The Objectives of Firms - Unit 3 (AQA)

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  • Created on: 22-01-13 19:29
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Economics ­ The Objectives of Firms (5.12.12)
Traditional View = Firm's want to minimise costs and maximise revenue in order to
maximise its profits
Later Views = Take into consideration the wider perspective of the firm's motivation
Profit ­ Maximising Output:
A firm wanting `profit-maximisation' will produce up to the point where MR=MC (where
the MC is rising)
Firm's include `Normal Profit' in their costs and so when MC=MR the firm will still receive
`Normal Profit' which is just sufficient to ensure that the firm will continue to supply it's
good or service
Depending on market conditions, firms may earn:
Supernormal Profits = More than that required to ensure the supply of the good
Normal Profits = Just sufficient to ensure supply of the good
Sub-normal Profits = Less than that required to ensure supply of the good
The economists view of profits:
Normal profit = a return that covers the opportunity cost of all factors used in the
process (the amount necessary to keep a factor in its present occupation)
Supernormal or abnormal profit implies a return over & above normal profit
Supernormal profits can be seen as providing an incentive to firms to enter an
industry ­ signal entrepreneurs to allocate more factors and therefore are important
in allocating scarce resources to areas where they are required
Supernormal profits may indicate a lack of competition in the industry
Negative or falling profits may indicate that oversupply is taking place; firms will
leave the industry and relocate their factors elsewhere

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A firm's objectives:
Traditional View = A firms sole objective is to maximise its level of profits and suggests that
an entrepreneur will change levels of output every time there is a change in the level of
prices or costs
In a modern world concerned about negative externalities and the destruction of the
environment, a firm that ignored these considerations in order to increase its profit levels
would be likely to lose custom and receive heavy censure (Example: Nike using child labour
in Pakistan)
The…read more

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If they don't = increase likelihood of a hostile bid
Hostile Bid = a bid to buy shares in an attempt to gain control of the firm which is
opposed by the firms directors who fear job losses
While the goal of profit maximisation mat not be an appropriate assumption, firms
may indulge in satisficing
Satisficing = Firm produces satisfactory, but not maximum profit
A firm doing this may produce at a range of outputs that are within its target level of
profits rather…read more

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The above factors make it almost impossible for a firm to make an accurate
assessment of whether it is profit maximising
Firms are therefore more likely to satisfice rather than maximise (make an acceptable
profit rather than achieve the maximum) ­ firm will not waste time & resources
seeking the optimal solution.…read more


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