What happens when profits are maximized

Profit maximization

Profit maximization is a behavioral assumption in economics according to which the goal of the company is to maximize profit. The profit (G) as the most important economic indicator of the business activity of a company is the difference between sales (U) and costs (K): G = U - K.

Profit maximization takes place by maximizing sales and minimizing costs. If sales remain the same, minimizing costs leads to more profit; if costs remain the same, maximizing sales leads to more profit, i.e. companies can maximize profit on the one hand via the goods supply (sales market) and on the other hand via the factor demand volume (procurement market). So minimizing costs and maximizing sales are sub-goals of profit maximization.

A company is faced with the decision problem of finding the sales volume that maximizes profit. If a company wants to maximize profit, it can achieve this on the sales market by increasing quantities (sub-goal: maximizing sales). In perfect markets for the monopoly as well as for the polypolist, an increase in quantity is initially only possible by lowering the price. This, however, has an ambivalent effect on the revenue: the increase in the volume components increases the revenue (revenue = volume x price) - the price component has a positive effect on the volume component. But the marginal revenue (syn. Marginal turnover) - that is, the increase in revenue that results from the sale of additional units of measure - decreases due to the reduction in the price component. The profit maximization for the monopolist does not initially differ from the polypolist: As long as the marginal revenues are above the marginal costs, a positive marginal profit can be achieved by increasing the quantity. On the other hand, in contrast to the polypolist, marginal revenues and marginal costs rise because the market price falls overall. The polypolist, on the other hand, does not have to consider the slipping of the market price when the sales volume increases, because the polypolist's revenues increase linearly with the sales volume.

More recent theories, however, question profit maximization as an objective function of the company. In particular, the separation of ownership and management in large companies leads to a change in incentive structures and interests in terms of the target values ​​in terms of institutional economics: In particular. From the owner's point of view, profit maximization is also only a partial goal for increasing the capital value, i.e. the return on their investment (Blattner, 1977). This also becomes clear in the discussions on shareholder value and value-based management: the maximization goals here are to increase the company value or the value of equity. From this perspective, profit maximization itself is only a partial goal, insofar as the company itself is only an instrument for realizing the owner's goals.

See also the commercial principle.