Simple Profit Maximizing Perspective Essay Example | Topics and Well Written Essays - 2000 words

Simple Profit Maximizing Perspective - Essay Example Firms use these strategies as the spring board for their activities towards profit realization. These strategies introduce both positive and negative results to the organization. Positivity arises when the firm meets its targets and rewards employees and shareholders. Negative results arise when managers concentrate on personal development instead of the firm’s goals. The firm may also engage in unethical practices in order to achieve its profit goals. Therefore, there is need for strategic management of the firm’s profit strategies to prevent the workers from going overboard to introduce negative impacts to the firm. Profit maximization perspectives Total revenue- total cost Total revenues are derived from the amount a firm receives from the sale of its output. Total costs include all expenses incurred by a firm in buying the inputs required in the production process (Grant, 2002). This perspective begins with determining the optimum quantity of output that will maximi ze profits. The quality of the output is also considered in the planning stage. Firms processing high quality products attract several customers, which increases their revenue. A firm is considered profitable when the total revenues exceed the total costs. As illustrated in the diagram below, the curve illustrates profit maximization point for a firm in a perfect competition market. The optimal level of output at which the firm should operate to maximize profits is point C. At this point, the total profit curve is also at its maximum; therefore the firm can maximize its profits. Figure 1.0 Total revenue-total cost curve Source: Journal of Political Economy, 108 (3): 604-631. Marginal revenue- marginal cost This perspective holds that for each unit sold, a deduction of marginal cost from the marginal revenue will result to a marginal profit. At a certain level of output, the marginal profit becomes positive when marginal revenue exceeds marginal cost (Smith, Ferrier & Ndofor, 2001). This firm can adopt this level as the optimum level of production and the number of units produced should not fall below this level. Where the marginal cost exceeds the marginal revenue, the firm is making marginal losses, and this is an indication that the firm should produce fewer units of output. When the marginal cost is equal to the marginal revenue, the marginal profit is zero and the firm is considered to be maximizing profits. The goals of a firm are crucial as they are the elements that lay a foundation for understanding, predicting and interpreting different profit behaviors experienced by different firms. Some profit maximization strategies may have a conflict with the employees of the firm leading to negative impacts. Profit maximization perspectives limit the ability to understand how the firms utilize different methods and techniques to achieve their goals and objectives. The agency theory gives the relationship between the ownership structure of a firm and the profit maximization objective. The theory demarcates ownership from control of corporate organizations (Berle, & Means, 2006). This leads to a nonprofit maximizing behavior if managerial and individual needs have a mismatch with the profit goal of the organizational. This is common in firms where the managers have different goals from those governing the entire firm. The managers strife to achieve and maximize personal utility and they end up compromising the profit targets of the firm (Gupta et al., 2004). In microeconomic theory, it is argued that only