4.1.5.2 The Objectives of Firms

assumes a firm’s main aim is to profit maximise

Traditional theory of a firm’s objectives

aim to produce the level of output where the difference between total revenue(TR) and total cost(TC) is greatest

Profit maximisation means firms:

MC = MR

when does profit maximisation occur on a diagram?

MR>MC

firm must raise output

MR<MC

firm must lower output

reward shareholders, invest in innovation, survive in competitive markets

Profit maximisation is vital as it allows firms to:

Principle-agent problem

• Alternative objective for firms

• when the owners of a firm(principals) delegate decision-making to managers(agents) leading to a possible conflict of objectives

divorce of ownership=>managers may not always aim to maximise profit(usually the goal of shareholders) and pursue there own objectives, e.g. revenue growth, market share, or greater job security

why does the Principal-Agent Problem occur

satisficing

• A result of PA problem

• aiming to avoid pressure from shareholders but still meet minimum expectations

“good enough” rather than the highest possible

In satisficing managers aim for a level of profit that is: