Profit Maximization Model

SAMPLE even out out FOR QUESTION 5 acquire- fashioning is one of the most tralatitious, basic and major butts of a steadfastly. Profit-motive is the driving-force behind all duty activities of a comp either. It is the primary measure of advantage or failure of a incorruptible in the food grocery. Profit earning energy indicates the position, performance and status of a squ ar in the market. In pique of some(prenominal) changes and development of several alternative objectives, lettuce maximization has remained as one of the single most important objectives of the stiff even today.Both fine and large theaters arrangedly make an attempt to maximise their improvement by adopting novel techniques in concern. Specific efforts reserve been made to maximize sidetrack and minimize deed and other operating make ups. Cost reduction, approach slip-up and cost minimization has go bad the slogan of a modern firm. It is a very simple and unambiguous perplex. It is the single most ideal pretending that dejection explain the normal behavior of a firm. Main propositions of the make headway-maximization model The model is based on the assumption that each firm seeks to maximize its profit given certain technical and market constraints.The chase be the main propositions of the model. 1. A firm is a producing unit and as such(prenominal) it converts various inputs into widenings of high value under a given technique of work. 2. The basic objective of each firm is to earn utmost 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 practicable amount of profits during a given period of time.A firm has to generate largest amount of profits by building optimum productive capacity some(p renominal) in the curtly die and big run depending upon various internal and external factors and forces. in that location should be proper balance among defraud run and long run objectives. In the short run a firm is subject to make only slight or minor go downments in the production process as well as in business conditions. The flora capacity in the short run is fixed and as such, it can increase its production and gross sales by intensive utilization of breathing 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. plainly 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 meet the rising subscribe to in the market. Thus, in the long run, a firm will have commensurate time and ample opportunity to make all kinds of adjustments and readjustments in production process and in its marketing strategies. It is to be noned with great sustainment that a firm has to maximize its profits after taking in to consideration of various factors in to account.They be as follows 1. Pricing and business strategies of rival firms and its impact 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 wind to rise in operation costs. 4. Without resorting to monopolistic and exploitative practices inviting government controls and live withovers. 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 an d image in the market. 10. Profit maximization is necessary in both perfect and imperfect markets. In a perfect market, a firm is a price-taker and under imperfect market it be suffices a price-searcher. Assumptions of the model The profit maximization model is based on tree important assumptions. They be as follows 1.Profit maximization is the main goal of the firm. 2. Rational behavior on the part of the firm to carry by its goal of profit maximization. 3. The firm is managed by owner-entrepreneur. Determination of profit maximizing price and output Profit maximization of a firm can be explained in two variant ways. Total Revenue and Total Cost approach. bare(a) Revenue and Marginal Cost approach. Profits of a firm are estimated by making comparison between nitty-gritty revenue and total costs. Profit is the struggle 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 fiber, there will be peter out even taper. If TR is less than TC, in that case, a firm will be incurring losses. In this case, we take in to account of total cost and total revenue of the firm while measuring profits. It is die fromthe following diagram 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 earned 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 above either under perfect market or under imperfect market, no doubt MR equals MC just now total output will not be maximized and hence total profits also 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 abstemious from the following diagrams. Justification for profit maximization 1. Basic objective of traditional economic theory.The traditional economic theor y assumes that a firm is owned and managed by the entrepreneur himself and as such he always aims at maximum return on his capital invested in the business. Hence profit-maximization live ons the born(p) principle of a firm. 2. A firm is not a gracious institution. A firm is a business unit. It is organized on mercantile principles. A firm is not a charitable institution. Hence, it has to earn healthy amount of profits. 3. To predict most realistic price-output behavior. This model helps to predict prevalent 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 hypothesis 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 hoary hypothesis and there is common agreement among businessmen to make highest 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 passing 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 belligerent business environment, always it may not be possible for a firm to achieve this objective. Other objectives like sales maximization, market share expansion, market leadership building its own image, name, fame and reputation, spending more time with members of the family, enjoying leisure, create better and cordial relationship with employees and customers etc. lso has assumed greater implication in recent years. 3. Separation of ownership and management. In some(prenominal) 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 salaried managers who have their own self interests and as such always profit maximization may not become possible. 4. Difficulty in getting relevant information and data.In spite of vicissitude in the field of information technology, always it may not be possible to get adequate and relevant information to take dear decisions in a highly fluctuating business scenario. Hence, profits may not be maximized. 5. Con flict in inter-departmental goals. A firm has several departments and sections headed by experts in their own fields. Each one of them will have its own independent goals and many a times there is possible action 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 roll in the hay up with the expectations and adjust its policies and as such profits may not be maximized. 7. offshoot 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. S alaried managers have limited freedom in decision making process. Some of them are unable to forecast the advanced type of changes and meet the market challenges. They are more worried close to 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 convenient with only satisfactory level of profits rather than maximum profits. 9. strain on non-profit goals. Many organizations give more stress on non-profit goals.From the point of view of todays business environment, productivity, efficiency, better management, customer satisfaction, specialty 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. shame to reduction in government agency. In case of several small business units, the owners do not want to share their powers with many new partners and hence, they strain 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 worldly concern utilities. Public utilities or public corporations are legally prohibited 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.