Date: 2025-07-02 Page is: DBtxt003.php txt00025780
ECONOMICS
PROFIT MAXIMIZATION
The mathematics of profit maximization is incorrect ... Written by Philip George [India]
PROFIT MAXIMIZATION
The mathematics of profit maximization is incorrect ... Written by Philip George [India]
Open PDF: http://www.paecon.net/PAEReview/issue99/George99.pdf
Peter Burgess COMMENTARY
This paper written by Philip George in India got my attention because of my own interest in the manner in which decision makers in business make their decisions and how decisions ripple through not only the business but into society and impact the environment.
Many years ago, I was working to improve the profit performance of a manufacturing company that made electrical switchgear. Our main competition was General Electric and between the two companies we supplied about 80% of the market demand.
The analysis of many profit improvement decisions is quite simple. In this example there was a huge management team at the top of the company, but very few cleaners and maintenance staff keeping the factory clean and operating well. Removing much of top management saved a lot of money and made it possible to hire more cleaners and mainenance staff to improve the factory looks and performance.
Other performance improvement opportunities are more nuanced. One of the product lines required castings, machining, and assembly. We made the castings in our own foundry and we were at maximum capacity on a two shift basis. The conventional wisdom was that it was impossible to operate a third shift. It had been tried before and did not work. A third shift had not been successful since WWII. As our sales improved ... grew ... we were stuck with a production bottleneck in the foundry.
This product line was getting more and more sales at the expense of our main competitor, GE. Our production capacity on a two shift basis five days a week was not enough for production to keep up with sales ao we had to work weekends as well to keep up. But working weekends meant we had to pay labor time and half on Saturdays and double time on Sundays according to our Union contracts ... not to mention that was also had to call in the workers according to seniority and not thie particular skill-set! Net net, everything that we produced during the weekend had a real cost fare in excess of the selling price ... we lost money on everything we were producing at the weekend. My colleague, the VP Marketing and Engineering was very happy with his sales performance on this product line, and became not at all happy when I argued that more and more sales were in fact reducing our company's profit performance. I argued that we should raise prices ... my colleague did not agree. He argued that our competitor would take away our sales! Fortunately, I won the argument and we raised our prices enough so that we could cover our costs even during the high cost weekends. Our competitor, GE, also raised its prices, because it was no longer being challenged in the market place by our 'loss producing' competition.
Philip George in India is using a lot of economic language that I am not sure I follow correctly ... but the stories I have about production costs and market prices in the various companies where I have practical knowledge suggest that much of the modern economy is operating with little conventional competition and a lot of monopoly power that goes unchallenged by government authorities. Big companies have become bigger and bigger and less and less 'transparent' and the 'rules' for reporting do rather little to help, rather they serve to confuse and justify quite useless 'numbering' that avoids disclosing a lot of what is truly needed!
Peter Burgess