Business Economics Profit Maximization Theory Term Paper

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They presented the idea that "business firms maximize profit as a means to maximize the utility of their owners. In a word: businessmen maximize profit as a means to maximizing utility, so profit maximization follows from utility maximization" (Ormazabal). One may observe that this approach is quite similar to that of the new institutionalists a few decades ago, mentioned above. This approach considers that profit maximization does not seem to a primary objective for nowadays companies. Instead, profit maximization derives from utility maximization, being implied by it. Therefore, profit maximization is an implicit objective, not a primary one.

The second approach is opposes the first one and was provided by Scitovsky in his paper "A Note on Profit Maximization and Its Implications." In Scitovsky's opinion, profit is maximized for its own sake, and this fact should be the starting point of any theory of profit.

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He considered that profit maximization cannot derive from utility maximization.

Reference List

The Maximization Debates (2008). The History of Economic Thought. Retrieved March 3, 2008. Available at http://cepa.newschool.edu/het/essays/product/Maxim.htm.

Haring, J. & Smith, G. (1959). Utility Theory, Decision Theory, and Profit Maximization. The American Economic Review. Vol. 49, No. 4. Available at http://links.jstor.org/sici?sici=0002-8282%28195909%2949%3A4%3C566%3AUTDTAP%3E2.0.CO%3B2-9.

Ormazabal, Kepa M. (2008). Mas-Collel, Whinston, and Green vs. Scitovsky on Profit and Utility Maximization. University of the Basque Country. Department of Foundations of Economic Analysis. Retrieved March 3, 2008. Available at http://www.ehu.es/fundamentosI/cas/investigacion/il2005-20.pdf......

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