Business Objectives

Objectives Beyond Profit

1. Firms are traditionally assumed to profit maximise, but many pursue other aims in practice.
2. The divorce of ownership from control makes alternatives more likely, as managers may chase growth, status or an easier life.
3. The objective a firm chooses shapes the price it sets and the output it produces.
4. At a listed plc such as BP, salaried directors act as agents for dispersed shareholders (the principals), and this principal-agent split can push them towards growth or revenue targets tied to their pay rather than maximum profit.

Profit Maximisation

$$MC=MR$$

1. Below this output an extra unit adds more to revenue than to cost, so producing it raises profit.
2. Beyond this output marginal cost exceeds marginal revenue, so the last unit reduces profit, which is why profit peaks where the two are equal.
3. On a cost and revenue diagram it sits at the output where the MC curve cuts the MR curve from below.
4. A profit-maximising producer such as a patent-holding pharmaceutical firm restricts output to the point where MC = MR, since any further unit would add more to cost than to revenue.

Revenue Maximisation

$$MR=0$$

1. Total revenue peaks here because up to this output marginal revenue is positive, and beyond it marginal revenue turns negative.
2. It gives a higher output and lower price than profit maximisation, since the firm pushes past the profit-maximising point.
3. Managers may target revenue where their bonuses or status are tied to sales revenue rather than to profit.

Sales Maximisation

$$AR=AC$$

1. It sits further right than revenue maximisation, at the output where the AR curve meets the AC curve so only normal profit is earned.
2. A firm may maximise sales to build market share or deter new entrants, accepting lower profit to do so.

Satisficing

1. It reflects the idea that managers balance competing stakeholder groups rather than optimise a single aim.
2. Even a satisficing firm must earn enough profit to survive and fund investment in the long run.

Do firms maximise profit in practice?

1. Many do, because shareholders demand returns and competitive pressure punishes firms that let costs drift.
2. But the divorce of ownership from control lets managers pursue revenue, sales or a quiet life instead of maximum profit.
3. Firms also lack the perfect cost and revenue data needed to pinpoint the profit-maximising output, so they often satisfice instead.
4. On balance it depends on who controls the firm and how contestable its market is, though some profit is still needed for long-run survival.