If a firm wants to maximize profits , it must give careful attention Essay

If a firm wants to maximize profits , it must give careful attention to its pricing decisions .under what conditions does this statement have relevance what a - Essay Example Profit is the difference between the total revenue and total costs of a business enterprise. Profits are considered to arise either as rewards for risk taking or due to the imperfections in the economy or as reward for innovations, according to economic theories (Dean 1977, pp. 5 – 9). Rewards for risk taking: Entrepreneurs are essentially people with the ability to take risks. The risk involved is, to be prepared to accept as their share of the (monetary) value of the enterprise activities, after all costs have been provided for. What is left may be losses or minimal profits or more than reasonable profits. It is this risk that entitles the entrepreneur to keep for himself whatever is left at the end of the day. This is his profit. A good example of the reward for risk taking is photocopying business. When the plain paper photocopying technique was invented, it was a risky business to invest in, as the future would be that of ‘computerized paperless offices’. Rank Xerox Corporation, on the other hand, was willing to accept the risk and acquired the technology and patent rights. The stupendous success of this decision and the great revenues that it brought to Rank Xerox, are legendary (www.xerox.com). Imperfections in economy: According to this view, profits arise due to ‘†¦the imperfections in the adjustment of economy to change’ (Dean 1977, p.8). Imperfection refers to the competitive situation. There is a time lag between the occurrence of a change and the return of the market to near-perfect competitive position or equilibrium, and it is during this time of absorbing the change that profits accrue. An example of this type of opportunity is the occasional shortage in supply of food grains due to bad weather or crop failure and the time lag before a government takes corrective actions for increasing supplies through imports etc. Reward for innovation: In this third view on how profits arise, it is postulated that profits are what the