Question

briefly discuss two limitations of "profit maximization" as a goal for the firm.

Answer 1

Profit maximization as a goal for the firm basically means that the primary focus of a firm is on profits and that the firm will use all its resources solely to get the maximum profits possible .

Limitations :

a) This goal comes with the risk that the company may be so indulged in this single strategy that it may lose everything if the market takes a sudden turn. For example , If a company identifies that it makes the most profit by selling a particular product, then the company following the profit maximization startegy, will invest solely in selling that particular product instead of also focussing on other products to keep a balance. If that particular product goes out of demand , the company could lose everything since it relied solely on its investment in that particular product.

Hence, if a company focuses only on "profit maximization" , it might result in missed opportunities for investment or expansion.

2. A company following the profit maximization goal ruthlessly needs to consider its consequences. While following this goal, a company might create an environment where price is a premium and cutting cost becomes its primary goal . This creates a perception of the company that could lead to a loss of goodwill with the stakeholders of the company such as customers, suppliers etc.

This approach also creates an expectation of shareholders to see immediate gains rather than realizing profits over time.