Economic Objectives of Firms
Profit maximization is the process of obtaining the highest possible level of profit through the production and sale of goods and services. Profit is the difference between the total revenue a firm receives from selling output and the total cost of producing that output. Profit-maximization means that a firm seeks the production level that generates the greatest difference between total revenue and total cost.
In many firms separation of ownership and control is present as the shareholders who run the company often hardly ever get involved in the day to day running of the firm. However this is a problem as although the owners want to maximise profits, the managers will have less motivation to do this as they won’t get the same rewards. Therefore most managers will create a minimum level of profit just to keep the shareholders happy but also enjoy work and get on with others. However this could be overcome, to some extent by giving managers share options and performance related pay yet this could be difficult to measure in some industries.
Most firms often seek to add to their market share even if this means that they will turnover less profit, this could happen because of various reasons for example: an increase in market share increases the monopoly power and may enable the firm to put up prices and make more profit in the long run. Another example could be that managers often prefer to work for bigger companies at it will lead them to a higher salary. The final reason could be that increasing the firm’s market share could force their rivals out of business e.g. the big supermarkets have led to an decrease in local shops, this is because there is more supermarkets about therefore people will choose to go to them as they offer more products and normally aren’t that far away....