1

Firms Objectives
________________________________________________________
Profit Maximisation

If revenue is greater than costs then there are supernormal/abnormal profits
Occurs at the output level where supernormal profits are at their greatest
Profit Max: MC = MR
In addition to this, at this point MC must be rising:

In the graph:
- At an output of 1, marginal profit is 0, i.e. there is no profit from the last unit sold
- The next time that marginal profit is 0 (output of 5) the firm is maximising its profits each unit
sold between one and five is adding to total profit.
- See table below.

Output Marginal Revenue Marginal Cost Marginal Profit Total Profit
1 10 10 0 0
2 10 6 4 4
3 10 3 7 11
4 10 6 4 15
5 10 10 0 15
6 10 13 -3 12


However:
- Do firms (e.g. local pubs and coffee shops) know the marginal cost of a pint of beer or a cup of
coffee?
- If they knew the level of output would they stop selling because the next item would result in a
fall in total profit?
- Long run if consumers dislike price changes (as market conditions change) long run profit
levels will be enhanced by the maintenance of a stable price possible that price will only be
changed when it becomes clear that a change in market conditions will persist into the long run
particularly true when firms pursue price mark-ups (price = cost of production plus a
percentage known as cost-plus pricing) only thing that will change the price then is a long run
shift in cost conditions or a change in market conditions.
- Long term profit maximising might entail forward looking policies that would be rejected by a
company more interested in short term profit levels.

Sales Revenue Maximisation

Where firms are willing to sell units until the next unit sold will reduce revenue.
Revenue Max: MR = 0

2

In the graph:
- As the firm expands output, marginal revenue declines
- However, while marginal revenue is still positive it is still adding gradually smaller amounts to
total revenue
- When MR passes 0 and becomes negative, however, total revenue starts to decline

If a firm pursues sales revenue maximisation it is likely to have a bigger share of the market than if
it is profit maximising.
Sales Volume Maximisation
When a firm wants to maximise the number of units sold
This means that they maximise their share in the market
Volume Max: AC = AR=D
In the graph:
- Price is set at Ps
- This is because at any price below Ps AC>AR meaning that losses are made
- PsQs is therefore the level at which the quantity is maximised whilst normal profits are still
being made.

Ps
Qs
3

Other Theories
These arise due to the debate over who really controls the firm:
Shareholders own the firm and want to maximise profits for dividends BUT they have little direct
input into the day-to-day running of the firm.
Board of directors may have other objectives than making profits.
This illustrates the principal-agent problem the manager (agent) does not always act in the best
interest of their shareholders (the principal).
Decision makers on key strategic objectives by the board of directors of a PLC is likely to be subject
to more constraints than in a private limited company:
- PLCs can trade shares openly on the Stock Exchange anyone can buy the shares and attend the
Annual General Meeting, questioning board members.
- Pressure groups such as Greenpeace have bought shares in PLCs who may not have been taking
enough care (in their opinion) of the environment they may not be able to exert real power but
they can articulate their viewpoints effectively.
Behavioural theories:
Managerial:
- Managers control the company
- They may have their own agenda maximise their personal welfare or ego
- Perks and status arent always tied to profit maximisation managers make enough profit to
prevent a shareholder revolt, while still enjoying the perks afforded by not striving to
maximise profits
- They may aim to grow the business/take over rival firms
- May try to maximise their own short-term bonus while taking significant risks with the
future viability of the business
Satisficing:
- US economist Herbert Simon argued that decision making within a company results from
the interaction between many competing groups within the firm
- A solution is satisficing compromises between different groups in the firm which may be
seen as satisfactory minimum targets may be set for objectives, and this may carry on until
more difficult trading conditions occur, then managers will remove organisational
inefficiency (X-inefficiency) in the firm by e.g. reforming work practices and announcing
redundancies.
Other goals:
Satisfying stakeholders (customers, employees, shareholders, lenders etc.) i.e. those who have an
interest in the activities of the firm
Airline sector load factor airlines may be aiming for an 85% load factor (number of seats filled)
important where costs are fixed
Network Rail more emphasis on safety and maintenance than its more profit-motivated
predecessor, Railtrack
Ethical and environmental objectives more important to firms operating in sensitive areas of
production such as oil and chemicals
Common for large firms to produce annual social audits of their activities examine the positive
and negative effects of the firms operations on the wider society
4

Pricing strategies:
Designed to gain market share.
- Predatory pricing: pricing at a level low enough to drive out firms currently in the industry
by reducing profitability.
- Limit pricing: pricing at a level low enough to limit profits, which has the effect of
discouraging new entrants from joining the industry.
Short run limit and predatory pricing will benefit the consumer by providing them with low
prices.
However long run when the firm has managed to drive rival firms out of the industry and gained
monopoly power, it will be able to raise prices, reducing consumer surplus and exploiting the
consumer.
Non-pricing strategies:
Particularly relevant when firms sell goods which cannot be discounted heavily or where some
form of collusion takes place.
Includes:
- Advertising
- Branding
- Packaging
- After care/customer service/warranties
- Product development and innovation
- Product placement the type of retail outlet in which the good is sold