Economic Objectives of Firms

Revision Notes

1. Profit Maximisation

Alternative Aims of Firms

1. Profit Satisficing.

· In many firms there is separation of ownership and control. Those who own the company (shareholders) often do not get involved in the day to day running of the company.

· This is a problem because although the owners may want to maximise profits. The managers have much less incentive to max profits because they do not get the same rewards (share dividends)

· Therefore managers may create a minimum level of profit to keep the shareholders happy but then max other objectives such as enjoying work, getting on with other workers (not sacking them)Problem of separation between ownership and manager.

· This can be overcome, to some extent, by giving mangers share options and performance related pay although in some industries it is difficult to measure performance

2. Sales Maximisation.

Firms often seek to increase their market share even if it means less profit this could occur for various reasons:

a) Increased market share increases monopoly power and may enable to put up prices and make more profit in the long run.

b) Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries

c) Increasing market share may force rivals out of business. E.g. supermarkets have lead to the demise of many local shops. Some firms may actually engage in predatory pricing which involves making a loss to force a rival out of business

3. Growth Maximisation.

This is similar to sales maximisation and may involve mergers and takeovers.

4. Long Run Profit Maximisation

5. Social/ Environmental concerns.

A firms may incur extra expense to choose products which don’t harm the environment or products not tested on animals.

· Many companies who have adopted such strategies have been very successful. This has encouraged more firms to consider these over objectives, but a cynic may argue they see it as another opportunity to increase profits

Essays and Revision Notes on Costs, Revenue and Profit