Site IndexFollow ChronFacebookTwitterLinkedInNewslettersRSSMarch 4, 2012, marks the 125th anniversary of Hearst. The company has grown from a single newspaper in 1887, into one of the world's most admired private media and information companies with some 200 businesses in more than 100 countries. Learn moreTerms & Conditions | Privacy Policy | Ad ChoicesHouston Chronicle | P.O. Box 4260 Houston, Texas 77210-4260© Copyright 2012 Hearst Communications, Inc.
Why profit maximization by itself is an inappropriate goal?
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.A company may be seeking to gain market share by lowering its prices and squashing competition.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.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.
Under what conditions might profit maximization not lead to share price maximization?
Profit maximization will not lead to share price maximization if the organization is working on building wealth in the future. With long range goals, the profits will be delayed until future goals are met.
Under what conditions might profit maximization not lead to stock price maximization?
Under what conditions might profit maximization not lead to stock price maximization?"
Under what condition might profit maximization not lead to stock price maximization?
There are various conditions under which profit maximization may not lead to stock price maximization. Some of them include outstanding shares and assets falling below the cost of the debt among others.
What are the arguments in favor of wealth maximization as the objective of a firm Why is profit maximization?
The arguments in favor of wealth maximization as the objective of a firm are that it aligns the interests of shareholders and management, promotes long-term sustainability, and encourages efficient allocation of resources. Profit maximization, on the other hand, may lead to short-term thinking, unethical practices, and neglect of other stakeholders' interests. By focusing on wealth maximization, firms can generate sustained value for shareholders and society as a whole.
Does shareholder wealth maximization benefit society as a whole?
Of course yes, if organization assum objectives of shareholders wealth maximization, it will struggle for profit maximization which will lead to more operations. operations of business needs employees, which will be hired from the society and the unemployment rate will decreased, on the other hand the organization will survive in long run and would meet the demands of the society as whole.... Haleem Graduate school of business University of gothenburg Sweden
What are the difference between the goals of profit maximization and maximization of shareholder wealth?
The diffence in laymen's terms is all within the focus. If one is maximizing shareholder value, they are simply placing focus on what can raise value in the "short term" (increase stock price). If one is maximizing company value, they are looking from a different point of view which is usually on what you can really sell the company for, intangibles such as reputation, products in the works, workplace, etc. A person would be looking towards the future "long-term" outlook with this perspective.
What is maximise?
Growth depends on the volume of investment. Investment depends on capital availability. Capital may come from either internal or external source. External source of capital is costly where as internal generation of funds is economical. Generation of internal capital depends on profit making capacity of a firm. Hence, profit maximization would automatically lead to growth maximization
What is growth maximisation?
Growth depends on the volume of investment. Investment depends on capital availability. Capital may come from either internal or external source. External source of capital is costly where as internal generation of funds is economical. Generation of internal capital depends on profit making capacity of a firm. Hence, profit maximization would automatically lead to growth maximization
What are some disadvantages of stockholders wealth maximization?
Ah, I love loaded questions. Stockholder Wealth Maximization is the root goal of all business. But a narow focus on that can lead to neglecting many facets of business: Re-investment in technology and capital projects. Investing in Training and employee development Enviromental risk assesment and reduction. Comunity involvment and stewardship Basic Empoyee health and benifit (See Wall Mart )
Will profit maximisation necessarily lead to wealth maximisation?
Assuming that you understand what is maximisation, the the question is left only with two words, profit and value.Profit = Incomes - Expenses, while value is simply the relative worth (in monetary or...analysis of shareholder wealth maximization.While it is easy to see why you might think this, theoretically a sponsorship should be useful as an advertisement. Furthermore, if the sponsorship is of a nonprofit such as a scholarship or an AYSO..
How did wealth lead to the abbasid downfall?
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How is the goal of profit maximization affected by ethical considerations?
As a goal "profit maximization" alone is too simple to be meaningful.All goals are filtered by our values. If someone is driven by greed alone then ethics may not be considered. However, that person will still need to consider timescale. If you take the short-term view a manager may put off maintenance on a machine so that it can continue to produce but not have the expense of the maintenance. Thereby increasing profit in that accounting period. But what if doing so causes irreparable damage to the machine that means it will eventually have to be replaced several years earlier than necessary. In the long-term the company's profit is reduced even though it was maximized in the short-term.So even someone who does not value ethical behavior should modify their idea of what the "maximum" acceptable profit is in the short-term giving due consideration to the long-term.When someone's values mean that they bring ethical behavior into the equation you need to plan for the cost of behaving differently. This means that the maximum profit achievable from acting ethically will often in the short-term be lower than from acting unethically. However, in the long-term the profits may be higher.Look at the way banks have behaved in the recent past. The search for maximum profits lead them to act unethically in lending to people who were never going to able to service the debt. A culture of high bonuses fueled this behavior and people never thought that the growth would end.Shame on the bankers, regulators and politicians who believed that profit maximization, without any other considerations, was a good thing.
