Maximising profits: Is it necessary?

Maximising profits is said to be the objective of all firms. Indeed, it's not always easy for the management to find out which are the right decisions that would maximise them. For instance, short-run profits can be easily pumped up by avoiding maintenance, discretionary costs, investments, that however are necessary of on-going competitiveness, as you can experiment with this free business game.

Moreover, what maximises the "overall profits" is not necessary what allows to attain the maximum of "profitability", i.e. the percentage of profits to turn-over, as you can better understand by using this model of monopoly and comparing two policies: (i) extremely high prices (= high profitability), (ii) a price set from a mark-up of 15% on costs.

In reality, firms do have profits targets, and sometimes they pay managers for reaching them, but the goals of firms are broader than profits alone.

Proceeding with other determinants of profits, rising prices of competitors, better sales conditions and skills, a higher overall price level allow for higher prices of the considered firm's products, thus increase nominal profits to the extent that costs are inelastic, i.e. they rise less than proportionally to revenues.

Cost structure and its general elasticity to production level is thus relevant to profits. Economies of scale increase profits more than proportionally when sales grow. Conversely, a recession with falling sales levels will hit profits particularly hard in industries where there are economies of scales and high fixed costs.

Rising wages directly reduce profits. If, however, on a macro-economic level, these wages will be spent on domestic goods, higher consumption will boost business revenues, partially counteracting the previous dynamics. Depending on the dynamics of exports and other GDP components, higher wages are compatible with higher profits, as you can see in these real data.