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
      • 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


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