Firm's Objectives

Firms can have a range of different objectives. In Economics, we assume this is Profit Maximisation but this may not always be the case.

Principal Agent Problem / divorce of ownership from control

This is where the people who own the business (shareholders) are not the ones controlling it (managers). This means that the managers may not act in the best interests of the shareholders. For example, it may be beneficial for managers to increase revenue as it looks good for them, and they may be rewarded with high bonuses / pay raises. In comparison, profit maximisation would be more desirable for shareholders because that will mean higher dividends.

Profit Maximisation

Where firms try to maximise profit by operating at MR=MC (i.e producing another good would have a higher cost than revenue).

Advantages

  • More profits to reinvest into Research & Development, new capital / expansion.
  • Pay dividends to shareholders
  • Lower costs -> lower prices
  • Profit is the reward for risk-taking enterprises

Disadvantages

  • Might not know where MC=MR is
  • Scrutiny from regulators / investigators

Profit Satisficing

Profit Satisficing is where profits are sacrificed in order to satisfy key stakeholders

Which key stakeholders would firms want to satisfy

  • Consumers -> may boycott if unreasonable prices
  • Workers -> may go on strike if wages are too low / government intervention
  • Government -> unhappy if there are unfair working conditions / prices too high for consumers
  • Environmental groups -> may cause government intervention if cutting costs causes high pollution / damage to the environment.

Revenue Maximation

Revenue maximisation is where you try to maximise revenue, by operating at MR=0

Advantages

  • Economies of scale -> larger output will mean greater economies of scale
  • Predatory pricing -> drive out competition

Sales Maximisation (Growth)

Sales maximisation is where you sell as many of your good/service as possible until you have zero profit.
Sales maximisation occurs are AR=AC

Advantages

  • Economies of scale - This objective will grow the firm the quickest
  • Lowest price without making a loss
  • Beneficial for managers (Principal Agent Problem)
  • Flood the market - Develop loyalty, then change objectives later.

Other Objectives

Survival

If competition is harsh, the firm's only objective may be to make sure it survives - such as charging competitive prices while saving profit.

Public Sector

Public Sector firm's goal is to maximise consumer welfare. They operate when consumer welfare gained = AC. They have allocative efficiency.

Corporate Social Responsibility

Acting ethical - e.g donating to charities, using green energy, to generate good publicity for the company in an effort to increase loyalty of consumers.