Profit maximisation & its alternatives

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Profit maximisation & its alternatives

  1. 1. Presented by Group No-9
  2. 2. <ul><li>Sapna Chodimella……………………… 08 </li></ul><ul><li>Mohammad Khalid Khan………….. 18 </li></ul><ul><li>Vani Mangalur………………………….... 28 </li></ul><ul><li>Frenzina Rodrigues……………………. 38 </li></ul><ul><li>Shamiya Shaikh…………………………. 48 </li></ul><ul><li>Swapnil Wani……………………………… 58 </li></ul>
  3. 3. <ul><li>Profit is the making of gain in Business activity for the benefit of the owners of the business. </li></ul><ul><li>Two Important Concepts Of Profit :- </li></ul><ul><li>Accounting Profit – Profit is the surplus of revenue over and above all paid-out costs, including both manufacturing and overhead expenses. </li></ul><ul><li>Economic Profit – It is the difference between a Company’s total revenue and its opportunity cost. </li></ul>
  4. 4. <ul><li>Measure Of Performance </li></ul><ul><li>Premium To Cover Costs Of Staying In Business </li></ul><ul><li>Ensuring Supply Of Future Capital </li></ul>
  5. 5. <ul><li>Profit Maximization is the process by which a firm determines the Price and Output level that returns the greatest Profit. </li></ul><ul><li>Approaches To Profit Maximization :- </li></ul><ul><li>Total Revenue – Total cost Method </li></ul><ul><li>Marginal Revenue – Marginal Cost Method </li></ul>
  6. 6. Types Of Profit <ul><li>SuperNormal Profit </li></ul><ul><li>Normal Profit </li></ul><ul><li>Negative Profit or Loss </li></ul>
  7. 7. <ul><li>Preventing Entry Of Competitors </li></ul><ul><li>Projecting A Favourable Public Image </li></ul><ul><li>Restraining A Trade Union Demand </li></ul><ul><li>Maintaining Customer Goodwill </li></ul>
  8. 8. METHOD OF PROFIT MAXIMISATION (in short run): There are 2 Approaches; Approach-1: By using Total Cost & Total revenue Curves ( This is simple approach) Profit maximization under short run (by using total curves): This is the period in which one or more factors are fixed in supply. Total profit (TII) = TR-TC
  9. 10. Approach-2: Marginal cost, Average cost & Marginal -Revenue, Average Revenue curves: (This is complicated but very useful to compare profit maximization under different market condition) Stage-1: To find profit maximizing output, we use MC& MR curves. To maximize profit Marginal Revenue mist be equal to Marginal Cost. i.e. MR=MC Why profit maximize when MR=MC? To find out the answer to this question, observe when MR=/= (not equal to) MC.
  10. 11. MC MR 1 3 2 5 3 10 4 Profit is maximum at the output level of 3, where MR=MC
  11. 12. Output Below3: MR exceeds MC; It means by additional production output higher additional revenue then MC Therefore Total profit can increase by increasing production . Output above3: MC exceeds MR; It adds more to the cost then revenue hence reduce profits. Therefore profit can increase by cutting back on production .
  12. 13. <ul><li>FUNDAMENTALS : </li></ul><ul><li>PROFIT = TR-TC </li></ul><ul><li>Total Revenue (TR): This is the total income a firm receives. </li></ul><ul><li>Total cost: refers to the total expense incurred in reaching a particular level of output; if such total cost is divided by the quantity produced, average or unit cost is obtained. </li></ul><ul><li>MARGINAL REVENUE:IS THE CHANGE IN REVENUE WHICH COMES FROM SELLING AN ADDITIONAL UNIT OF OUTPUT. </li></ul><ul><li>MARGINAL COST:IS THE CHANGE IN COST WHICH COMES FROM PRODUCING AN ADDITIONAL UNIT OF OUTPUT. </li></ul>
  13. 14. MC AC AR MR Y P O X S M R Q E OUTPUT COST&REVENUE <ul><li>THE FOLLOWING FIG SHOWS : </li></ul><ul><li>AC AND AR ARE THE AVERAGE COST AND REVENUE COST CURVES. </li></ul><ul><li>MC IS THE MARGINAL COST AND MARGINAL REVENUE. </li></ul><ul><li>WHEN OUTPUT REACHES OM,MARGINAL REVENUE EQUALS MARGINAL COST AT E. </li></ul><ul><li>HENCE PQRS IS THE PROFIT. </li></ul><ul><li>BEYOND OM OUTPUT ,THE MC CURVE IS HIGHER THAN MR CURVE WHICH INDICATES LOSSES. </li></ul><ul><li>THUS PROFITS ARE MAXIMUM WHEN MR=MC. </li></ul>
  14. 15. <ul><li>Divorce of ownership from control: </li></ul><ul><li>Difficulties in pursuing profit maximisation: </li></ul><ul><li>Problems in the measurement of profit: </li></ul><ul><li>Social responsibility of the firm: </li></ul><ul><li>Deliberate limitation of profits: </li></ul><ul><li>Aversion for business expansion: </li></ul>
  15. 16. <ul><li>Profit is indispensable for a Firm’s survival </li></ul><ul><li>Achieving other objectives depends on firm’s ability to make profits </li></ul><ul><li>Evidence against Profit Maximization is ambiguous </li></ul><ul><li>Profit Maximization objective has greater Predicting Power </li></ul><ul><li>Profit is a more reliable measure of firm’s efficiency </li></ul>
  16. 17. <ul><li>Salary & other earnings of managers are closely related to sales revenue than to profits. </li></ul><ul><li>Banks & Financial Corporations look at Sales Units while financing the corporation. </li></ul><ul><li>Trend in Sales Revenue indicates Performance of Co. </li></ul><ul><li>Increasing Sales Revenue is a prestige issue for managers, while Profit is related to Owners </li></ul><ul><li>Profit maximization is a difficult objective to fulfill consistently, over time & at the same level. </li></ul><ul><li>Growth is another proof of Competitive spirit of the firm. </li></ul>
  17. 18. <ul><li>Managers maximize the firms balanced growth rate . </li></ul><ul><li>G= GD-GC </li></ul><ul><li>Williamson’s Hypothesis of Maximization of managerial utility function. </li></ul><ul><li>The managers seek to maximize their own utility function subject to minimum level of profit. </li></ul>
  18. 19. <ul><li>The main objective of the firm’s is to achieve satisfying profit . </li></ul><ul><li>Rothschild's Hypothesis of Long-Run survival and Market share Goals. </li></ul><ul><li>The Primary goal of the firm is Long run survival. </li></ul><ul><li>Attainment and Retention of constant market share is also suggested as an additional objective of the firms. </li></ul>
  19. 20. <ul><li>Profit maximization in long run. </li></ul><ul><li>Securing a constant market share. </li></ul><ul><li>Avoidance of risk caused by unpredictable behaviour of new firms. </li></ul>
  20. 21. <ul><li>Although profit maximization remains the main hypothesis in economic analysis, there is no reason to believe that profit maximization is the only objective that the firms persue. Modern organizations , in fact, follow multiple objectives as the various economists have also postulated in their theories. </li></ul>

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