Main Constraints of profit maximization for firms

To achieve the objective of maximum profit-maximum economic profit--a firm must make five basic decisions: What goods and services to produce and in what quantities? How to produce-the techniques of production to use? How to organize and compensate its managers and workers? How to market and price its products? What to produce itself and what to buy from other firm

Technology Constraints

Economists define technology broadly. A technology is any method of producing a good or service. Technology includes the detailed designs of machines. It also includes the layout of the workplace. And it includes the organization of the firm. For example, the shopping mall is a technology for producing retail services. It is a different technology from the catalog store. It might seem surprising that a firm's profits are limited by technology because it seems that technological advances are constantly increasing profit opportunities. Almost every day, we learn about some new technological advance that amazes us, With computers that speak and recognize our own speech and cars that can find the address we need in a city we've never visited, we can accomplish more than ever. Technology advances over time. But at each point in time, to produce more output and gain more revenue, a firm must hire more resources and incur greater costs. The increase in profit the firm can achieve is limited by the technology available. For example, by using its current plant race, Ford can produce some maximum number of cars. To produce more cars per day, Ford must hire more resources, which increases its costs and limits the increase in profit that it can make by selling the additional cars.

Information Constraints

We never possess all the information we would like to have to make decisions. We lack information about both the fin.d the present For example, suppose you plan to buy a new computer. When should you buy it? The answer depends on how the price is going to change in the future. To get the best deal, you must c.compare the quality and prices in every shop. But the opportunity cost of this comparison exceeds the cost of the computer!

Similarly, a firm is constrained by limited information about the quality and effort of its work force, the current and future buying plans of its customers, and the plans of its competitors. Workers might slacken off when the manager believes they are working hard. Customers might switch to competing suppliers. Firms might have to compete against competition from a new firm.

Firms try to create incentive systems for workers to ensure that they work hard even when no one is monitoring their efforts. And firms spend millions of dollars on market research. But none of these efforts and expenditures eliminate the problems of incomplete information. The cost of coping with limited information itself limits profit.

Market Constraints

What each firms can sell and the price it can obtain are constrained by its customer's willingness to pay and by the prices and marketing efforts of other firms. Similarly, the resources that a firm can buy and the prices it must pay for them are limited by the willingness of people to work for and invest in firm.