We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

See Pricing

What's Your Topic?

Hire a Professional Writer Now

The input space is limited by 250 symbols

What's Your Deadline?

Choose 3 Hours or More.
Back
2/4 steps

How Many Pages?

Back
3/4 steps

Sign Up and See Pricing

"You must agree to out terms of services and privacy policy"
Back
Get Offer

Economics objectives of firms

Hire a Professional Writer Now

The input space is limited by 250 symbols

Deadline:2 days left
"You must agree to out terms of services and privacy policy"
Write my paper

Objectives of firms

1. Profit Maximisation
In neo-classical economics it is assumed that the interest of owners or shareholders are the most important.
Just as consumers attempt to maximise utility, shareholders main motivation is to maximise their gain firm the company.

Don't use plagiarized sources. Get Your Custom Essay on
Economics objectives of firms
Just from $13,9/Page
Get custom paper

Therefore, one of the main objectives of firms is to maximise profit.
Profit is the reward for the risk-bearing function of the
entrepreneur.
The firm is in equilibrium, and is maximising profit, when it is producing the level of output for which MC=MR and the MC
curve cuts the MR curve from below.


MC = MR
2

By Jean-François Tuyau

Theory of Production

By Mr. Jean-François Tuyau

1

12-Sep-13

1. Profit Maximisation
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.

3

Theory of Production

By Mr. Jean-François Tuyau

2. Minimise Cost
Another objective of the firm can be to minimise cost.
The firm is said to be minimising cost of production when:
i.
It produces at the optimum level of output
It is therefore achieving productive efficiency
• It uses a mimimum amount of resources
to produce a given level of output, or
• It produces the maximum output possible
with a given amount of resources

Cost
AC

qopt
4

By Jean-François Tuyau

Theory of Production

Qty

By Mr. Jean-François Tuyau

2

12-Sep-13

2. Minimise Cost
ii.

When it uses the least-cost combination of factor of
production: The Marginal Physical Product
MPPF3
MPPF1
MPPF2
=
=
PriceF3
PriceF1
PriceF2

5

Theory of Production

By Mr. Jean-François Tuyau

3. Maximise Sales Revenue
Sales Revenue can be maximised
when the firm produces the level of
output for which Marginal Revenue is
equal to zero.

TR

MR=0 ; TR is at max
AR

6

By Jean-François Tuyau

Theory of Production

By Mr. Jean-François Tuyau

MR

3

12-Sep-13

4. Sales (output) Maximisation
Maximising Sales (output) rather than sales revenue might
be an alternative objective.
Sales level is maximised when TC=TR
TC
TR

0
7

Q
Theory of Production

By Mr. Jean-François Tuyau

4. Sales (output) Maximisation
Firms often seek to increase their market share – even if it means less profit. This could occur for various reasons:
a) Increased market share increases monopoly power and may
enable the firm to put up prices and make more profit in the long run.
b) Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries.
c) Increasing market share may force rivals out of business. E.g. 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.
8

By Jean-François Tuyau

Theory of Production

By Mr. Jean-François Tuyau

4

12-Sep-13

5. Sales Maximisation and Normal Profit
Another objective is the maximisation of sales while
achieving at least normal profit (at Q on the diagram
below).
This is achieve when AC=AR.
Cost/Revenue
At this level, the firm is breaking-even
AC

AR
0
9

Theory of Production

Qnormal π Output
By Mr. Jean-François Tuyau

6. Allocative Efficiency
A firm is said to be allocatively efficient when the amount of money the consumer is spending on one unit of good (Price);
and the amount of money the producer is spending on one
unit of good (Marginal Cost) are equal.
P = MC
When Allocative Efficiency is achieved, there is no consumer exploitation.
Note that the Price (P) consumers spend on one unit of goods is also the Average Revenue (AR) the firm receives from the
sales of that unit. Therefore, P=MR is where the MC Curve
cuts the AR curve.
10

By Jean-François Tuyau

Theory of Production

By Mr. Jean-François Tuyau

5

12-Sep-13

7. Profit Satisficing
This is when the manager of a firm will make sufficient
profit to satisfy the demands of their shareholders.
However, once a satisfactory level of profit have been
made, the managers are free to maximise their own
rewards from the company.
This objective is also common to small firm (sole traders)
where the owner’s aim is not to work ‘flat out’ very long hours to earn maximum profit, but more to earn enough
profit to ‘live comfortably’ (to also have leisure time) 11

Theory of Production

By Mr. Jean-François Tuyau

8. Social/Environmental concerns
A firms 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.
Many companies who have adopted such strategies have
been quite successful.
But a cynic may argue they see it as another opportunity
to increase profits rather than a genuine sacrificing of
profits in order to promote other objectives.
12

By Jean-François Tuyau

Theory of Production

By Mr. Jean-François Tuyau

6

12-Sep-13

9. 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.

13

Theory of Production

By Mr. Jean-François Tuyau

Graphical illustration of the Objectives
Profit Maximisation → qπ → MC=MR

Cost/Revenue
MC

Po
PTR
Pe
Ps

Cost Minimisation → qo → AC min

Sales Revenue Max → qTR → MR=0
Allocative Efficiency → qe → P(AR)=MC

AC

Sales level Maximisation → qs → AC=AR
and Normal Profit

MR
MC

0
14

By Jean-François Tuyau

MR
qπ qo qTR qe qs

AR

AC

qTR

qe
qo
qs

Output
Theory of Production

By Mr. Jean-François Tuyau

7

Cite this Economics objectives of firms

Economics objectives of firms. (2016, Nov 01). Retrieved from https://graduateway.com/economics-objectives-of-firms/

Show less
  • Use multiple resourses when assembling your essay
  • Get help form professional writers when not sure you can do it yourself
  • Use Plagiarism Checker to double check your essay
  • Do not copy and paste free to download essays
Get plagiarism free essay

Search for essay samples now

Haven't found the Essay You Want?

Get my paper now

For Only $13.90/page