Profit maximization is the procedure that organizations use to determine the price and production level that will help it attain higher profits in either short or long run (Chapter 9.pdf, n.d., 227). There are two methods used to establish profit maximization. First, the marginal cost focuses on achieving the maximum gain in a perfect market. The minimal cost argues that profits are lower when the marginal income is negative (Chapter 9.pdf, n.d., 231). Hence, for a firm to be on the safe side, it is best for it to have both equal marginal cost and revenue that result in zero minimal profit. The total cost approach works on recognizing the benefits through subtracting the value from the income. Total cost method is the optimal selling price for attaining profit maximization. It is best determined when the quantity demand equals the profit-maximizing output (Chapter 9.pdf, n.d., 232). In other words, it implies that profit maximization is driven by the need for a product in a market depending on the price of the particular item. For instance, in the case of New Hemisphere resort, the firm will still maximize its profits in the summer season despite maintaining the standard price offer due to the demand; occupancy rate is high at that time. This paper aims to explain whether the policy of maximization applied by New Hemisphere resort can be consistent with profit maximization or not.
The policy employed by the New Hemisphere resort is inconsistent with policy maximization based on the pricing strategy of elasticity of demand. Notably, while the need in the market is low, the prices should be lowered to attract more consumers (Economics. Help, n.d.). Instead, the resort hikes its rates when the occupancy rate is low. It should decrease its price in the winter season to boost the occupancy rate. Since there is a relationship between quantity of demand and rates, one can easily predict the impact of increasing or decreasing prices through the demand curve for the season. The season has been there; hence it is not something new, and the resort has also not made changes to the products it offers during that season. Therefore, if they increase the rates during low seasons, they will have less consumer demand than in the summer season. As a result, there is an elasticity of demand making it impossible to attain profits throughout the year (Riley, 2016).
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With the activities that the resort offers, it is deemed to face stiff competition in the perfect market because many businesses provide the same services. Therefore, it is unreasonable for the company to inflate its prices during low occupancy season because customers will divert to other places rendering the same services at affordable or fair rates. Instead, the firm should work on a consumer retention strategy to maximize its sales through cost reduction. People will have more reasons to flock the resort considering its lower rates. Unless the firm is offering other incentives to support the high price during the winter season, then its policy is not justifiable, thus leading to unpredictable profits. Hence, it is best for the resort to analyze its rates using the profit maximization strategy to consider the advantages and disadvantages of a decision before implementing it.
In conclusion, the policy for New Hemisphere resort of hiking rates when there is low demand is inconsistent based on the pricing strategy of elasticity of demand. Additionally, the approach does not support profit maximization in the long run. The optimal step is to weigh the decision before implementing it as a long-term policy to evaluate its benefits as well as its disadvantages. Since this study proves that the idea is shallow for a perfect competition market, it should be abolished.
References
Chapter 9. Profit Maximization in Perfectly Competitive Markets. (n.d.). Retrieved from https://www.wiley.com/college/browning/0471389161/pdf/ch09.pdf
Economics.Help. (n.d.). Price Elasticity of Demand (PED) - Economics Help. Retrieved from https://www.economicshelp.org/microessays/equilibrium/price-elasticity-demand/
Riley, G. (2016). price elasticity of demand, .edu - Yahoo Video Search Results [Video file]. Retrieved from https://video.search.yahoo.com/yhs/search;_ylt=AwrJ3U2ZdPVaF2IAZ4gPxQt.?p=price+elasticity+of+demand%2C+.edu&fr=yhs-lvs-awc&fr2=piv-web&hspart=lvs&hsimp=yhs-awc&type=lvs__webcompa__1_0__ya__ch_WCYID10444__180403__yaff#id=3&vid=731df1b1b82448fdd4d063670238b924&action=view
