What are the main objectives of businesses? Why might businesses depart from the aim of profit maximisation?
The UK is a mixed economy with private and public sector businesses operating in markets:
Conventional theory of the firm makes an assumption that businesses have enough information, market power and motivation to set prices for their products that maximise their total profits
Examples of different business objectives
An increasing number of companies are refocusing their priorities towards the welfare of their suppliers, employees and the planet.
Why might a business depart from profit maximisation?
It is hard for a business to pinpoint their precise profit maximising output, as they cannot accurately calculate marginal revenue & marginal cost
Day-to-day pricing decisions are taken on the basis of “estimated demand" or “rules of thumb". Businesses can also take advantage of their market experience when setting prices
A business might look to add a profit margin on top of average cost – this is known as “cost-plus pricing." When demand is price inelastic, the profit margin can be higher.
Most businesses are multi-product firms operating in a range of markets across countries and continents – the sheer volume of information that they have to handle is vast. And they must keep track of the ever-changing preferences of consumers.
The idea that there is a neat, single profit maximising price is now largely redundant