1. Market operations ofMarket operations of
firms:firms:
objectives of firmsobjectives of firms

2. Learning outcomes
Understand
that firms have
a range of
objectives
Explain and
assess other
objectives
firms may
pursue
Understand the
profit maximising
rule
Explain why firms
may not maximise
profit

3. In pairs, discuss what
objectives firms might
pursue.
Make a list of your top
five objectives.

4. Keep on task:Keep on task:
time is ticking away …time is ticking away …
In pairs, discuss what objectives firmsIn pairs, discuss what objectives firms
might pursue.might pursue.
Make a list of your top five objectives.Make a list of your top five objectives.
countdown.mp3

5. Profit maximisationProfit maximisation
Traditional economic theory is based on the
assumption that firms aim to maximise profits.
Profit is:
Total Revenue – Total Cost
So, to maximise profits firms must maximise the
difference between total revenue and total
cost.

6. Task 1Task 1
Using the information below, draw a diagram of
TR and TC against output (Q) and find out the
profit maximising output.
Output Total Revenue Total Cost
0 0 6
1 8 10
2 16 12
3 24 16
4 32 24
5 40 36
6 48 52

7. 0
10
20
30
40
50
60
0 1 2 3 4 5 6
Output
RevenueandCost(£)
Total Revenue Total Cost

8. 0
10
20
30
40
50
60
0 1 2 3 4 5 6
Output
RevenueandCost(£)
Total Revenue Total Cost

9. Task 2Task 2
Using the information below, calculate MR and
MC, plot them on a diagram and find out the
profit maximising output.
Output Total Revenue Total Cost
0 0 6
1 8 10
2 16 12
3 24 16
4 32 24
5 40 36
6 48 52

10. 0
2
4
6
8
10
12
14
16
18
0.5 1.5 2.5 3.5 4.5 5.5
Output
MRandMC(£)
MR MC

11. 0
2
4
6
8
10
12
14
16
18
0.5 1.5 2.5 3.5 4.5 5.5
Output
MRandMC(£)
MR MC

12. Profit maximising ruleProfit maximising rule
There is a very simple rule which has to be
satisfied for profits to be maximised.
It is:
Marginal Revenue (MR) = Marginal Cost (MC)
If raising output adds more to revenue than it
does to costs (MR > MC), then profits must rise.
If raising output adds more to costs than it
does to revenue (MC > MR), profits must fall.
So, profits must be maximised (or losses
minimised) when MR = MC

13. Do firms maximise profits?
Difficulties maximising
profit
Firms may want to maximise profits but
they are unable to
Difficulties maximising
profit
Firms may want to maximise profits but
they are unable to
Other aims
Firms pursue other aims either in addition to
maximising profit or instead of
Other aims
Firms pursue other aims either in addition to
maximising profit or instead of

14. Difficulties maximising
profit
Knowledge of
demand
Short run or long
run?
Multi-product firms

15. Difficulties maximising profitDifficulties maximising profit
Lack of information
Firms do not use economic concepts of profit
(eg opportunity cost), so cannot maximise
true profit
Firms do not know their demand curves, so
cannot know their marginal revenue.
Estimates of PED may help but are unreliable.
Firms do not know their demand curves
because they do not know their competitors
reactions (interdependence, oligopoly and
game theory)

16. Difficulties maximising profitDifficulties maximising profit
Short run or long run?
Over what time period should the firm maximise
profits? Over time revenue and costs change – in
reality they are not static. Investment in capital
equipment, for example, reduces profit in the short
run but raises it the long run.
Multi-product firms
Multi-product firms will find it difficult to assign
fixed costs (overheads) to each product. How much
of Morrisons overheads can be allocated to a tin of
Baked Beans – it doesn’t know the MC

17. Why alternative objectives?
Divorce of
ownership from
control
Asymmetric
information
Profit satisficing
behaviour

18. Why alternative objectives?Why alternative objectives?
Divorce of ownership from control
In modern day companies, PLCs are owned by
shareholders, who elect directors, who in
turn employ managers.
Those who own PLCs do not control them on a
day-to-day basis.
Managers are likely to pursue their own
objectives – maximise their own utility –
through higher salaries, power and prestige,
growth of the firm …
They will earn just enough profit to keep
shareholders happy – profit satisficing

19. Why alternative objectives?Why alternative objectives?
Asymmetric information
Asymmetric information occurs when one
group has more information than another.
This is the principal-agent problem.
Shareholders are the principals, managers
the agents of the shareholders.
Shareholders may not be in a position to
judge whether performance (profit) could be
better.
Managers (shareholders) pursue their own
interests.

20. What alternative objectives?
Managerial utility
maximisation
Sales revenue
maximisation
Growth maximisation
achieved through mergers,
acquisitions, internal growth

21. Satisficing behaviour
In reality, firms
are likely to have
multiple objectives
Business
environment
changes
Firms respond to
changing environment
with changing objectives
profit acts as a constraint