In today's world, every business entity aims to maximize their profits or wealth as an objective. However, there is a debate over which objective is superior for a firm. Some argue that profit maximization should be the primary objective of the firm, while others believe that wealth maximization is a more appropriate goal. In this essay, we will discuss the concepts of profit maximization and wealth maximization, and analyze which objective is superior to be an objective of a firm.
Concept of Profit Maximization: Profit maximization is the traditional objective of the firm. It refers to the process of maximizing the profits of the firm, i.e. the difference between revenue and cost. This objective is based on the assumption that the primary goal of the firm is to maximize its profits. According to this concept, the firm should focus on maximizing profits in the short run and the long run. In the short run, the firm should aim to increase its revenue and reduce its costs to maximize its profits. In the long run, the firm should make investments that generate a higher return than the cost of capital to increase its profits.
Concept of Wealth Maximization: Wealth maximization is a relatively new objective of the firm. It refers to the process of maximizing the wealth of the shareholders, i.e. the value of the firm. This objective is based on the assumption that the primary goal of the firm is to maximize the wealth of its shareholders. According to this concept, the firm should focus on increasing the value of the firm in the long run. This objective takes into account the time value of money and the risk associated with the investments.
Analysis of the Two Concepts: The objective of profit maximization has been criticised on various grounds. Firstly, it is criticised for being short-sighted. The focus on short-term profits may lead the firm to ignore long-term investments, which may be more profitable in the long run. Secondly, it is criticised for ignoring the risk associated with the investments. The focus on profits may lead the firm to take on high-risk investments that may result in a loss of capital. Thirdly, it is criticised for ignoring the interests of other stakeholders, such as employees and customers. The focus on profits may lead the firm to cut costs at the expense of employees and compromise on the quality of products or services provided to customers.
On the other hand, the objective of wealth maximization has several advantages. Firstly, it takes into account the long-term interests of the firm and its shareholders. The focus on increasing the value of the firm in the long run ensures that the investments are profitable and sustainable. Secondly, it considers the risk associated with the investments. The focus on increasing the value of the firm takes into account the risk associated with the investments and ensures that the investments are made with a consideration of the risks involved. Thirdly, it considers the interests of other stakeholders, such as employees and customers. The focus on increasing the value of the firm in the long run ensures that the firm provides quality products or services and takes care of its employees.
Which Concept is Superior? The objective of wealth maximization is superior to the objective of profit maximization. The focus on increasing the value of the firm in the long run ensures that the investments are sustainable and profitable. The objective takes into account the interests of all stakeholders, including employees and customers. The focus on the long-term value of the firm ensures that the firm is sustainable and provides long-term benefits to its shareholders. Furthermore, the objective of wealth maximization takes into account the risks associated with the investments and ensures that the investments are made with a consideration of the risks involved.
However, wealth maximization also has its limitations. One of the main drawbacks of this approach is that it is difficult to measure wealth, and it is subject to fluctuations in market conditions. Wealth maximization also does not consider the ethical and social responsibility of a firm, which can lead to negative impacts on stakeholders such as employees, customers, and the environment. This can lead to negative public perception, which can ultimately harm the long-term success of the firm.
In conclusion, while both profit maximization and wealth maximization are valid objectives of a firm, wealth maximization is a more superior objective. This is because wealth maximization takes a long-term view and considers the interests of all stakeholders, including shareholders, employees, customers, and society as a whole. Profit maximization, on the other hand, can lead to short-term thinking and may neglect the interests of other stakeholders. However, it is important to note that the pursuit of wealth maximization should also take into account the ethical and social responsibilities of the firm.
Subscribe on YouTube - NotesWorld
For PDF copy of Solved Assignment
Any University Assignment Solution
.webp)
