Profit Maximization Model and Theory for Market

Profit maximization is the rational behaviour of equilibrium assumption. Any firm which aiming at profit maximization model; will go increasing its output till it reaches maximum profit output. Profit is known nothing but differences between total revenue and total cost. The more the differences between total revenue and total cost will create maximum profit. So, the equilibrium for a firm will be when there is maximum difference between the total cost and total revenue.

Economist Theory of Firm:

According to the Economist Theory of Firm, a firm is a transformation unit, which converts input into output and while doing so, tries to create surplus value. This surplus value is nothing but the difference between the value of the product and the value of the factors of production. The firm aiming for profit maximization reaches its equilibrium only when it produces profit maximizing output. The firm maximizes profit by equating marginal revenue with marginal cost.

Behavioral Theory of Cyert & March:

According to the theory, in a large multi-product firm the management is not the owner. There are forms of business firm which compromises the group of individuals and not controlled by single entity.

Marris Growth Maximization Model:

Robin Marris is the developer of the model. According to this theory, modern firms are managed by both the manager and the shareholders. A manager aims to maximize the rate of growth of the firm and the shareholders will try to maximize the dividend and the increase the share price.

Sales Maximization Model:

This is alternative model for profit maximization model. The model has been propounded by W.J. Baumol who was an American Economist. The assumption in this theory is relation about business behaviour. Baumol thinks managers are more interested in maximizing sales rather than profit.

Williamson’s Managerial Discretionary Theory:

According to the theory, in a firm, shareholders and managers are two separate groups. The firm tries to get maximum returns on investment and get maximum profit, whereas managers try to maximize profit in their satisfying function.

At last, Williamson’s managerial discretion theory shows the utility function of a manager. In this theory, the firm will try to get maximum returns or maximum profit where as manager try to maximum utility satisfying function. They are in equilibrium when the utility has maximum amount.

1 Response to “Profit Maximization Model and Theory for Market”

  1. 1 shabbir December 11, 2010 at 6:55 am

    its very hellful to analyse all the theories

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