Objectives are targets or goals that a business sets itself
The theory of the firm is based on the assumption that all businesses will operate to make a profit
Businesses face upward sloping total cost and revenue curves – as more is produced costs increase and as more is sold revenue increases
Marginal Costs and Revenues
If a business has a downward sloping demand curve revenue will rise at a decreasing rate as production rises until marginal revenue equals zero. At this point any additional units don’t add anything to total revenue.
Assuming the law of diminishing returns in the short run total costs will eventually start to rise at a faster rate as marginal costs increase
Marginal Costs and Marginal Benefits
The point of profit maximisation is where the difference between Total revenue and total costs is greatest. At the point of profit maximisation MC = MR
Additional Objectives
There are additional objectives that a business could pursue including:
- Growth Sales revenue maximisation
- Limit pricing to gain monopoly power
- Customer satisfaction
- The satisficing principal sets a minimum acceptable level of achievement
Divorce of Ownership and Control
Divorce of ownership and control is where the people that own the business (the shareholders) are not the same as the people that control the business (the board of directors)
Where there is a divorce of ownership and control businesses may not pursue profit maximisation as the managers may have different objectives to the owners
