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Negative Effects Of Profit Maximization. This property is known as the second-order condition. If the firm sells 1 more unit it earns and the firms revenue increases. Social responsibility goes beyond profit making and social obligation. Lack of transparency can damage long-term goodwill with customers which can have dire financial consequences in the future.
It is mainly a short-term goal and is primarily restricted to the accounting analysis of the financial year. A change in fixed cost would have no effect on the position or shape of these curves. A firm may be able to maximize its revenue in a way that does not make for profit maximization. It is primarily concerned as to how the company will survive and grow in the existing competitive business environment. The process of increasing the profit earning capability of the company is referred to as Profit Maximization. The idea that corporations should pursue the interests of their shareholders takes its starkest form in the sentiment expressed by Milton Friedman that the social responsibility of business is to increase its profits Friedman 1970.
Ambiguity in the Concept of Profit.
Schumpeterian theory derives innovation and imitation behavior endogenously from the profit-maximization problem facing a prospective innovator It assumes that faster growth implies a higher rate of firm turnover because this process of creative destruction allows new innovators to enter the market and for former innovators to exit. Profit maximization can also conflict with a customer-centric approach which means companies may mislead customers to generate revenue. Some of the disadvantages that can result from a company becoming overly focused on profit maximization are the ignoring of risk factors a lessening or loss of transparency and the compromising of ethics and good business practices. For instance managers could step up their advertising efforts. These examples show you that you should always consider if your short-term profit maximization will be in support of your long-term sustainable goals. This point can also be illustrated using the diagram for the marginal revenuemarginal cost perspective.