Question

Distinguish between the terms ‘wealth’ and ‘profit’.

Answer 1

Difference between wealth maximization and profit maximization

The main difference between miximization of wealth and profit is that profit focus short term goals while wealth is focus on maximization of overall value of the business organization over a time. These are substantial difference noted as below

Planning duration

Risk management

Pricing strategy

Capacity planning

Planning Duration : under profit maximization immediate increase in profit is Paramount so management elect not to pay discretionary expenses such as advertisement research and maintenance cost. Under wealth maximization management always pays for discreationery expenses

Risk management: under profit maximization management minimizes expenditure so it is less likely to pay for hedges that could reduce organization risk profile.under wealth maximization company work on risk mitigation so it's risk of loss is reduced

Pricing strategy : in profit maximization in order to increase profit company prices products as high as possible.in wealth maximization it would be reversed, electing to lower prices in order to build market share over a long term

Capacity planning : A profit oriented business will spend just enough funds on its production capacity in order handle the existing levels sales and perhaps the short term sales forecast. A wealth oriented business will spend more on production capacity in order to achieve long term sales projections