Objectives of Firms 

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  • Objectives of Firms
    • Profit Maximisation
      • MC=MR
        • MC= the cost of producing one more good
        • MR= the revenue from producing one more good
      • Profit maximisation will take place over the time period determined by the business owner- usually focuses on long term PM
    • Other Objectives
      • May wish to boost prestige within local community or only employ local workers despite lower productivity.
      • Austrian School of thought- each individual attempts to maximise their own preferences.
        • In theory could be entirely monetary but more likely include living in a pleasant area, time with children etc.
          • In other words, individuals will strive to maximise their psychic revenue.
            • Profit maximisation actually occurs where: marginal psychic revenue of consumer= marginal psychic cost of the firm
      • Satisficing
        • Large firms contain many groups all who want to pursue different aims
          • Shareholders want an increasing share price
          • Management want large bonuses
          • Workers want good pay and good working conditions
        • Rather than maximising one objective the firm attempts to find an acceptable goal to all
    • The Divorce of Ownership and Control
      • Large corporations such as PLCs have owners (shareholder) who do not run firm but vote in Board of Directors to run firm day to day.
        • PLC floats on stock exchange and so many shareholders are only concerned with share price and nothing else
      • The Principle-Agent Problem
        • Can exist in any organisation which is not a sole trader- competing of objectives of manager and worker
        • Directors are paid bonus if the generate £10m of sales revenue, as such they lower prices to increase sales but would reduce profitability- share price reduced which annoys shareholders


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