Economic objectives of firms
The main objectives of firms are:
1. Profit maximisation
2. Sales maximisation
3. Increased market share/market dominance
4. Social/environmental concerns
5. Profit satisficing
6. Co-operatives
Sometimes there is an overlap of objectives. For example, seeking to increase market
share, may lead to lower profits in the short-term, but enable profit maximisation in
the long run.
Profit maximisation
Usually, in economics, we assume firms are concerned with maximising profit. Higher
profit means:
• Higher dividends for shareholders.
• More profit can be used to finance research and development.
• Higher profit makes the firm less vulnerable to takeover.
• Higher profit enables higher salaries for workers
Alternative aims of firms
However, in the real world, firms may pursue other objectives apart from profit
maximisation.
1. Profit Satisficing
• In many firms, there is a separation of ownership and control. Those
who own the company (shareholders) often do not get involved in the
day to day running of the company.
• This is a problem because although the owners may want to maximise
profits, the managers have much less incentive to maximise profits
because they do not get the same rewards, (share dividends)
• Therefore managers may create a minimum level of profit to keep the
shareholders happy, but then maximise other objectives, such as
enjoying work, getting on with other workers. (e.g. not sacking them)
This is the problem of separation between owners and managers.
• This ‘principal-agent‘ problem can be overcome, to some extent, by
giving managers share options and performance related pay although in
some industries it is difficult to measure performance.
• More on profit-satisficing.
2. Sales maximisation
Firms often seek to increase their market share – even if it means less profit. This
could occur for various reasons:
• Increased market share increases monopoly power and may enable the
firm to put up prices and make more profit in the long run.
• Managers prefer to work for bigger companies as it leads to greater
prestige and higher salaries.
• Increasing market share may force rivals out of business. E.g. the
growth of supermarkets have lead to the demise of many local shops.
Some firms may actually engage in predatory pricing which involves
making a loss to force a rival out of business.
•
3. Growth maximisation
This is similar to sales maximisation and may involve mergers and takeovers. With
this objective, the firm may be willing to make lower levels of profit in order to
increase in size and gain more market share. More market share increases its
monopoly power and ability to be a price setter.
4. Long run profit maximisation
In some cases, firms may sacrifice profits in the short term to increase profits in the
long run. For example, by investing heavily in new capacity, firms may make a loss in
the short run but enable higher profits in the future.
5. Social/environmental concerns
A firm may incur extra expense to choose products which don’t harm the environment
or products not tested on animals. Alternatively, firms may be concerned about local
community / charitable concerns.
• Some firms may adopt social/environmental concerns as part of their
branding. This can ultimately help profitability as the brand becomes
more attractive to consumers.
• Some firms may adopt social/environmental concerns on principal alone
– even if it does little to improve sales/brand image.
6. Co-operatives
Co-operatives may have completely different objectives to a typical PLC. A co-
operative is run to maximise the welfare of all stakeholders – especially workers. Any
profit the co-operative makes will be shared amongst all members.
Diagram showing different objectives of firms
• Q1 = Profit maximisation (MR=MC)
• Q2 = Revenue Maximisation (MR=0)
• Q3 = Marginal cost pricing (P=MC) – allocative efficiency
• Q4 = Sales maximisation – maximum sales while still making normal
profit (AR=ATC)
