Profit Maximization Critique Hypothesis

Profit Maximization Critique Hypothesis

Profit Maximization Critique Hypothesis is an important aspect of Economics. Companies will ultimately have to function in line with the marginal principles of profit maximization in their attempt to increase their income. This purpose is also based on the Darwinian theory of the survival of the fittest.

Many economists have made the following points against the theory of profit maximization.

1. Hall and Hitch’s empirical research, Price Theory, and Market Behavior made the first most damaging assault on profit maximization. Their study found that many did not attempt to maximize their profit and did not use the marginal profit-maximizing law,

          That is, MC = MR.

2. The goal of profit maximization is truer for a monopoly or oligopolistic business in perfect competition. A monopoly firm receives supernormal earnings without any difficulty by way of monopoly control. “The best of monopoly profit is a quiet life.”A quiet life is the best monopoly profit.
3. A significant assumption of profit maximization is that not only its cost and revenue functions but also those of its rivals are known to each organization. This is not true.
4. To understand the actual actions of business companies, a number of alternative theories such as revenue maximization, a target rate of return on investment, limit pricing, etc are developed. Such alternative objectives are clear and can help illustrate the truth of the world of business.
5. The presence of a market leader is a bar to the operation of the profit maximization idea. Under price leadership, one company fixes the price, and the other smaller companies have to obey the leading company’s price policy.
6. Larger businesses are not managed by their shareholders, i.e. the owners, in a new, complex business environment. Yet there may be different interests for managers who run the companies. There are also both defenders and attackers of the purpose of benefit maximization. But the fact is that there is no alternative theory that can explain and predict corporations’ behavior, which has proved to be stronger than the hypothesis of profit maximization.

Hypothesis in Defence of Profit Maximisation

The advocates of the hypothesis of profit maximization have put forward the following claims in support of the hypothesis of profit maximization.

1. Important for the survival of businesses: It is argued that only those companies that are able to make fair profits can succeed in a competitive market. That is, companies would have to make money for their survival and keep their gross earnings over their total costs. All other goals are secondary to this primary aim. Companies will ultimately have to function in line with the marginal principles of profit maximization in their attempt to increase their income. This purpose is also based on the Darwinian theory of the survival of the fittest.
2. Greater Predictive Ability: The power of the hypothesis of profit maximization lies in the fact that economists have found this hypothesis to be exceptionally accurate in predicting some aspects Greater Predictive Ability: The power of the hypothesis of profit maximization lies in the fact that economists have found this hypothesis to be exceptionally accurate in predicting some aspects.
3. Empirical: Maximization of benefit is a theory honored over time. It is predicated on reality. Having observed many businesses, Matchup testified that the company aims to compare its MC with its MR when deciding on the amount of production. In other words, the company still hankers for profit maximization.
4. Strongest motive: A company’s underlying motive is the profit motive. In addition, other alternate motivations make the study of company behavior challenging and cumbersome. All other reasons are secondary.
5. A Simple Hypothesis: In addition, the purpose of a company’s benefit maximization is simple and there are well-developed statistical methods to evaluate issues of maximization or minimization.
6. Proper Explanation of the Business Group’s Behavior: The goal of maximizing profit is a valuable way of recognizing and justifying the behavior of groups of businesses, which of course, is of particular significance in microeconomic theory.