Objectives of a firm
- Created by: Ali Bland
- Created on: 06-03-15 18:12
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- Objectives of a firm
- Profit maximisation
- MC = MR
- The models that comprise the traditional theory of a firm are based upon this assumption.
- Including prefect competition, oligopoly and monopoly
- will produce one more unit of output only if it adds to more total revenue than cost
- Assume businesses have sufficient information, market power and motivation to set prices to max profit
- Objective criticised as businesses have wider range of objectives
- Many focussing priorities beyond profit and towards welfare of suppliers, employees and planet
- Why depart from PM?
- Imperfect information
- Hard to know PM output as cannot calculate MC and MR
- May add profit margin on top of AC (cost plus pricing)
- Multi-product businesses
- Most businesses are multi-product and volume of information they have to handle is vast
- Imperfect information
- Most important as universal yardstick, otherwise would have case study approach
- Acts as signal to producer to inc or dec rate of output or leave/ enter industry
- Satisficing
- Significant when there is a divorce of ownership and control
- The decision makers within the firm may be happy with a satisfactory outcome to please the managers and other stakeholders
- Each group has different objective
- Aim for minimum acceptance levels of achievement
- Only consider limited amount of alternatives
- Companies eg. Google, Intel, Nestle, Wal-Mark have tried to create shared value by looking at intersection between society and corporate performance
- Maximise sales revenue
- MR = 0
- Developed by Baumol- argued annual salaries and perks linked to sales revenue rather than profit
- Companies with this objective likely to price discriminate to extract extra revenue from consumers
- If it wishes to deter entry of new firms
- May cause reduction in price of shares
- May sacrifice profit in SR when firm enters market to built share and reputation
- Pursuing ethical business objectives
- Companies integrate social and environmental concerns in their business operations on a voluntary bais
- Firms are increasing embracing this objective
- Altruism, contracting benefits (helps recruit, motivate and retain employees), customer satisfaction, low production costs (energy use, packaging)
- Providing public service
- Some charities, community organisatons are run on commercial lines
- Eg. Network rail's purpose is to provide safe, efficient railway
- Not-for-dividend company, profits invested in railway
- Profit maximisation
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