Profit vs Profit maximisation

These are two terms that have caused some trouble for students in the past, and it’s most probably because they are so closely related. How do we distinguish between them? What do they mean exactly, and when should you use them?

  • Profit is what is left after subtracting total costs from total sales (revenue).                  Profit = Total Sales – Total Costs
  • Profit maximisation is where the greatest positive difference between total revenue and total costs is achieved

Ultimately, profit is the return for the risk that business owners take for investing in the business. Remember opportunity cost? Business owners also had to deal with opportunity cost when they initially invested in the firm. Instead of starting up a business or purchasing shares in a company, the owners (or entrepreneurs) could have rather invested their finance elsewhere. They might have saved the money in an interest-bearing account, purchased shares in a different firm or started their own business.

Profit maximisation is a business objective. Just like survival, increasing market share and growth, profit maximisation is an objective that a business hopes to achieve, and makes certain decision in order to reach this outcome.

For most businesses, profit is seen as necessary for the long-term survival of the firm. The profit motive rewards the taking of risks and hard work; it gives business owners an ultimate outcome. For the sole trader, profit will always be in mind: it’s his or her “salary” earned from the business’s activity.

Profit maximisation is not always necessary or even vital for long-term success. Of course, in the competitive, globalised business world of today, ‘the bottom line’ is always of concern. But it’s not always the main aim or objective. In some cases and different contexts, the objective of survival is more important (such as during an economic recession where consumer spending is reduced). Alternatively, a business may value the objective of increasing market share more highly; gaining a greater proportion of the total market might be seen as an important step in attaining loyalty (profit maximisation could be sought thereafter).

QUESTION: In your own words, explain one situation where profit maximisation might not be the most important objective for a business. 

 

9 thoughts on “Profit vs Profit maximisation

  1. 1: Some businesses, usually state controled businesses may want to provide consumers with goods and services. This could be their most important objective. Profit maximisation is usually not the most important objective in state controled businesses.

    • Excellent example, Rudi! We often find that state-owned and controlled enterprises don’t have profit maximisation as an objective; many provide services that are seen as vital or important for a group of people.

      Do you think that all state enterprises will be profitable though (i.e. should they make profit)?

      • No, not all state enterprises “will” be profitable. Profitability “should” be an objective of some state enterprises, but it must not be the main objective.

  2. A publishing business is faced with the choice between up-grading it’s databases or widening it’s advertisement field. If profit maximization were it’s main goal, it would probably choose up-grading it’s databases to improve efficiency. But since it is a publishing business, a broader field of readers could be it’s main goal; thus it would choose expansion over efficiency.

  3. Businesses that provide a service to customers will consider their relationship with their customers as more important than profit maximisation of the business. This is because if they have a bad relationship with their customers the business will fail. Thus a good relationship with customers is more important than profit maximisation.

    • Correct – and depending on the nature of the business, such customer relations could be increasingly important during specific periods, for example economic recessions. Alternatively, improving customer relations could have the effect of increasing profit in the long-run (loyalty, repeat purchases).

  4. Profit maximization might not be the main objective of a company run by the government. I such a case, the government would be more concerned about keeping the workers employed than having profit maximization as their main goal although it could benefit the company or business.

    • Good example. Some state enterprises are profitable, but for the most part they are not run with profit maximisation as the main objective.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s