All firms, in the end, are run to make the most profit they can - Essay Example

Profit All firms, in the end, are run to make the most profit they can. This ment is true for all firms, big or small, companies or cooperatives, limited or unlimited liability. A firm which does not function with the aim to maximize profits runs the risk of going out of business. This is because the law of natural selection applies even to the field of business and a firm which does not actively try to maximize its profits may be forced out of business by its competitors. So in order to continue to remain competitive and remain in business, all firms must strive to maximize their profits. It is generally assumed that only firms in the market economy need to maximize their profits. The profit maximization needs of large firms are almost self explanatory. These firms are usually public companies and hence it is their responsibility to try and make as much profit as possible for their shareholders. While the management in these firms have added responsibility to their shareholders, even private firms and cooperatives need to work towards profit maximization. This principle is even true for not-for-profit organizations since in order to remain in business, they must be able to affectively compete and this is only possible if they work towards profit maximization. Whether an organization is not-for-profit or for-profit, it is in the business of providing a good or service to the consumers. This good or service has to be one that the consumer wants. If a firm produces something which no one wants, it is wasted and the firm suffers loss. On the other hand, if the organization does not produce a good that consumers want, than someone else will produce it and the firm will lose out on business. In either case, ultimately, the firm will have to close doors. So in order to remain in business, a firm must produce goods which are wanted by the consumers. This automatically results in profit. An organization may choose to sell its products at no profit. However, this would lead to problems with cash flow and ultimately, it would have to operate for profit. Hence, every organization must operate for profit, intentionally or by accident. According to Primeaux and Stieber (1994), it is the ethical mandate of a business to try and achieve maximum profit. They argue that good business and good ethics are synonymous and that ethics and business are intricately linked. According to them, there are certain rules of business, which every business must follow. Profit maximization is one such rule and hence it is the ethical duty of a business to follow it. According to the economics theory of profit maximization, a firm should increase its output until its marginal revenue is equal to its marginal cost. Marginal revenue is the extra revenue that an additional unit of product would bring in. Marginal cost is the rise in cost that producing this additional unit would result in. A firm cannot indefinitely go on increasing its output. Initially, even at zero output, the firm would incur certain costs, such as cost of equipment, maintenance and rent. As the number of units produced increases, the cost goes up. However, at a certain level of output, the revenue from these goods starts to go down. Hence, maximum profit is obtained at the point where marginal revenue is equal to marginal cost. Coming back to different types of businesses, let us explore why profit maximization is a must for them irrespective of their operating conditions. Let us consider the case of a firm operating in a monopolistic market. In the absence of competition, it would seem that the firm would have no obligation to maximize profits. However, as the supply goes beyond the demand, the producer’s ability to demand any price for its products goes down. Hence, after a certain level the marginal revenue goes below the marginal costs and business starts losing money. While it may seem that a monopolistic firm would always make profit, his is not necessarily true. Eve a monopolistic firm can lose money in the short run. This happens when the cost of production is higher than the price the firm can charge (CliffNotes). In a monopolistic condition, the producer would stop producing at this stage until he can regain the equilibrium. However, if he were not thinking about profit maximization, he might continue to produce, building up an inventory which no one wants. Under the circumstance, the costs would keep rising while the revenues would keep falling until the firm goes bankrupt. Hence, even for a monopolistic firm, profit maximization is not an option but a necessity. As already mentioned, in a competitive market, a firm not operating with the intention to maximize profits will see its market share eaten up by the competitors. This is true, irrespective of the size of the firm. Let us next consider a small business. Because, it is small, such an organization has little or no market power and hence it cannot influence the environment in which it operates. Under the circumstance, it would have to play by the rule risk going bankrupt. A small firm may have sole proprietorship, in which case it is in the interest of the owner to maximize profits for himself. Because many firms, such as cooperatives and not-for-profit organization do not operate with the sole purpose of making profits, it may be argued that profit is not their goal. In fact, there are a number of goals, other than profit maximization, which a firm may purport to have. Some of these goals include Sales maximization, Personal welfare and Social welfare (AmosWeb). A sales maximization goal would result in more revenue, but not necessarily more profits. Or, as in the case of a cooperative, the goal is welfare of the members and hence profit may be sacrificed. Similarly, not-for-profit organizations operate to improve the overall well being of the society and may not worry about the profits. Even though the explicit goal of such organizations is not to make profit, they must make profit in order to survive and remain in business. No firm can afford to sacrifice the profits in favour of other goals for too long because the law of natural selection catches up in the long run. Let us take the case of not-for-profit (NPO) organization. It is goal of such a firm to work for the benefit of the society. However, this requires money. Many NPOs rely on external source of funding such as government funds, grants and charities. However, these sources of income are neither reliable nor predictable. Hence, the organization must use whatever funds it has judiciously so that they can make the money last as long as possible. This is only possible by following the principle of profit maximization. So even though explicitly, the firms aim is not to make profit, it must, in the end, adopt profit maximization techniques in order to remain in business and achieve its stated goals. Similarly, a cooperative would want to maximize profits so as to achieve enough surpluses over its costs so that all its members can achieve some income. This is important, because the members of a cooperative need some incentive to remain in the cooperative other than for the good of the society. Even if all the members of a cooperative are willing to forego personal income, the firm would still need to make profits so as to have some operating cash at hand. In a private firm, the entire liability of the business is on the owner or the joint owners. Since, in such a firm, there are only a limited number of owners, all of whom may be either related to one another or known to each, the liability shared by these shareholders or owners becomes unlimited. Hence, if the business goes bankrupt, all the shareholders would suffer. If this firm has sole proprietorship, then the risk is even greater. But even in a partnership, the partners have a lot riding on the success of the business and hence cannot allow the business to fail. Under the circumstance, they must actively work to maximize profits or risk losing their business. A privately held firm may seek to limit the liabilities of its shareholders and go public. Under the circumstance, the management of the firm becomes liable to the thousands of shareholders and work towards profit maximization. So as we can see, irrespective of the market condition in which it operates, every firm must strive to maximize profits or risk losing business. This profit maximization need is true even for those firms who do not explicitly seek to make profit. Any firm, which is in the business of producing goods or services, must do so with an eye on the profit. A firm which ignores the profit may survive in the short run but in the long run, it will definitely go bankrupt. Profit maximization is not only necessary but also ethical, since every business, irrespective of its goals, has certain responsibilities which it can never fulfil without following the principle of profit maximization. References CliffsNotes.com. Profit Maximization. [online] [Accessed December 3 2009] http://www.cliffsnotes.com/WileyCDA/CliffsReviewTopic/topicArticleId-9789,articleId-9769.html Primeaux, P. and Stieber, J. (1994). Profit Maximization: The ethical mandate of business. Journal of Business ethics. 13: 287-294. [online] [Accessed: December 2 2009]. http://www.springerlink.com/content/j253rm52k4h2rg54/ PROFIT MAXIMIZATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2009. [Accessed: December 2, 2009 Read More