Limitation of profit maximization. Profit Maximisation 2022-10-19

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Profit maximization is a common goal for businesses, as it is seen as a way to maximize shareholder value and ensure the long-term viability of the company. However, there are several limitations to this approach that can ultimately be detrimental to both the company and society as a whole.

One limitation of profit maximization is that it can lead to unethical or irresponsible behavior. In an effort to maximize profits, companies may cut corners and engage in practices that are harmful to the environment, employees, or consumers. For example, a company may choose to use cheaper, but more harmful, materials in their products, or may exploit workers by paying low wages and providing poor working conditions. This can have negative consequences for both the individuals and communities affected, as well as for the company's reputation and long-term success.

Another limitation is that profit maximization can create a narrow focus on short-term gains, rather than considering the long-term sustainability of the company and its impact on society. This can lead to decisions that prioritize immediate profits over the well-being of the company and its stakeholders in the long run. For example, a company may choose to outsource jobs to countries with lower labor costs, which can lead to job loss and economic instability in the company's home country.

Additionally, profit maximization can lead to a lack of innovation and a failure to adapt to changing market conditions. This is because companies that are solely focused on maximizing profits may be less likely to invest in research and development, or to take risks on new ideas that may not have an immediate financial return. This can result in a failure to keep up with changing consumer demand or technological advancements, ultimately leading to a decline in the company's market share and profits.

Finally, profit maximization can contribute to income inequality and social unrest. When companies prioritize profits above all else, it can result in a concentration of wealth among a small group of individuals, while the rest of society may be left behind. This can lead to social and political tensions and can ultimately harm the overall stability and prosperity of society.

In conclusion, while profit maximization is an important goal for businesses, it is important to recognize the limitations of this approach. Companies must consider the ethical and social implications of their actions and strive to balance their pursuit of profits with the well-being of their employees, communities, and the environment.

Value Maximisation Model of the Firm (With Limitations and Diagram)

limitation of profit maximization

They have criticized the profit maximization objective on the following grounds: i The profit maximization objective ignores the timing of returns. Different stakeholders such as owners, managers, customers, creditors, and employees are directly connected with the organization. Points : 1 27 37 46 46 None of the above are within rounding error of the correct calculation. It is pointed out that in the present-day corporate form of business firms, in their decision making managers strive to promote their own interest by enhancing their power, prestige, leisure. In the lower part of Figure 2. What is the basic Limitations of Profit Maximization? Marginal cost, on the other hand, goes through an obvious change with an increased quantity of production. Earning higher profits might be one of the goals of financial management but cutting corners, using lower quality materials, and sacrificing company values to earn a higher profit will affect the reputation of the company and potentially lose customers.

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The limitations of the profit maximization goal include: A) It lacks a time dimension (i.e., it is static) B) It fails to consider risk C) The definition of profit is ambiguous D) All the above are limitations

limitation of profit maximization

More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. Points : 1 increase; increase decrease; decrease increase; decrease decrease; increase Question 18. The value of the euro would often depreciate against the dollar. Points : 1 Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. Points : 1 59 62 67 88 None of the above are within rounding error of the correct calculation.

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Profit Maximization

limitation of profit maximization

Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U. The firm with wider fluctuation in profit is riskier. Further insights regarding maximisation of value of the firm can be gained by decomposing TR and TC which determine profits made by the firm. In fact, managers may maximise their utility rather than profits or value of the firm. It is the traditional approach and the primary objective of financial management.

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What is the basic Limitations of Profit Maximization 10 What is the difference

limitation of profit maximization

The idea of profit maximization is not self-sustaining in nature and it is not built to target a market. The fixed costs are calculated only in the cases if there is any requirement to expand the production while the variable costs are always included in the marginal cost. It brings about increase in total revenue more than increase in costs. Thus, in the free market economies today managers have strong incentives to pursue profit motive or value maximisation of the firm. Under perfect competition, as none of the firms can individually influence the price of the goods that are to be purchased or sold therefore the firm is the price taker. The division of total cost into fixed cost and variable cost is determined by the choice of a production method to be used for the production of a commodity.

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Criticisms of Profit Maximization Objectives

limitation of profit maximization

Before expiration, the time value of an in the money call option is always Points : 1 equal to zero. Points : 1 stop-buy order limit-buy order market order limit-sell order none of the above. Therefore, in their opinion, managers only satisfied, that is, they attempt to have a satisfactory performance in terms of profits, sales, market share or growth of the firm. The interest of each member in this organizational collusion cannot be achieved with the sole objective of profit maximization. It reduces costs, revenue remaining the same.

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Profit Maximisation

limitation of profit maximization

Conditions in the financial markets determine interest rate and, therefore, the borrowing costs of the firm. As the organization begins its operations, the goals must be clearly stipulated in order to have a clear path to success. This states that every time there is a demand for an additional unit that company products meet, its revenue increases by an exact amount equal to the prevailing market price. Stock holders are interested in profit maximisation or value maximisation of the firm because it affects rate of return on capital investment. The idea of a company has also changed over time.


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The limitations of profit maximization as the goal of a corporation

limitation of profit maximization

Assume 365 days per year. This fact is ignored by profit maximization objective. To do so profits of future years must be discounted because money value a rupee of profit in a future year is worth less than a rupee of profit in the present. This difference in the concepts of costs makes the concept of profits used in economic theory different from that used in its calculation by the accountant. It can be assumed that if the level of the sales is high, the profits can be high as well but it is not true in all cases.

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Wealth Maximization vs Profit Maximization

limitation of profit maximization

A firm may not be able to obtain as many skilled workers as it needs for the production of a good. The initial margin is 50%. Points : 1 long; decrease short; decrease short; stay the same short; increase long; stay the same Question 26. It will be seen from the upper part of Fig. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should: Points : 1 exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

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