1. Profit maximization
By :omid minooee

2. Profit definition:
.Profit is a basic concept in market economy. Profit acts as an
incentive mechanism for business investment. Higher profits
provide incentives for business growth. Profit also acts as an
automatic signal for the allocation and reallocation of scarce
resources. Profit which is the hub of all economic activities
has no precise definition of its own. In fact it is the most
controversial topic of economic theory. To get an accurate
idea of profit, it is necessary to first distinguish gross profit
from net profit.

3. THE NATURE OF PROFIT
 The simplest definition of profit is that it is
 The excess of revenue over cost
. This is a little deceptive, because in practice it is not always 
easy to decide what revenue is and what cost is. There are
also problems arising from changes in the value of property.
For example, the value of a building may rise or fall for
reasons that have nothing to do with the trade carried on in
that building. However at this stage it is convenient to
overlook problems of this kind, and keep to the idea of profit
as the excess of the revenue

4. THE NATURE OF PROFIT Cont..
gained by selling products over the cost of producing 
those products. Nevertheless this definition does not
satisfy the economist's desire to explain why profit
exists and what its economic function really is; and here
we come up against two rather conflicting ideas. On the
one hand there is what might be called the traditional
view of profits a payment to a factor of production, just
as wage is the payment to labor or rent the payment to
capital. On the other hand there is the view that profit is
surplus which remains when the payments to
production factors have all been made.

5. Difference Between Gross Profit
and Net Profit:  Definition of Net Profit:
 Definition of Gross Profit:  Net profit is the profit which accrues
 Gross profit is the surplus to an entrepreneur for his functions
as an entrepreneur. These functions
which accrues to a firm when it
include risk bearing
deducts its total costs in
ability, innovating spirit, bargaining
producing products from its
ability etc. Net profit is the reward of
total income received from the an entrepreneur for (i) organizing a
sale of goods. In producing business and undertaking risk (ii)
goods, a firm incurs explicit his bargaining ability with the
costs and implicit costs. In the customers (iii) adopting new
techniques of production (iv)
ordinary language, the term
monopoly gains if any (v) windfall
profit is used in the sense of
gains due to sudden rise in the
gross profit.
prices of goods.


6. Different Theories of Profit
1. Dynamic Theory of Profit:
The dynamic theory of profit was given by J.B. Clark.
According to him profit accrues because the society is
dynamic by nature. Since the dynamic nature of society
makes future uncertain and any act, the result of which
has to come in future, involves risk. Thus profit is the
price of risk taking and risk bearing. It arises only in a
dynamic society which means in a society where
changes does not occur i.e. it is static by nature the risk
element disappears and hence the profit element does
not exist there.

7. Different Theories of Profit Cont.
2. Marginal Productivity Theory of Profit
According to this theory, profit always equals to the marginal
productivity of the entrepreneur. The marginal productivity
of the entrepreneur cannot be evaluated in the case of the
firm because there is only one entrepreneur in a firm. It is
however can be easily done in an industry where the
number of the firms can be calculated and hence the
marginal productivity of various entrepreneurs can be
measured.
According to this theory the profit depends upon the marginal
production. Greater the marginal production greater will be
the profit.

8. Different Theories of Profit Cont.
3. Wages Theory of Profit
According this theory the services of the entrepreneur are also
classified as labour though of a superior type. These
entrepreneurs do a lot of work in organizing the business unit
as well. The entrepreneurs in the shape of profit pay to
themselves for service just as managers are paid for their
services. It means that profit is a wage for the entrepreneur
for the services rendered by them.

9. Different Theories of Profit Cont.
4. Un-Certainty Breaking Theory of Profit
Profit is the reward for uncertainty bearing and not
the risk bearing”.
Prof. Knight has regarded uncertainty bearing as a
factor of production. Knight’s theory classifies the
position that profit arises because of the joint action
of uncertainty bearing and capital.

10. Different Theories of Profit Cont.
5. Risk Bearing Theory of Profit
According to F.B. Hawley, “Profit is reward for risk
bearing which is the most important function of an
entrepreneur”. Hawley believes that risks are
unpleasant and therefore no one likes to bear
it, until and unless some reward is insured. Profit is
a reward for bearing these risks.

11. Profit maximization:
A process that companies undergo to determine the
best output and price levels in order to maximize its return.
The company will usually adjust influential factors such as
production costs, sale prices, and output levels as a way of
reaching its profit goal. There are two main profit
maximization methods used, and they are Marginal Cost-
Marginal Revenue Method and Total Cost-Total Revenue
Method. Profit maximization is a good thing for a
company, but can be a bad thing for consumers if the
company starts to use cheaper products or decides

12. SALES MAXIMIZATION
V/S
PROFIT MAXIMIZATION:
Sales maximization is an approach to business where the
company's primary objective is to generate as much
revenue as possible. Profit maximization is an objective
where the company intends to generate the highest net
income over time.

13. Difference Between Sales Maximization & Profit
Maximization
 Revenue vs. Profits
 The main difference between sales maximization and profit
maximization is the financial intention. Sales, or revenue, is the
generation of cash flow through the sale of goods and services. A
goal of maximizing revenue does not necessarily produce
profits, because companies often sell products at a loss to generate
revenue. Maximizing profits typically requires that you not only sell a
significant volume, but that you also maintain reasonable profit
margins.
 Timeliness
 One of the more prominent differences between sales and profit
maximization is time orientation. Sales maximization objectives are
typically intended to produce as much revenue as possible in a short
time frame. Companies often have this objective to build their
customer base, to steal customers from competitors, to drive quick
cash flow and to sell excess inventory. Profit maximization is a
longer-term objective where the company intends to position itself
for long-term viability and success.

14. Difference Between Sales Maximization & Profit
Maximization
 Recurrence
 Profit maximization theoretically remains the primary long-
term objective of any for profit business. However, sales
maximization objectives can come and go. Companies use
sales objectives for various reasons and at different times.
The launch of the business, near the end of a quarter or fiscal
year, during typically slow times, when the business is
slumping and when excess inventory builds up are common
points at which a company may introduce sales maximization
goals for a temporary period. Still, the long-term focus is
earning income.
 Risks
 Risks of profit maximization objectives are somewhat limited.
The business does have to work diligently to build the
perception of value in the market. Sales maximization goals
do pose significant risks to long-term profit potential.
Companies advertise to build the sense of worth customers
have for their products. Constantly cutting costs to drive
revenue creates a price orientation in the market. If a
business mismanages sales objectives, it can restrict the
success of long-term profit maximization.

15. Thank you