Evaluate Whether Profit Maximisation Is Always the Most Important Objective of Firms. (25 Marks)

Why is stock value maximization superior to profit maximization as a goal for management?

Stock value maximization is pretty significant to a company since it can be told about the company such as an reputation. Companies cannot exist by themselves. They do need a lot of money or

When the firm is trying to maximize their stock they are trying to develop new products and technology which leads to producing products that the customer (society) needs.

MNEs try to maximize profits. How could MNEs maximize profits and minimize profit volatility at the same time?

Throughout this task I will do my best to explain how firms determined to maximize profit do just that. Specifically I will delineate how such firms choose the optimum level of production or output for the goods they produce and how they behave with respect to various elevations of marginal revenue. In my attempt it will be appropriate for me to clarify the definitions of various economic terms in order to assure a proper understanding of my thoughts on this topic, I will provide these definitions throughout.

In order for any business to be successful they would need to know how to make the most profit for the goods they are producing and selling.

Helen’s is an upmarket fashion boutique store in Sydney’s east. Falling sales have been reflected by surveys that reveal consumers view the business as outdated and no longer relevant to consumers’ needs. Strong competition in the area has placed considerable pressure on pricing. The business’s target market, 50-65 year old females, no longer dominated the now younger demographic character of the area.

If a company can make a profit with low expenses, then they have succeeded in profit maximization. Companies strive to make a profit, but if they can reach their profit maximization then that’s even better.

Therefore monopolies aim to produce more units of their good in order to maximize their profits. Reversely, if they produce at a high a level of output, marginal costs are greater than marginal revenue, and they therefore increase their profits by reducing the number of items produced (Mankiw, 2014).

They went on to state that competition would not solve this dilemma. This lead to a re-evaluation of the goal of corporations, from merely maximizing revenues, to maximize the value of the firm, as it was determined in the stock market.

In the short run the perfect competition equilibrium can be found by graphing the marginal cost (MC), average total cost (ATC) and marginal revenue (MR) curves. In perfect competition the price is equal to the average revenue, which is equal to the marginal revenue and these are all constant, giving an infinitely elastic demand curve for the firm. The demand curve is “perfectly price elastic” due to the homogeneity of the products supplied, where each supplier, as a price taker, must focus on a single price. Given this, the only choice a supplier has in the short run is how much to produce. For profit maximisation to occur marginal costs (supply curve) must equal marginal revenue (demand curve). Profit maximisation is assumed to mean the maximisation of normal economic profit (i.e. revenue that covers the

When companies are making decisions, the companies do not worry about how the rivals will react, in part to each company’s actions are unlikely to affect its rivals to a great extent hence they are independent. In addition, there is perfect knowledge in the market hence new companies have the freedom to enter into the industry. The companies are also profit maximizers, producing output where marginal revenue equals marginal cost; the profit maximising condition. Companies in a

* The more money that managers make in wages and benefits, the less stockholders see in bottom-line net income. Stockholders obviously want the best managers for the job, but they don’t want to pay any more than they have to. In many corporations, top-level managers, for all practical purposes, set their own salaries and compensation packages.

Similarly looking at J.A Schumpeter as an economist, his concepts seem to favour monopolistic activity within our economy suggesting that they provide an ‘engine for technological processes’ and are needed to fuel research and development and increase innovation. Through his readings, Schumpeter conveys the idea that monopolies bring forward extra surplus in which other perfectively competitive firms will be unable to supply and can be used to undertake extra research. Looking at the graph on the left you can see that monopolies have the ability to gain ‘supernormal’ profits as the degree of competition within the market stands at zero for a pure monopoly. The profit maximising point is MC=MR and output is Q and price P, given that price (AR) is above ATC at Q, supernormal profits are possible (area PABC). All graphs and ideologies are referenced below. The extra amount gained can be used on improving the

Most companies are profit oriented. Companies survive and live on profit. Even governmental institutions, NGO's and NPO's are profit oriented, what they do with profit is different though. Saying this means that companies seek always to be at a position where profit is maximized. As we know by now this happens when MC=MR but this is an always changing point as supply and demand are dynamic, effectively meaning that if firms get it right once they can't just do the same eternally, they still need to adapt to every market factor as a new change is a new reality all together that needs to be studied and addressed. All

One often stumbles upon such statements while reading about shareholders value or maximization of shareholders wealth. This is also a typical answer to questions such as “what is the best and primary objective of a company in a competitive market”. But should it be the only and most important objective in a firm? Must it be fulfilled first and foremost, or is there the possibility of generating more wealth for company, shareholders and stakeholders with other, different approaches? It has