Economics objectives of firms
Profit Mastication In neo-classical economics it is assumed that the interest of owners or shareholders are the most important. Just as consumers attempt to maximize utility, shareholders main motivation is to maximize their gain firm the company. Therefore, one of the main objectives of firms is to maximize profit. Profit is the reward for the risk-bearing function of the entrepreneur. The firm is in equilibrium, and is maximizing profit, when it is producing the level of output for which MAC=MR. and the MAC curve cuts the MR. curve from below.
MAC = MR. By Jean-Francis Taut Theory of Production By Mr.. Jean-Francis Taut Long Run Profit Mastication. In some cases, firms may sacrifice profits in the short term to increase profits in the long run. For example, by investing heavily in new capacity, firms may make a loss in the short run, but enable higher profits in the future. 3 Economics objectives of firms By Acquaintances Another objective of the firm can be to minimize cost.
The firm is said to be minimizing cost of production when: It produces at the optimum level of output It is therefore achieving productive efficiency Ђ It uses a minimum amount of resources to produce
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Maximize Sales Revenue Sales Revenue can be maximized when the firm produces the level of output for which Marginal Revenue is equal to zero. MR.=O ; TAR at Max AR 6 4. Sales (output) Mastication Maximizing Sales (output) rather than sales revenue might e an alternative objective. Sales level is maximized when ETC=TAR -arc 7 could occur for various reasons: a) Increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run. ) Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries. C) Increasing market share may force rivals out of business. E. G. Supermarkets have lead to the demise of many local shops. Some firms may actually engage in predatory pricing which involves making a loss to force a rival out of business. 5. Sales Mastication and Normal Profit Another objective is the mastication of sales while achieving at least normal profit (at Q on the diagram below). This is achieve when AC=AR.
Cost/Revenue At this level, the firm is breaking-even 9 Conformal Output 6. Allocation Efficiency A firm is said to be lucratively efficient when the amount of money the consumer is spending on one unit of good (Price); and the amount of money the producer is spending on one unit of good (Marginal Cost) are equal. When Allocation Efficiency is achieved, there is no consumer exploitation. Note that the Price (P) consumers spend on one unit of goods is also the Average Revenue (AR) the firm receives from the sales of that unit.
Therefore, P=MR. is where the MAC Curve cuts the AR curve. 10 7. Profit Satisfying This is when the manager of a firm will make sufficient profit to satisfy the demands of their shareholders. However, once a satisfactory level of profit have been made, the managers are free to maximize their own rewards from the company. This objective is also common to small firm (sole traders) where the owner’s aim is not to work flat out’ very long hours to earn maximum profit, UT more to earn enough profit to ‘live comfortably (to also have leisure time) 1 1 8.
Social/Environmental concerns A firms may incur extra expense to choose products which don’t harm the environment or products not tested on animals. Alternatively, firms may be concerned about local community / charitable concerns. Many companies who have adopted such strategies have been quite successful. But a cynic may argue they see it as another opportunity to increase profits rather than a genuine sacrificing of profits in order to promote other objectives. 2 9.