Profit maximization theory
Profit Maximization Theory in Entrepreneurship
Explaining Profit Maximization Theory
Profit maximization is a core principle in economics where firms aim to produce at a level where marginal revenue equals marginal cost (MR = MC). This ensures the highest possible difference between total revenue and total cost. The theory assumes rational decision-making and perfect information, serving as a benchmark for analyzing firm behavior and market efficiency.
Application in Entrepreneurship
Entrepreneurs apply this theory to guide pricing, cost control, and resource allocation. Startups often use lean operations and prioritize high-margin products to reach profitability quickly. Dynamic pricing strategies and MVP testing are common practices aligned with profit-maximization principles.
Critique of the Theory
Critics argue that the theory oversimplifies reality. It assumes perfect markets and rational actors, which rarely exist. Modern businesses pursue multiple objectives—such as sustainability, innovation, and social impact—that may conflict with short-term profit goals. Behavioral economics also shows that decision-makers often satisfice rather than optimize.
Relation to Other Theories
Profit Maximization Theory intersects with:
- Utility Theory: Focuses on individual satisfaction rather than firm profits.
- Resource-Based View: Sustainable profits stem from leveraging unique resources.
- Effectuation Theory: Emphasizes flexibility over strict optimization.
- Stakeholder Theory: Advocates balancing interests beyond shareholders.
Latest Research Study Results
Recent research by Tran, Azizi, and Archibald (2025) introduced stochastic models for profit maximization in hub-location problems with elastic demand. Their approach highlights the evolution of profit maximization from static models to dynamic, uncertainty-driven strategies.
References:Tran, D., Azizi, N., and Archibald, T. W. (2025). Stochastic profit maximization and pricing in hub location problems with elastic demand: Mathematical formulations and exact algorithms. European Journal of Operational Research.