Question

Why is the goal of wealth maximization is superior than the goal of profit maximization. Also explain why profit maximization is a short run goal and wealth maximization is long run goal.
please explain in detail.

Answer 1

Profit Maximization is the capability of the firm to produce maximum output with the limited input, or it uses minimum input for producing stated output. It is termed as foremost objective of the company.

It is recommended that the apparent motive of any business organisation is to earn a profit, it is essential for the success, survival, and growth of the company. Profit is a long term objective, but it has a short-term perspective i.e. one financial year.

Profit can be calculated by deducting total cost from total revenue. Through profit maximization, a firm can be able to ascertain the input-output levels, which gives the highest amount of profit.

Wealth maximisation is the ability of a company to increase the market value of its common stock over time. The market value of the firm is based on many factors like their goodwill, sales, services, quality of products, etc.

It is the versatile goal of the company and highly recommended criterion for evaluating the performance of a business organisation. This will help the firm to increase their share in the market, attain leadership, maintain consumer satisfaction and many other benefits are also there.

Key Differences Between Wealth Maximization and Profit Maximization

The fundamental differences between profit maximization and wealth maximization is explained in points below:

1.The process through which a company is capable of increasing earning capacity known as Profit Maximization. On the other hand, the ability of the company to increasing the value of the stock in the market is known as wealth maximization.

2.Profit maximization is short term objective of the firm while the long-term objective is Wealth Maximization.

3.Profit Maximization ignores risk and uncertainty. Unlike Wealth Maximization, which considers both.

4.Profit Maximization avoids time value of money, but Wealth Maximization recognises it.

5.Profit Maximization is necessary for survival and growth of the enterprise. Conversely, Wealth Maximization accelerates the growth rate of the enterprise and aims at attaining the maximum market share of the economy.

For a business, it is not necessary that profit should be the only objective; it may concentrate on various other aspects like increasing sales, capturing more market share etc, which will take care of profitability. So, we can say that profit maximization is a subset of wealth and being a subset, it will facilitate wealth creation.