The Objectives of Firms
- The objectives of a firm will be influenced by a number of factors, including the type of organisation it is, and the priorities of the managers/owners
- g. the BBC, being in the public sector, wants to provide the best service to the public
- To contrast it is often assumed that the main objective of private-sector firms are to profit maximise.
- This, however, is not always the case
- In practise, it can be difficult to calculate MC and MR, and so firms use a more straightforward approach to pricing (such as just adding 10% on to costs)
- The other main criticism is that for PLCs, the managers and the shareholders will want different things.
- One objective is therefore sales revenue maximisation, which is the objective of achieving as high a TR as possible
- This is because managers’ salaries are linked to the growth of sales, instead of profit performance.
- Also, high sales can attract external finance, and may result in greater economies of scale
- To maximise sales revenue, a firm would continue to produce more as long as extra output would increase revenue (up to the point where MR = 0)
- In practise, this objective is subject to a minimum profit constraint, based on the level needed to keep shareholders happy
- Growth is another objective that’s linked to sales revenue maximisation
- This is because as a company gets bigger (due to producing more, and having more resources to deal with), a manager is likely to earn more, have higher status and increase career prospects
- A manager may also feel more secure in his job if the company is growing, as it’s less prone to buyouts
- Growth objective is also subject to a minimum profit constraint
- With imperfect information and conflicting objectives, it would be more realistic to aim for satisfactory profit instead of maximum profit.
- This is called profit satisficing, and can allow a firm to pursue other objectives.
- Different members of firms will each want different things; accountants will want to reduce costs, marketers may want to run advertising campaigns, workers may want better machinery, etc.
- Such objectives may conflict with profit maximisation in the short term, but sacrificing this may lead to a satisfactory performance in other areas.
- When a firm is new to a market, such as a football club joining a higher league, its main objective could be survival
- Such a firm may face difficulties due to rising costs, or a decrease in demand
- While some objectives may conflict with profit maximisation in the short-run, in the long-run it is likely that profit maximisation will be the main objectives, and short-term goals like growth aid this long-term goal.
- Another objective for a firm is utility maximisation
- This is most commonly associated with public sector firms, but even private sector firms, such as owners of football club, are just in it for the pleasure.
- This applies to a lot of football clubs, especially ones in lower divisions, where high profits are unlikely
- With things like golf clubs, however, they’re more profit-orientated, but there is still some evidence of utility maximisation, such as member-waiting-lists
- A higher price would increase profit for a golf club, but they don’t do this.