Objectives of Firms

• Profit maximization


  The objective of a firm to maximize its profits
• Reasons for profit maximization


  • Reinvestment of profits into new capital, upgraded capital, new technology, R&D
  • Paying higher dividends to shareholders
  • Allowing for lower costs to be passed on to consumers
  • Rewarding entrepreneurship and risk-taking
• Profit maximization occurs


  Where marginal cost equals marginal revenue
• Firms may not profit maximize due to:
• Profit satisficing


  A firm sacrifices profit to satisfy as many key stakeholders as possible
• Key stakeholders


  • Shareholders
  • Managers
  • Consumers
  • Workers and trade unions
  • Government
  • Environmental groups
• Harming key stakeholders can lead to reputational damage, worker strikes, government investigations, and environmental protests
• Revenue maximization


  A firm's objective where marginal revenue equals zero
• Revenue maximization


  Leads to a higher quantity but lower price compared to profit maximization
• Reasons for revenue maximization

  • Economies of scale benefits
  • Ability to engage in predatory pricing to drive out competitors
  • Managers using it to justify perks and benefits
• Sales/growth maximization


  A firm's objective to become as large as possible without making a loss (where average cost equals average revenue)
• Reasons for sales/growth maximization

  • Economies of scale
  • Limiting competition by setting a 'limit price'
  • Managers using it to justify perks and benefits
  • Flooding the market to build brand awareness and customer loyalty
• Survival


  A short-term objective for firms entering hyper-competitive markets to build brand awareness and customer loyalty before shifting to profit-making
• Public sector objectives


  Maximize societal welfare by pricing and producing where demand equals supply (allocative efficiency)
• Corporate social responsibility


  Firms pursuing ethical, sustainable, and socially responsible practices beyond profit-making