Profit Maximization Model

SAMPLE ANSWER FOR QUESTION 5 salary-making is genius of the most traditional, basic and major objectives of a securely. lettuce-motive is the driving-force behind all caper activities of a company. It is the primary winding measure of success or failure of a firm in the market. Profit suck ining capacity indicates the position, murder and status of a firm in the market. In spite of several changes and development of several choice objectives, pull in maximization has remained as one of the single most important objectives of the firm even today.Both dainty and large firms consistently make an attempt to maximise their boodle by adopting novel techniques in business. particular proposition efforts take on been made to maximize output and minimize production and other operating follows. Cost reduction, cost fareting and cost minimization has become the slogan of a modern firm. It is a actually open and unambiguous example. It is the single most ideal model that can e xplain the normal mien of a firm. Main propositions of the gelt-maximization model The model is based on the assumption that each firm seeks to maximize its salary given certain technical and market constraints.The following are the main propositions of the model. 1. A firm is a producing unit and as such it converts various inputs into outputs of higher value under a given technique of production. 2. The basic objective of each firm is to earn maximum profit. 3. A firm operates under a given market condition. 4. A firm will select that alternative course of action which helps to maximize consistent profits 5. A firm makes an attempt to change its prices, input and output quantity to maximize its profit. The model Profit-maximization implies earning highest possible descend of profits during a given period of meter.A firm has to generate largest amount of profits by building optimum productive capacity both in the short order and long choke depending upon various internal a nd external factors and forces. in that respect should be proper balance in the midst of short run and long run objectives. In the short run a firm is suitable to make only slight or minor adjustments in the production process as hygienic as in business conditions. The plant capacity in the short run is fixed and as such, it can increase its production and sales by intensive utilization of existing plants and machineries, having over time work for the existing staff etc.Thus, in the short run, a firm has its own technical and managerial constraints. But in the long run, as there is plenty of time at the disposal of a firm, it can expand and add to the existing capacities build up new plants employ additional workers etc to action the rising demand in the market. Thus, in the long run, a firm will feed equal to(predicate) time and ample opportunity to make all kinds of adjustments and readjustments in production process and in its merchandise strategies. It is to be noned wi th great care that a firm has to maximize its profits after fetching in to consideration of various factors in to theme.They are as follows 1. Pricing and business strategies of rival firms and its move on the working of the given firm. 2. Aggressive sales promotion policies adopted by rival firms in the market. 3. Without inducing the workers to demand higher wages and salaries leading to rise in operation cost. 4. Without resorting to monopolistic and consumptive practices inviting government controls and takeovers. 5. Maintaining the quality of the product and services to the customers. 6. Taking various kinds of risks and uncertainties in the changing business environment. . Adopting a stable business policy. 8. Avoiding any sort of clash between short run and long run profits in the business policy and maintaining proper balance between them. 9. Maintaining its reputation, name, fame and image in the market. 10. Profit maximization is necessary in both perfect and imperfec t markets. In a perfect market, a firm is a price-taker and under imperfect market it becomes a price-searcher. Assumptions of the model The profit maximization model is based on tree important assumptions. They are as follows 1.Profit maximization is the main goal of the firm. 2. noetic behavior on the part of the firm to achieve its goal of profit maximization. 3. The firm is managed by owner-entrepreneur. inclination of profit maximizing price and output Profit maximization of a firm can be explained in two different ways. Total Revenue and Total Cost approach. borderline Revenue and Marginal Cost approach. Profits of a firm are estimated by making comparison between impart revenue and total costs. Profit is the difference between TR and TC.In other words, excess of revenue over costs is the profits. Profit = TR TC. If TR is equal to TC in that facial expression, there will be break even point. If TR is less(prenominal) than TC, in that slipperiness, a firm will be incur ring losses. In this case, we take in to account of total cost and total revenue of the firm while measuring profits. It is clear fromthe following plot how profit arises when TR is greater than that of TC. 2. MR and MC approach In this case, we take in to account of revenue realise from one unit and cost incurred to produce only one unit of output.A firm will be maximizing its profits when MR= MC and MC curve cuts MR curve from below. If MC curve cuts MR curve from preceding(prenominal) either under perfect market or under imperfect market, no doubt MR equals MC but total output will not be maximized and hence total profits as well as will not be maximized. Hence, two conditions are necessary for profit maximization- 1. MR = MC. 2. MC curve cut MR curve from below. It is clear from the following diagrams. Justification for profit maximization 1. Basic objective of traditional stinting theory.The traditional economic theory assumes that a firm is owned and managed by the entrepr eneur himself and as such he always aims at maximum return on his capital invested in the business. Hence profit-maximization becomes the natural principle of a firm. 2. A firm is not a charitable institution. A firm is a business unit. It is nonionized on commercial principles. A firm is not a charitable institution. Hence, it has to earn conceivable amount of profits. 3. To predict most realistic price-output behavior. This model helps to predict usual and general behavior of business firms in the real world as it provides a practical guidance.It also helps in predicting the reasonable behavior of a firm with more accuracy. Thus, it is a very simple, plain, realistic, pragmatic and most useful guessing in forecasting price output behavior of a firm. 4. Necessary for survival. It is to be noted that the very existence and survival of a firm depends on its capacity to earn maximum profits. It is a immemorial hypothesis and there is common agreement among businessmen to make hi ghest possible profits both in the short run and long run. 5. To achieve other objectives.In recent years several other objectives have become much more popular and all these objectives have become highly relevant in the context of modern business set up. But it is to be remembered that they can be achieved only when a firm is making maximum profits. Criticisms 1. Ambiguous term. The term profit maximization is ambiguous in nature. There is no clear cut explanation whether a firm has to maximize its net profit, total profit or the rate of profit in a business unit. Again maximum amount of profit cannot be precisely defined in quantitative terms. . It whitethorn not always be possible. Profit maximization, no doubt is the basic objective of a firm. But in the context of highly competitory business environment, always it may not be possible for a firm to achieve this objective. different objectives like sales maximization, market share expansion, market leadership building its own i mage, name, fame and reputation, spending more time with members of the family, enjoying leisure, developing better(p) and cordial relationship with employees and customers etc. lso has assumed greater significance in recent years. 3. Separation of ownership and management. In many cases, to-day we come across the business units are organized on partnership or joint stock company or cooperative basis. In case of many large organizations, ownership and management is clearly separated and they are run and managed by compensable managers who have their own self interests and as such always profit maximization may not become possible. 4. Difficulty in getting relevant development and data.In spite of revolution in the subject field of information technology, always it may not be possible to get adequate and relevant information to take salutary decisions in a highly fluctuating business scenario. Hence, profits may not be maximized. 5. Conflict in inter-departmental goals. A firm h as several departments and sections headed by experts in their own fields. severally one of them will have its own independent goals and many a times there is casualty of clashes between the interests of different departments and as such always profits may not be maximized. 6. Changes in business environment.In the context of highly competitive and changing business environment and changes in consumers tastes and requirements, a firm may not be able to cope up with the expectations and adjust its policies and as such profits may not be maximized. 7. Growth of oligopolistic firms. In the context of globalization, growth of oligopoly firms has become so common through mergers, amalgamations and takeovers. Leading firms dominate the market and the small firms have to follow the policies of the leading firms. Hence, in many cases, there are limited chances for making maximum profits. 8.Significance of other managerial gains. Salaried managers have limited freedom in decision making pr ocess. Some of them are unable to forecast the right type of changes and meet the market challenges. They are more worried about their salaries, promotions, perquisites, security of jobs, and other types of benefits. They may lack strong motivations to make higher profits as profits would go to the organization. They may be contented with only satisfactory level of profits rather than maximum profits. 9. Emphasis on non-profit goals. many a(prenominal) organizations give more stress on non-profit goals.From the point of view of todays business environment, productivity, efficiency, better management, customer satisfaction, durability of products, higher quality of products and services etc. have gained importance to cope with business competition. Hence, emphasis has been shifted from profit maximization to other practical aspects. 10. Aversion to reduction in power. In case of several small business units, the owners do not want to share their powers with many new partners and hen ce, they screen to keep maximum powers in their hands.In such cases, keeping more power becomes more important than profit maximization. 11. Official restrictions over profits of public utilities. Public utilities or public corporations are legally nix to make huge profits in many developing countries like India. Thus, it is clear that a firm cannot maximize its profits always. There are many constraints in the background of multiple objectives. Each one of the objectives has its own merits and demerits and a firm has to strike a balance between all kinds of objectives.