profit maximization

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The act of making as much profit as possible for a business. It is standard in economic theory to assume that the actions of firms are guided by profit maximization. This applies equally to firms operating in competitive markets and to firms with monopoly power. These differ with respect to scenarios the variables that are under the control of the firm and the form of strategic interaction with other firms. The assumption of profit maximization is justified if firms are run to meet the interests of their shareholders: the share price is equal to the discounted value of the flow of profits. If the separation between ownership and control in a firm creates an agency problem then profit maximization may not be the firm's objective.

Subjects: Economics.

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