Differing objectives and policies of firms
Different objectives
- Not every firm just chases the most profit:
- profit maximisation — produce where MR = MC (the traditional aim),
- revenue maximisation — produce where MR = 0 (to grow market share),
- sales maximisation — sell as much as possible while still making normal profit,
- satisficing — aim for "good enough" results keeping everyone reasonably happy.
Practice
Profit maximisation occurs at the output where:
Profit is maximised where MR = MC; revenue maximisation is where MR = 0.
Practice
Satisficing means a firm aims for:
Satisficing settles for satisfactory results across owners, workers and customers, not the maximum.
Ownership vs control
- In large firms the owners (shareholders) are not the managers.
- This divorce of ownership from control creates the principal–agent problem: managers may pursue their own aims (bigger salaries) instead of maximum profit.
Practice
The principal–agent problem arises because:
When ownership is divorced from control, managers (agents) may not act in the owners' (principals') interest.
You've got it
Key idea
- objectives: profit max (MR=MC), revenue max (MR=0), sales max, satisficing
- divorce of ownership from control → the principal–agent problem
- managers (agents) may not act in the owners' (principals') best interest