3.2 objectives of firms

the typical traditional assumption is that the main objective of a firm is

to profit maximise

profit is

the difference between TR and TC, it is the reward the entrepreneurs yield when they take risks

the profit maximising level of output can be found where

MC=MR as increasing output would mean costs are higher than revenue, decreasing profit, and decreasing output means that there is potential to produce more whilst making profit

when MC<MR

profits rise when output increases

when MC>MR

profits rise when output decreases

firms may choose to profit maximise because

it provides greater wages and dividends for entrepreneurs, retained profits are cheap source of finance which saves paying high interest on loans, in the SR the interest of owners and shareholders are most important since they aim to maximise their gain from the company

PLCCs are keen to profit maximise because

they could lose their shareholders if they do not receive a high dividend, therefore they are more likely to SR profit maximise

the divorce of ownership from control is when

the owners and those who manage the firm are different groups with different objectives

the reason for divorce of ownership from control is

the principal agent problem which can be linked to asymmetric information

in the principal agent problem

shareholders are the principal and managers are the agents, the agents make decisions for the principles but are often inclined to act in their own interest

conflicts of interest arise between agents and principles when

the incentives which affect their behaviour are not the same, if the agent does not receive the full benefit of the action, often in profit maximising where they would rather persue other objectives, it destroys incentive for the agent

shareholder activism arises

when mangers sell their shares, giving shareholders more control over the decisions and increasing conflicts of interest

other possible objectives of firms are

survival, growth, increased market share, quality, sales revenue maximisation, sales maximisation

survival is an objective of some firms because

particular new firms aim to survive, it is a short term view adopted during periods of economic decline when consumer spending plummets and firms aim to survive until economic growth again

growth is a possible objective for firms are

some firms may aim to increase the size of their firm to take advantage of economies of scale like risk-bearing or technological, it would lower average costs in the long run increasing long run profitability. large firms can also participate in r and d making their more competitive and efficient in the LR

ways a firm may attempt to grow is

expanding their product range, merging or taking over existing firms

firms may aim to increase their market share

by maximising sales in SR, helping to increase chances of survival and to gain customer loyalty

firms may aim to increase their quality to

increase competitiveness, they could increase the quality of customer service or the good they produced, possibly through innovation. helps the firm gain good reputability

maximising sales revenue occurs 

when MR=0 

firms may aim to sales maximise

to gain market share of not for profit organisations will work at the sales maximisation and price, it occurs when AR=AC (without making a loss)

satisficing is

achieving a satisfactory outcome rather than the best possible outcome, therefore can help with the divorce of ownership and control