In capitalist economies, the primary goal of for-profit companies is to maximize their profits. This doesn't mean that companies focus on profits at the expense of everything else, though. Instead, every company must find the point at which employee pay, customer discounts and other undertakings maximize profits rather than cutting into them. The rule companies use to determine this formula is called the profit maximization rule.
The Right Formula
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In economics, the profit maximization rule is represented as MC = MR, where MC stands for marginal costs, and MR stands for marginal revenue. Companies are best able to maximize their profits when marginal costs -- the change in costs caused by making a new item -- are equal to marginal revenues. Although this looks like a mathematical formula, it's a highly complex and ever-shifting equation that must take into account virtually every factor in the market.
Balancing Expenses and Revenues
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When you design or sell a new product, you incur a variety of costs that can include manufacturing or purchasing from a manufacturer, advertising the product, packaging and -- particularly if the product requires upkeep or is a live plant -- product care. To maximize profits, these costs need to be lower than or equal to the additional revenues you make from the product.
Planning for the Unexpected
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When you design a budget for creating a new product, it can be challenging to anticipate all costs. For example, a controversial product could yield bad reviews or negative publicity that causes you to make lower profits than planned. Consequently, you'll have to constantly adjust your profit maximization equation rather than planning for profit maximization a single time.
Employee Costs
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One of the most significant costs faced by most businesses is the combined cost of paying employees, maintaining office safety and providing upkeep for employee work spaces. To maximize profits, you'll have to spend the lowest possible amount to get the minimum quality you need. This doesn't necessarily mean paying minimum wage, though. Instead, it means you have to pay the lowest wage that qualified employees will accept, and hire the smallest possible number of employees to complete your daily tasks.
