A firm should be encouraged to maximize profits because this makes the firm more efficient.?

Question

A firm should be encouraged to maximize profits because this makes the firm more efficient.?
Discuss whether this assessment is true for a firm operating in perfect competition, as well as one operating in imperfect competition[Monopoly].
Its an assignment and I really need a good grade on this....please help me out...any supporting links would be great...I need this to be like a 2 pages long... :| An A level perspective would be much appreciated

Answer 1

A firm should not be encouraged to maximize profits for the sake of being more efficent. It should be encouraged to maximize efficency to make the firm more profitable. This statement holds especially true for a firm with perfect competion for reasons of potentially unrecoverable risk to its enterprise. The same caution would be given toward a monopoly having an internal mindset of increasing profits for the same reasons with some addtional complications. For both types of firms having this perspective would create misunderstanding below the upper managment level and might result in canabalization of the business by middle managers who might use the wrong tactics to achieve this goal. First I will discuss a company that operates in perfect competition and how the statement should not be applied to it's operations. Even though I give an adversarial perspective toward the statement I do think elements of the statement are important depending on what aspect of the business is being discussed. In general almost any statement like the one being discussed would be inadvisible as a single operating principle. For the purposes of this discussion I think that a better statement could be developed for employees and managers that would capture the most essense of a sound business strategy.

A company that was operating in perfect competition that wanted to gain an edge to make the competition imperfect would have a number of ways to do so.

1. Operational efficency

2. Branding


For a business that was operating in perfect competition at a given moment the only way to maximize profits without the risk of destroying the balance of equality it has with its' competitors is to increase it's operating efficency first. The reason for this is that the cost savings are contained within it's current processes which reduces its' risk of creating an imbalance that is unrecoverable.

Ok I am getting tired I gave you the start of what is probably a good paper. GL

Answer 2

True for perfect competition- If one restaurant can maximize profits and become more efficient it will be able to get ahead of its competitors. The restaurant is encouraged to maximize its profits because the customers actually have a choice as to where to go to eat and so they must share the market and cannot be guaranteed all the money in that market unlike a monopoly.
False for monopoly- When there is a monopoly then it doesn't matter if the company maximizes profits because there is no other firm in that market and so consumers have no choice but to go to the single business. That way, even if the product sucks and is expensive, the customers will still have to buy it.

Answer 3

Economic theory assume that firms maximize profits and then shows that competing firms that do this will allocate resources efficiently. There is nothing in theory that this is the only way to reach an efficient outcome. You could assume that firm wished to maximum worker welfare ( employee owned companies) so they would make zero profit, and pay the maximum wages and still reach an efficient outcome. Economist just don't believe people are altruistic, so they depend on self interest to produce an efficient outcome, but if you assume that this is the driving force in human behavior there is no reason to encourage it. It would be like encouraging people to breath.
Economic theory relies on an unspoken assumption that firms behave ethically, they keep their word, sell quality products, and don't cheat their business associates of their customers. In the real world that is often not the case, even with just human geed as the incentive to make more profits. Adding additional incentives or encouragement would only make matters worse.
Basic economic predicts that the profit maximization for monopolies do not produce efficient outcomes, and the efficiency can be improved by taxing to reduce monopoly profits. Sometimes we just tell them not to by regulation or appealing to their better nature but it usually does not work so in most cases governments use anti trust legislation to break them into smaller competitive firms.