Difference between Profit Maximization and Wealth Maximization

Definition of Wealth Maximization

Wealth maximization is the ability of a company to increase the market value of its common stock over time. The market value of the firm is based on many factors like their goodwill, sales, services, quality of products, etc.

Definition of Profit Maximization

Profit Maximization is the capability of the firm in producing maximum output with the limited input, or it uses minimum input for producing stated output. It is termed as the foremost objective of the company.
Profit can be calculated by deducting total cost from total revenue. Through profit maximization, a firm can be able to ascertain the input-output levels, which gives the highest amount of profit.

Profit Maximization Vs Wealth Maximization

wealth maximization

Basis of Difference

Profit Maximization

Wealth Maximization

1. Definition or Nature The concept of profit maximization implies that a firm either produces maximum output for a given input, or uses minimum inputs for producing a given output. Thus, it relates to optimizing the input-output relationship of resources to minimize the wasteful costs. The concept of shareholders wealth maximization means maximizing the wealth in the hands of shareholders by way of dividends and value-creation or net present value of a course of action such that future inflows value is maximized and determined precisely.
2. Formula Profit maximization concept is based on the determination of maximization of profits. In a simple way:

Profit= Total Revenue Receipts-Total Costs

The stockholders current status wealth in the firm is based on the share price and the number of shares held. It can be depicted as:

Wealth= No.of shares owned*current stock price per share.

3. Purpose of Concept The main purpose of profit maximization is to maximize the profitability derived out of economic activity of the business. The main purpose of this concept is to enhance the value of the firm and the market value of the shares of the shareholders.
4. Time span This concept relates to relatively shorter time period, say a financial year. Thus, a short-term myopic vision. This concept relates to long-term value building and augmenting individual shareholders utility. Thus, a long-term vision.
5. Limitations The profit maximization concept has the following constraints:

  • It ignore the time value of money concept.
  • Short-term vision based.
  • gives lower priority to share
The wealth maximization concept has the following constraints:

  • It suffered from drastic changes and fluctuations in financial markets.
  • Very long span of time. so increased efforts on value building.
  • Conflict arises when there is separation of management from ownership.