In the conventional theory of the firm, the principle objective of a business firm is to maximize profit. Under the assumptions of given taste and technology, price and output of a given product under competition are determined with the sole objective of maximization of profit.
Profit maximization refers to the maximization of dollar income of the firm. Under profit maximization objective, business firms attempt to adopt those investment projects, which yields larger profits, and drop all other unprofitable activities. In maximizing profits, input-output relationship is crucial, either input is minimized to achieve a given amount of profit or the output is maximized with a given amount of input. Thus, this objective of the firm enhances productivity and improves the efficiency of the firm.
The conventional theory of the firm defends profit maximization objective on the following grounds:
* In a competitive market only those firms survive which are able to make profit. Hence, they always try to make it as large as possible. All other objectives are subjected to this primary objective.
* Profit maximization objective is a time-honored objective of a firm and evidence against this objective is not conclusive or unambiguous.
* Though not perfect, profit is the most efficient and reliable measure of the efficiency of a firm.
* Under the condition of competitive market, profit can be used as a perfermance evaluation criterion, and profit maximization leads to efficient allocation of resources.
* Profit maximization objective has been found extremly accurate in predicting certain aspect of firm's behaviour and trends; as such the behaviour of most firms are directed towards the objective of profit maximization.
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