Profit maximisation as a goal of business organisations

We have already learned that Economics is about how human beings satisfy their wants using the available resources. Therefore, individuals will always try to satisfy as much wants as possible with as little resources(money) as possible.

In the same way, the purpose of a firm is to get benefit from producing and selling goods and services. Therefore profit maximisation is clearly an important goal of any business organisation. We can calculate profit of a firm by using the following formula:

Profit = Total Revenue(TR) – Total Cost(TC)

Profit maximisation means the process of obtaining the highest possible level of profit through the production and sale of goods and services.

Therefor a firm trying to maximise profit must look at revenue and costs as well.

The profit-maximization assumption means that firms seek a production level that generates the greatest difference between total revenue and total cost.

Other Objectives

On a day-to-day basis most firms are likely to pursue goals other than profit maximization. Three most noted objectives are sales maximization, personal welfare, and social welfare.

Sales Maximization: Many firms make decisions designed to increase or maximize production and the amount of output sold. More sales means more revenue, but not necessarily more profit.

Personal Welfare: Firms are occasionally motivate to increase the personal welfare of owners or employees, especially the employees who control the operation of the firm. Profit is usually sacrificed in the process. Employees’ welfare will benefit the firm as it motivates the workers.

Social Welfare: Some firms are also inclined to take actions that they deem will improve the overall well-being of society. These actions also tend to reduce profit. However, the benefit they get is the good reputation, and therefore consumers may prefer its products.

Next topic: Pricing and output policies in perfect competition and monopoly

Leave a Comment