What are the objectives of a firm?

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A firm can have a number of objectives some of which can carry drawbacks. (All these objectives can also be accompanied with diagrams.)

1.Profit Maximisation ( at the point MC=MR)

this keeps shareholders happy, provides reinvestment opportunities, and create greater efficiency for the firm. 

BUT 

the point where marginal costs (MC) are equal to marginal revenue (MR) is difficult to calculate as MC includes physical costs and the opportunity cost- which is hard to quantify.

Additionally firms have greater risk of investigations by regulatory authorities if huge profits are being made.

2. Profit satisficing- which occurs when there is a divorce of ownership of control. So firms have to profit satisfice; make a level of profit which satisfies all stakeholders.

3. Survival e.g. this is typical of firms in the transport sector where there are high fixed costs to set up due to competition in the industry; so survival is good enough.

4. Revenue Maximisation (MR=0)

e.g. predatory pricing due to competition in the industry ( price driven down; this drives out competion and quantity driven down; as firms grow in size they may benefit slightly from economies of scale)

4. Sales maximisation (AC=AR)

can occur when a firm is concerned about producing as much as possible and maximising the size of the business.

evaluation summry; 

show why profit max. may not work

other objectives (often due to conflicts between short term and long term goals)

highlight the growth versus profit conflict.

(remember to give examples to show application skills too)

Sarswati L. GCSE Economics tutor, A Level Economics tutor, 13 Plus  E...

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