Why are Businesses Profit Maximizers

Profit maximization is an assumption of classical economics. One can easily understand the logic of the pursuit of profit maximization. Profit allows higher wages and dividends for entrepreneurs starting a business. Profits can be used to finance business expansion investments. Profits provide a backup solution for tough times. Here are some reasons or outcomes for profit maximization.

Why are Businesses Profit Maximizers

 1. Profit Satisfaction 

Owners want to maximize profits, but not workers and managers. Owners' shareholders care about the company's profits, but often don't care about the employees. As a result, workers have little incentive to maximize their profits. Workers earn enough profit to keep their jobs but then pursue other goals such as work pleasure. 

 

 2. Increase Market Share

In general, companies seem more interested in increasing their market share. This can be called sales maximization. For example, companies like Walmart/Asda have stated that their goal is to maximize sales and increase market share, even as profits decline. Amazon has grown with the goal of capturing market share rather than maximizing profits. The willingness of shareholders to accept small profits can vary by industry. For example, with IT/Internet companies like Amazon, shareholders have shown that they are willing to accept lower dividends and seek market penetration with the potential for greater future returns. Non-IT companies in “older” industries often find that shareholders are less tolerant of low returns. 

 

 3. Non-Economic Reasons 

Not always people make decisions for economic/financial reasons. A business may be reluctant to lay off workers even if it increases profits. Cooperative groups seek to share benefits among members. In terms of reviews, you could say these other goals are really just a smart way to increase profits in the long run.

 

4. Economies of Scale

The maximum apparent rationale for the excessive price of return loved by big-share companies is that they've accomplished economies of scale in procurement, production, advertising and marketing, and other valuable components. A commercial enterprise with a 40% percentage of a given market is definitely two times as big as one with 20% of the same marketplace, and it'll acquire, to a miles greater degree, more green strategies of operation within a specific sort of generation.


5. Market Energy

Many economists, especially those worried about antitrust paintings, trust that economies of scale are of exceedingly little significance in maximum industries. These economists argue that if big-scale groups earn a higher income than their smaller competition, it's miles a result in their more marketplace energy.


6. Quality of Control

The best of all explanations for the marketplace-percentage/profitability dating is that each proportion and ROI replicate a common underlying factor: the fine of control. Good managers (inclusive of, perhaps, fortunate ones!) are successful in achieving excessive stocks of their respective markets; they may be additionally skillful in controlling expenses, getting the most productivity from personnel, and so on. Moreover, once an enterprise achieves a leadership role—probable through developing a brand new field—it's miles a lot easier for it to hold its lead than for others to trap up.


References

WEB: The Purpose of Business: Profit Maximization versus Corporate Citizens - Shiv K. Gupta – University of Findley, 1 ... https://www.usi.edu/media/3654807/Purpose-of-Business.pdf
WEB: Sage Journals - Merter Mert, 1 ... https://journals.sagepub.com/doi/10.1177/1847979018815296

There are no comments

Leave your comment