3.2) Business Objectives

Business Objectives

• A firm’s motives are often determined by who controls it

• Who could have control:

  • owners/ shareholders

  • directors and managers

  • the workers (through a trade union)

  • the state (through regulation, taxes/ subsidies and direct control)

  • consumers (through their consumer sovereignty - businesses sell what consumers want to buy)

  • pressure groups

Profit Maximisation

• Neo-classical economics assumes that the interests of owners/ shareholders are the most important and therefore the goal of firms is to profit maximise in the short-run, in order to maximise owners’ returns

• By short-run profit maximising, firms can also generate funds for investment and to help them survive a slowdown during a recession

• E.g. Apple and pharmaceutical companies are likely to profit maximise since they need money to reinvest

• In order to short-run maximise, firms produce where MC=MR

Revenue Maximisation

• Suggests managers are most interested in their level of revenue since this is what their salary depends on

• Even when their salary is not directly connected to sales revenue, they knew that a growth in revenue was always likely to be positive for the business - increases their prestige and justifies managerial rewards

• As a result, many firms may aim to revenue maximise as long as they provide some profit for the owners

• E.g. Amazon aims to revenue maximise in order to dominate the market

• To revenue maximise, firms would produce where MR=0

Sales Maximisation

• Suggests managers aim to maximise the growth of their company above any other objective

• This is because their salary may be linked to the size of the company

• Size is often linked to security as it is believed large firms can survive rough periods much easier and are less likely to get into financial trouble overnight

• Growth will also increase market share, and may push other firms out of business. It will enable a firm to have more market power and more power over prices

• This tends to be a short-term strategy as in the long-term firms are more likely to profit maximise

• E.g. Netflix and Spotify follow the objective of sales maximisation, as they are attempting to increase the size of their business

• To sales maximise, firms would produce where AC=AR

Profit Satisficing

• Due to the principal-agent problem, owners and directors will have different goals - each want to maximise their own benefits

• Profit satisficing - make enough profit to keep owners happy whilst following other objectives and not profit maximising. These other objectives are likely to be to their own benefit, e.g. may increase their own salaries which increases cost and therefore decreases profit

Managerial Utility Maximisation

• Managers make decisions to maximise their own satisfaction

• This will be dependent on their salary, the number of staff they control, their power over decision making and other benefits they receive

Marginal Cost Pricing/ Allocative Efficiency

• Some firms, particularly nationalised industries, aim to maximise social welfare

• This is done by producing where the value society places on the good is equal to the extra cost of producing that good, i.e. MC=AR

• This achieves allocative efficiency