Objectives of Firms
Objectives of Firms
Introduction to Business Objectives
Standard theory assumes that businesses have sufficient information, market power and (importantly) motivation to set prices for their products that maximise profits
This assumption is now heavily criticised by economists who have studied the organisation and objectives of modern-day corporations.
Not only do most businesses frequently move away from pure profit-seeking behaviour, many are organised and operated in a way where profit is not the only objective.
Key Point: There will always be a range of business objectives:
1. Profit maximisation (where MR=MC)
2. Revenue maximisation (sales revenue) – where MR=zero
3. Increasing and protecting market share
4. Surviving an economic downturn / recession
5. Pursuing ethical business objectives (corporate social responsibility)
6. Providing a public service – see later sections on nationalised (state-owned) industries
Why might a business depart from profit maximisation?
Some explanations relate to the lack of accurate information required to set profit maximising prices. Others concentrate on the alternative objectives of businesses.
Imperfect information:
It might be hard for a business to pinpoint their profit maximising output, as they cannot accurately calculate marginal revenue & cost.
Day-to-day pricing decisions are taken on the basis of “estimated demand” or “rules of thumb”.
A business might look to add a profit margin on top of average cost – “cost-plus pricing”.
Multi-product businesses:
Most businesses are multi-product firms operating in a range of markets across countries and continents – the volume of information that they have to handle can be vast. And they must keep track of the ever-changing preferences of consumers.
The idea that there is a neat, single profit maximising price is redundant.
Behavioural Theories of the Firm
Behavioural economists believe that large-scale businesses are complex organizations made up of
Introduction to Business Objectives
Standard theory assumes that businesses have sufficient information, market power and (importantly) motivation to set prices for their products that maximise profits
This assumption is now heavily criticised by economists who have studied the organisation and objectives of modern-day corporations.
Not only do most businesses frequently move away from pure profit-seeking behaviour, many are organised and operated in a way where profit is not the only objective.
Key Point: There will always be a range of business objectives:
1. Profit maximisation (where MR=MC)
2. Revenue maximisation (sales revenue) – where MR=zero
3. Increasing and protecting market share
4. Surviving an economic downturn / recession
5. Pursuing ethical business objectives (corporate social responsibility)
6. Providing a public service – see later sections on nationalised (state-owned) industries
Why might a business depart from profit maximisation?
Some explanations relate to the lack of accurate information required to set profit maximising prices. Others concentrate on the alternative objectives of businesses.
Imperfect information:
It might be hard for a business to pinpoint their profit maximising output, as they cannot accurately calculate marginal revenue & cost.
Day-to-day pricing decisions are taken on the basis of “estimated demand” or “rules of thumb”.
A business might look to add a profit margin on top of average cost – “cost-plus pricing”.
Multi-product businesses:
Most businesses are multi-product firms operating in a range of markets across countries and continents – the volume of information that they have to handle can be vast. And they must keep track of the ever-changing preferences of consumers.
The idea that there is a neat, single profit maximising price is redundant.
Behavioural Theories of the Firm
Behavioural economists believe that large-scale businesses are complex organizations made up of