On Maximising Profits Essay Example | Topics and Well Written Essays - 1500 words

On Maximising Profits - Essay Example The desire to maximise profits does not form a clear and unique behaviour prescription. Enke (1965, p.54) adds that consequently, the economist cannot make individual-firm predictions in the short run.1 When the future outcomes of present decisions are uncertain, motivation does not constitute a criterion for each entrepreneur. To clarify motivation and criterion, Enke (1965, p.53) provides the following extreme gambling example. Suppose that one gambler might be given a hundred dollars and is told to make a single bet at a roulette table and "maximise profits" whereas another player might similarly be given one hundred dollars but then to "maximise losses." If they are obedient, both gamblers will play a number than a colour because, if they are ever to secure the maximum profits and maximum losses that they respectively seek, the longest odds provide profits or losses at the highest rate; if they both played a colour, they would be acting that is inconsistent with their instructions. Unless people have beliefs concerning the likelihood of certain future events occurring, a specific motivation cannot provide them with criterion for selecting one alternative from one another. The economist cannot predict how an entrepreneur will act if the economist does not know the entrepreneur's assessments of future pr obabilities (Enke 1965, p.55). Baumol (1961, p.193) also provides an example as to why the profit-maximising assumption does not hold for all firms. A small firm that is run by its owner may seek to maximise the proprietor's free time subject to the constraint that his earnings exceed some minimum level, and, indeed, there have been cases of overworked businessmen who, on medical advice, have turned down profitable business ventures. According to Anthony (1965, p.61), if a firm is to maximise its profits, the businessman must set a price such that the marginal revenue equals the marginal cost. This means that as a minimum he must be able top estimate the demand at all prices and the marginal cost at all volumes, and he must further estimate the extent to which demand is interdependent with cost because of advertising and other order-getting expenditures. In practice, states Anthony, is a "fantastically" [emphasis mine] difficult task, so difficult that is rarely attempted in practice. In Anthony's words: "who can accurately estimate the demand for a product at even one price" Another critic of the profit maximising firm is the "denigration" of the importance of managerial activity or to imply that it is without significant difficulties. Baumol (1993, p.3) defines the manager as the individual who oversees the ongoing efficiency of the continuing processes. In its generic and simplest form, the theoretical firm must choose among alternative values for a small number of rather well-defined variables: price, output, perhaps advertising outlay, and occasionally, a few others. The firm is then to perform a mathematical calculation which yields the optimal (profit maximising) values for all of its decision variables that the theory declares the firm's vector of decisions. Until there is such a shift in one of the relationships that define the problem, the firm is taken to replicate