Why might a business firm pursue other objectives besides the objective of maximum profits? What objectives other than profit maximisation might a firm pursue? Is this possible in a competitive world? The traditional theory of business behaviour tends to make a general assumption that businesses possess the information, market power and motivation to set a price and output that maximises profits. Profits being defined as the difference between the total revenue received by a firm and the total costs that it incurs in production. This assumption is now often criticised by economists who have a better understanding of business behaviour and phycology in modern-day corporations, in particular due to a divorce in ownership and control that is common to most large scale corporations. A business might depart from pure profit maximisation objectives for a number of reasons. Some relate to the lack of detailed and precise information, while others focus on the alternative objectives of firm.
One of the reasons that firms might abandon a profit maximising strategy is that it is very difficult for them to identify their profit maximising output, as they cannot accurately marginal revenue and marginal cost. Frequently the day to day pricing decisions of firms are taken on the basis of projected demand conditions rather than any systematic calculation of a demand curve. As most of today’s firms operate in a range of separate markets, the sheer volume of information that they need to process can be vast. On top of this they need to keep track of the ever changing consumer preferences and tastes as well as evolving market conditions. Thus the idea that there is a neat and single profit maximising price has become really redundant. For many larger firms especially public limited companies the owners may not be involved in running the business. Thus this gives rise to principle-agent problem, a problem arising from conflict between the objectives of the principals and...
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