Maximizing Profits and Maximum Profits - Profit Maximization Theory

 

Profit maximization theory is generally regarded as one of the most important concepts in management theory. It is a theory that has been developed by numerous researchers over the decades. The concept focuses on analyzing the process by which value is created and determined and then realizing the resulting value. This theory also focuses on the nature of the process itself and how it impacts the organization's internal processes and framework.

Profit maximization is essentially the main objective and the first principle of financial management. It implies that each decision related to company operation is analyzed in the light of anticipated future profits. All the relevant decisions with regards to making new investments, acquisition of productive assets, expansion of existing ones etc are all studied in relation to their potential effect on future profits and hence profitability. The focus of the theory is therefore not only on the dimension of profit but also on the dimension of time.

The main notion of profit maximization theory is that the firm has to be prepared to lose some of its assets in order to realize future profits from the whole assets invested. This could mean that a firm has to liquidate some of its assets in order to meet its short and long-run goals. This would of course imply a change in the current accounting practices and may lead to a complete revision of the accounts.

However, one should not be entirely put off by the above statement. There are many advantages associated with the profit maximization theory. The main advantage is that it makes a lot of sense when we talk about the measurement of time value. The time value of money theory suggests that the firm must make optimum use of its resources in order to maximize its profits over a period of time. It also makes sense if we analyze the relationship between resources and profits in terms of the firm's capacity to make profits, which of course is determined by its capital structure.

The profit maximization theory also predicts the level of prices across the market, taking into consideration the elasticity of demand, in order to determine the level of costs and the level of prices that are required to attract investment. Price elasticity of demand is defined as the degree to which the general public is willing to pay a given price for a fixed quantity of goods or services. An essential aspect of this theory is that the factors that affect demand such as income effects, the general state of the economy and the behaviour of other firms are taken into consideration.

The profit maximization theory is a valuable tool for managers to improve profitability, especially for those involved in the raw materials, minerals, energy, agricultural and animal production industries. Although profit margins can be maximized to a certain extent through economies of scale, profit maximization theory can be used as an effective guide for overall business planning to ensure maximum profitability at the firm level. It is important to understand that this is not a legal requirement for managers to focus on these objectives but rather an opportunity for them to develop an understanding of the interrelations among profits, prices and the objectives of corporate management as well as the factors that affect demand.

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