Private sector firms cannot survive in the long-run unless they aim to maximise profits. Explain
Profit maximisation occurs at the output where the difference between total revenue and total cost is
greatest, or when marginal cost equals marginal revenue. The formula of profit maximisation is MC=MR.
It is controversial whether private firms must profit maximise in order to survive.
On the one hand, firms may need to maximise profits in order to survive. There are two types of
economic theories, neo-classical and neo-Keynesian, which differ in their beliefs in regards to the aims
and nature of profit maximisation. An initial point is that neo-classical economics assumes that the
interests of the shareholders are the most important. Shareholders will be motivated solely by
maximising their gain from the company. Thus, profit maximisation is the main aim of all companies.
This is the case as shareholders aim to maximise their dividends while consumers aim to maximise the
quality of the goods they buy and workers aim to gain maximum return from working. Adding onto that,
neo-classical economics assumes that firms aim to maximise-short run profits. This is achieved when
marginal cost and marginal revenue are equal in the short term and determines the level of production
for the firm. This indicates that indeed firms cannot survive in the long-run unless they profit maximise
as most companies have profit maximisation and the maximisation of short-run profits as their aims. An
additional point that supports this stance is that, according to neo-classical economics, profit
maximisation is necessary due to the price instability of goods. In markets where there is heavy
branding, such as soft drinks, prices are likely to be stable but in commodity industries where firms are
producing homogenous goods, prices are likely to be unstable. Short-run maximisation implies that firms
will be prepared to supply even if they made a loss in the short run so long as price is above the average
variable cost of production. This means that in the long run, firms must cover all their costs or they will
leave the market. Hence, it is obvious that private sector firms are unable to make it in the long run
without profit maximising as prices are unstable so they cannot focus on long-run profits and must focus
on the short-run. Furthermore, as believed by neo-Keynesians, firms maximise their long-run profit
rather than their short-run profits as they use cost-plus pricing techniques. Cost-plus pricing is the
technique adopted to fix the price of products by adding a fixed percentage profit margin to the long-
run average cost of production. The price set and thus the profit aimed for is based upon the long-run
costs of the firm. This shows that long-run survival is unachievable for firms without profit maximisation
as firms aim to maximise their long-run profits using cost-plus pricing. Finally, the belief that prices are
mostly stable and price adjustments, according to neo-Keynesians, is another reason why profit
maximisation is necessary for long term business survival. Neo-Keynesians believe that rapid price-
adjustments may damage the firm’s position in the market, as consumers do not like frequent price
changes. Price cuts may be seen as a sign of panic selling and consumers might negotiate even larger
price reductions. While, price increases may be interpreted as a sign of profiteering with consumers
switching to other brands as they believe they will get better value for their money. Also, price costs
may involve costs to the company because price lists need to be changes, staff informed and advertising
materials changed. Hence, it is argued that firms attempt to maintain stable prices while adjusting
output to changes in market conditions. This may mean that a firm will produce in the short run even if
it fails to cover its average variable cost. If it takes the view that in the long run, it may prefer to produce
at a loss rather than disru-pt supplies to the market. Alternatively, it may prefer to keep prices above the
market price in the short run and sell nothing if it believes that price cutting in the short run would lead
to a permanent effect on prices and thus profits in the long run. This showcases how profit maximisation
Profit maximisation occurs at the output where the difference between total revenue and total cost is
greatest, or when marginal cost equals marginal revenue. The formula of profit maximisation is MC=MR.
It is controversial whether private firms must profit maximise in order to survive.
On the one hand, firms may need to maximise profits in order to survive. There are two types of
economic theories, neo-classical and neo-Keynesian, which differ in their beliefs in regards to the aims
and nature of profit maximisation. An initial point is that neo-classical economics assumes that the
interests of the shareholders are the most important. Shareholders will be motivated solely by
maximising their gain from the company. Thus, profit maximisation is the main aim of all companies.
This is the case as shareholders aim to maximise their dividends while consumers aim to maximise the
quality of the goods they buy and workers aim to gain maximum return from working. Adding onto that,
neo-classical economics assumes that firms aim to maximise-short run profits. This is achieved when
marginal cost and marginal revenue are equal in the short term and determines the level of production
for the firm. This indicates that indeed firms cannot survive in the long-run unless they profit maximise
as most companies have profit maximisation and the maximisation of short-run profits as their aims. An
additional point that supports this stance is that, according to neo-classical economics, profit
maximisation is necessary due to the price instability of goods. In markets where there is heavy
branding, such as soft drinks, prices are likely to be stable but in commodity industries where firms are
producing homogenous goods, prices are likely to be unstable. Short-run maximisation implies that firms
will be prepared to supply even if they made a loss in the short run so long as price is above the average
variable cost of production. This means that in the long run, firms must cover all their costs or they will
leave the market. Hence, it is obvious that private sector firms are unable to make it in the long run
without profit maximising as prices are unstable so they cannot focus on long-run profits and must focus
on the short-run. Furthermore, as believed by neo-Keynesians, firms maximise their long-run profit
rather than their short-run profits as they use cost-plus pricing techniques. Cost-plus pricing is the
technique adopted to fix the price of products by adding a fixed percentage profit margin to the long-
run average cost of production. The price set and thus the profit aimed for is based upon the long-run
costs of the firm. This shows that long-run survival is unachievable for firms without profit maximisation
as firms aim to maximise their long-run profits using cost-plus pricing. Finally, the belief that prices are
mostly stable and price adjustments, according to neo-Keynesians, is another reason why profit
maximisation is necessary for long term business survival. Neo-Keynesians believe that rapid price-
adjustments may damage the firm’s position in the market, as consumers do not like frequent price
changes. Price cuts may be seen as a sign of panic selling and consumers might negotiate even larger
price reductions. While, price increases may be interpreted as a sign of profiteering with consumers
switching to other brands as they believe they will get better value for their money. Also, price costs
may involve costs to the company because price lists need to be changes, staff informed and advertising
materials changed. Hence, it is argued that firms attempt to maintain stable prices while adjusting
output to changes in market conditions. This may mean that a firm will produce in the short run even if
it fails to cover its average variable cost. If it takes the view that in the long run, it may prefer to produce
at a loss rather than disru-pt supplies to the market. Alternatively, it may prefer to keep prices above the
market price in the short run and sell nothing if it believes that price cutting in the short run would lead
to a permanent effect on prices and thus profits in the long run. This showcases how profit maximisation
