Profit Maximization Business

Question: Discuss about the Report for Profit Maximization Business. Answer: 1. Introduction Profit maximization is the objective of each firm. It is the difference between the revenue and costs. In order to run a business, it is important to generate higher profit to increase the operation and scale of the business. However, profit is not used to pay wage; tax or interest, it remains within the firm and invested for further improvement. Therefore, it is important to take right decision that would maximize the level of profit. In the short run, profit can be achieved by avoiding different costs, however, in the long run a firm has to make decision very carefully. By ensuring long run profit, a firm will be able to become competitive in the market. Analysis In a perfectly competitive market structure, all firms attain a constant zero profit level in the long run equilibrium. In reality, firms earn different level of profits. This is mainly because of imperfect competition. Imperfect competition takes place when firm differentiate their product. Differentiation can be made in terms of high product quality that requires innovation or advertising. Innovation is a continuous process and continuous flow of investment is required. In contrast, the advertising is a once-off expenditure. Through advertisement the firms communicate with the consumers and broader society. Advertising is able to change the importance that is attached to specific features of the good. The advertisement differentiates its product by disclosing its quality; price or special feature that is distinct from products of other firms. The distinct features differentiate the products from the competitors. This will reduce the degree of substitution. The major impact of spending in advertisement is the increase in the sales volume. Product differentiation enables the firm to increase its amount of sale, even if the product price is premium. Even if the firm has spent huge amount on advertisement, high sales volume guarantees fairly high margin of costs (Hubbard et al., 2012). This leads to high profits as quantity and price both are high. Therefore, the fixed discretionary advertisement cost of advertising will be justified and can lead to high profit in the future. Figure 1: Advertisement Cost Source: Yan et al., 2014. According to Baumol, increase in the total advertising will increase total revenue, even if there will be diminishing return (Yan et al., 2014). If the firm wants to maximize profit, it will incur advertising cost of OA1. However, if it wants to maximize its sales then it will spend higher cost of advertisement. However, sales maximization is a feature of oligopoly market structure. Monopolistically competitive firm mostly engaged in product differentiation. These firm earn abnormal profit in the short run, however, in the long run they earn normal profit. Figure 2: Supernormal Profit in Short Run Source: Mankiw, 2014 Figure 3:Normal Profit in Long Run Source: Mankiw, 2014 Product differentiation is practiced through innovation and less innovation requires more advertisement. By spending on RD activity, the firm can differentiate its product. However, RD is a risky activity and may result into higher cost than revenue collected in short run. In spite of this fact, this strategy is adopted in order to offer a different product, which will in turn improve sales of the company in the short run as well as long run (Harimaya et al., 2012). Conclusion From the above discussion, it can be said that through once-off expenditure on product differentiation, may lead to maximising economic profit in the long run. However, in practical, the firms emphasize on sales maximization in the long run than profit maximization. Therefore, they focus on making their product different from others through advertising and innovation in order to compete with others in future. 2. Introduction Wage is determined by the law of demand and supply in the labour market. The wage is also paid according to the skill level of the workers. However, in most of the developed economy, the government has set minimum wage, so that wage rate does not fall under certain level (Case, Fair Oster, 2012). The wage rate is different across the occupation and across the industry. However, it has been seen in many cases that the wage is different within the occupation and industry as well. This is often remained unexplained. Analysis The wage is different because the abilities of the workers are not same in a company. a high skilled workers are paid higher wage than a low skilled worker within a company. In addition to this the demand and supply of labours are not same in every sector or across different occupation (Neumuller, 2015). There is huge demand for certain kind of jobs, i.e. supply of labour for a specific job is very high than the vacant positions. In such case, wage tends to fall to reduce the demand. Similarly, when there is vacant position but labour supply is less, the wage tends to increase, to bridge the gap between the demand and supply of labour. The vacant position and eligible labours are different across the occupation and across the industry. Hence, wage differential takes place. Figure 4: Labour Market Source: Created by Author The range of wage varies within the same occupation, because of payment according to the performance standard. In white-collar jobs, workers have high scope to improve their performance as they are engaged in multiple duties. Whereas, the blue-collar jobs offer little scope to improve their performance standard given the type of their work (Visintin et al., 2015). The wage differential also takes place within or across the same industry, because; requirement of skills and the skill levels are different. Apart from heterogeneity in performance and skill, the wage dispersion takes place due to mechanism of search and matching process between employer and workers. Wage also differs due to individual features like gender; age and often race as well. Conclusion From the above discussion, it can be said that theoretically wage rate differs because of different demand and supply across different industries and different occupations. However, in reality, there are several factors that cause wage differential. Such factors are performance improvement ability; individual feature; job searching tenure and so on. These factors vary across the industries. Therefore, economists find it difficult to explain the causes of wage dispersion. References Case, K. E., Fair, R. C., Oster, S. M. (2012). Principles of economics. 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