profit macimization


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profit macimization

  1. 1. Profit maximizationBy :omid minooee
  2. 2. Profit definition:.Profit is a basic concept in market economy. Profit acts as an incentive mechanism for business investment. Higher profits provide incentives for business growth. Profit also acts as an automatic signal for the allocation and reallocation of scarce resources. Profit which is the hub of all economic activities has no precise definition of its own. In fact it is the most controversial topic of economic theory. To get an accurate idea of profit, it is necessary to first distinguish gross profit from net profit.
  3. 3. THE NATURE OF PROFIT The simplest definition of profit is that it is The excess of revenue over cost. This is a little deceptive, because in practice it is not always easy to decide what revenue is and what cost is. There arealso problems arising from changes in the value of property.For example, the value of a building may rise or fall forreasons that have nothing to do with the trade carried on inthat building. However at this stage it is convenient tooverlook problems of this kind, and keep to the idea of profit as the excess of the revenue
  4. 4. THE NATURE OF PROFIT Cont..gained by selling products over the cost of producing those products. Nevertheless this definition does notsatisfy the economists desire to explain why profitexists and what its economic function really is; and herewe come up against two rather conflicting ideas. On theone hand there is what might be called the traditionalview of profits a payment to a factor of production, justas wage is the payment to labor or rent the payment tocapital. On the other hand there is the view that profit issurplus which remains when the payments to production factors have all been made.
  5. 5. Difference Between Gross Profitand Net Profit:  Definition of Net Profit: Definition of Gross Profit:  Net profit is the profit which accrues Gross profit is the surplus to an entrepreneur for his functions as an entrepreneur. These functions which accrues to a firm when it include risk bearing deducts its total costs in ability, innovating spirit, bargaining producing products from its ability etc. Net profit is the reward of total income received from the an entrepreneur for (i) organizing a sale of goods. In producing business and undertaking risk (ii) goods, a firm incurs explicit his bargaining ability with the costs and implicit costs. In the customers (iii) adopting new techniques of production (iv) ordinary language, the term monopoly gains if any (v) windfall profit is used in the sense of gains due to sudden rise in the gross profit. prices of goods.
  6. 6. Different Theories of Profit1. Dynamic Theory of Profit:The dynamic theory of profit was given by J.B. Clark.According to him profit accrues because the society isdynamic by nature. Since the dynamic nature of societymakes future uncertain and any act, the result of whichhas to come in future, involves risk. Thus profit is theprice of risk taking and risk bearing. It arises only in adynamic society which means in a society wherechanges does not occur i.e. it is static by nature the riskelement disappears and hence the profit element does not exist there.
  7. 7. Different Theories of Profit Cont.2. Marginal Productivity Theory of ProfitAccording to this theory, profit always equals to the marginalproductivity of the entrepreneur. The marginal productivityof the entrepreneur cannot be evaluated in the case of thefirm because there is only one entrepreneur in a firm. It ishowever can be easily done in an industry where thenumber of the firms can be calculated and hence themarginal productivity of various entrepreneurs can be measured.According to this theory the profit depends upon the marginalproduction. Greater the marginal production greater will be the profit.
  8. 8. Different Theories of Profit Cont.3. Wages Theory of ProfitAccording this theory the services of the entrepreneur are alsoclassified as labour though of a superior type. Theseentrepreneurs do a lot of work in organizing the business unitas well. The entrepreneurs in the shape of profit pay tothemselves for service just as managers are paid for theirservices. It means that profit is a wage for the entrepreneurfor the services rendered by them.
  9. 9. Different Theories of Profit Cont.4. Un-Certainty Breaking Theory of ProfitProfit is the reward for uncertainty bearing and notthe risk bearing”.Prof. Knight has regarded uncertainty bearing as afactor of production. Knight’s theory classifies theposition that profit arises because of the joint actionof uncertainty bearing and capital.
  10. 10. Different Theories of Profit Cont.5. Risk Bearing Theory of ProfitAccording to F.B. Hawley, “Profit is reward for riskbearing which is the most important function of anentrepreneur”. Hawley believes that risks areunpleasant and therefore no one likes to bearit, until and unless some reward is insured. Profit isa reward for bearing these risks.
  11. 11. Profit maximization:A process that companies undergo to determine thebest output and price levels in order to maximize its return.The company will usually adjust influential factors such asproduction costs, sale prices, and output levels as a way ofreaching its profit goal. There are two main profitmaximization methods used, and they are Marginal Cost-Marginal Revenue Method and Total Cost-Total RevenueMethod. Profit maximization is a good thing for acompany, but can be a bad thing for consumers if thecompany starts to use cheaper products or decides
  12. 12. SALES MAXIMIZATIONV/S PROFIT MAXIMIZATION:Sales maximization is an approach to business where thecompanys primary objective is to generate as muchrevenue as possible. Profit maximization is an objectivewhere the company intends to generate the highest netincome over time.
  13. 13. Difference Between Sales Maximization & ProfitMaximization Revenue vs. Profits The main difference between sales maximization and profit maximization is the financial intention. Sales, or revenue, is the generation of cash flow through the sale of goods and services. A goal of maximizing revenue does not necessarily produce profits, because companies often sell products at a loss to generate revenue. Maximizing profits typically requires that you not only sell a significant volume, but that you also maintain reasonable profit margins. Timeliness One of the more prominent differences between sales and profit maximization is time orientation. Sales maximization objectives are typically intended to produce as much revenue as possible in a short time frame. Companies often have this objective to build their customer base, to steal customers from competitors, to drive quick cash flow and to sell excess inventory. Profit maximization is a longer-term objective where the company intends to position itself for long-term viability and success.
  14. 14. Difference Between Sales Maximization & ProfitMaximization Recurrence Profit maximization theoretically remains the primary long- term objective of any for profit business. However, sales maximization objectives can come and go. Companies use sales objectives for various reasons and at different times. The launch of the business, near the end of a quarter or fiscal year, during typically slow times, when the business is slumping and when excess inventory builds up are common points at which a company may introduce sales maximization goals for a temporary period. Still, the long-term focus is earning income. Risks Risks of profit maximization objectives are somewhat limited. The business does have to work diligently to build the perception of value in the market. Sales maximization goals do pose significant risks to long-term profit potential. Companies advertise to build the sense of worth customers have for their products. Constantly cutting costs to drive revenue creates a price orientation in the market. If a business mismanages sales objectives, it can restrict the success of long-term profit maximization.
  15. 15. Thank you