Minimum and maximum principle: explanation |

People always act on that economic principle.

The principle describes the assumption that people or companies economically optimal act. This means that effort and result must be in the optimal ratio in order to maximize profit and use your own resources as efficiently as possible. A distinction is made here between the maximum and minimum principle.

The minimal principle simply explained

With the minimal principle, a target set.

And people or companies try to achieve this goal with as little effort and resources as possible. So that means the goal is set and the Means are variable. So the focus here is on cost minimization and effort minimization.

The principle is also known as that savings principlebut in business the term «minimal principle«.

This principle can be explained very well if you think about the fact that you have to study for an upcoming exam. Imagine you want to get the full number of points in the next business exam. So this is your fixed goal. So now you just have to think about how you can achieve this goal with as little learning effort as possible.

Another example would be getting to a given location using as little fuel as possible.

You want to drive to Berlin with your friends over the weekend or visit your grandma in Stuttgart. So that is your goal – the output. And you want to use as little fuel as possible. So these are the means for it – the input.

You have two cars at your disposal for this, Car A and Car B.

Car A uses 80 liters of petrol for your chosen destination and car B uses 75 liters.

So if you go by the minimum principle, you choose car B because the fuel consumption is lower here.

Then another example from business life.

A baker has the fixed goal of baking 1000 rolls a day. Of course, he wants to invest as little time as possible and use as little of the ingredients as possible, such as flour, eggs, salt, etc.

So he tries to minimize his effort and costs as much as possible.

At the minimal principle if you want a certain output or a fixed goal minimal effort reach.

The minimum principle is used by many companies and is mainly used in corporate management. There, costs and sales are planned, which are then later compared with the actual costs incurred, the so-called actual costs, and the sales actually realized. This allows companies to redefine and set goals.

The maximum principle simply explained

The maximum principle is exactly the opposite of the minimum principle.

In contrast to the minimal principle, one tries to maximum principlethe get the maximum benefit. So that means here the economic actor given funds and want that best possible result achieve.

The funds are limited or precisely defined and the aim is to achieve a high yield or benefit – that target is so variable. So the focus here is on profit maximization and utility maximization.

The principle is also referred to as the so-called yield principle.

Let’s take the example from earlier with the business exam and now use the maximum principle. Your funds are set here. This means that you have, for example, 15 hours to study for the upcoming exam. You don’t have any more time. And your goal is to achieve the best possible grade in the exam with the specified 15 hours of study time by using the time as effectively as possible.

Again, the previous example of the minimum principle with the car is a very good example to illustrate the maximum principle. Here we assume you have 40 liters of gas left. This is the established mean. With these 40 liters of petrol you try to drive as far as possible. To do this, first look for the ideal city or the best connection. So you get the most out of the limited resources – the petrol.

You invite all your friends over for dinner and you want to cook for them. You have 100 € available for the complete meal and with this money you try to buy as much food as possible in the supermarket.

A company has given a certain amount of machines and resources to produce certain products. The aim is now to achieve the greatest possible benefit with the available funds. In this case, the company tries to achieve the maximum production quantity or maximum production quantity.

Incidentally, there is another, third principle, the so-called extremum principle. This is a mixture of the other two principles. Here you look for the optimal combination of goal and given means in order to optimize the use. This means that with the extremum principle, the optimal relationship between effort (input) and yield (output) is established. It represents the optimal balance between the maximum and minimum principle and is the most common in reality.

Minimum and maximum principle – difference

Once you understand how the maximum principle and the minimum principle work and are applied, the two principles can be easily distinguished.

This table will help you to clarify the differences:

Minimum principleMaximum principlegiven/determinedTargetMedium, effortvariableminimum effort (input)Target

In the first line you can see what is specified for the maximum principle and the minimum principle. The second line states what is to be achieved with the respective principle. With the minimum principle, it is the minimum effort and with the maximum principle, the goal is profit maximization or maximization of benefit. And these sizes are just variable.

Limits and problems of economic principles

Basically, the principles work very well in the business world and are used again and again. But even here there are factors that give rise to criticism. One thing becomes particularly clear when you think about how you act as a human being in certain situations.

Imagine you have a part-time job and earn your own money. Now you have put €150 aside. With this money you want to go shopping and buy new clothes. If you act according to the economic principle, in this example the maximum principle, you would try to buy as many items of clothing as possible with the €150 you have available. Because you want to get the maximum out of the given resources.

Now, of course, you are certain preferences have, i.e. prefer a certain brand, quality, material etc. So there is also the possibility that the consumer, i.e. you, judges the maximum benefit based on the quality and not on the number of items of clothing.

So you notice that you don’t always act according to economic principles. That is why the minimum principle and maximum principle have in reality limits.

This is a prerequisite for using the principles of economy rational action. So you always have to act rationally so that you can apply the principles. But not all decisions can be made rationally. Because everyone has preferences and can be influenced by advertising or other things.

The theoretical model is also called Homo Oeconomicus. You can read more about this here. Just click on the term and you will get directly to the detailed article.

It should also be noted that this is only theoretical models acts and these do not always bring the desired success. In reality, therefore, the principles are often modified. The minimum principle and the maximum principle are rarely used in their pure form.

When planning certain goals, it is therefore an advantage to think carefully about whether you want to achieve a certain goal or whether you have to go according to your existing budget.

Minimum and maximum principle – the most important thing

  • Economic principles describe the economically optimal action
  • With the minimum principle, you want to achieve a set goal with minimal effort
  • With the maximum principle, the benefit or profit should be maximized with the specified means.
  • Prerequisite = rationality of action
  • In reality, rational action is not always possible (e.g. due to personal preferences)