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:
- Private sector businesses are owned by their shareholders and aim to make a sufficiently high rate of return for the capital invested by their shareholders. Examples of private sector businesses include the retailer Tesco the parcel firm FedEx, the Spanish-owned bank Santander and the South Korean electronics corporation Samsung.
- Public sector businesses are wholly or part-state owned. Examples of wholly or partly-owned public sector firms include Network Rail, East Coast Trains and Royal Bank of Scotland. Some businesses have recently been part privatized – for example the Royal Mail in 2013.
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
- This assumption is criticised by economists who have studied the organisation and objectives of modern-day corporations both large and small. Most businesses have a wide range of objectives
- Not only do businesses often move away from pure profit-seeking behaviour, many are deliberately organised and operate in a way where profit is not the only objective.
Examples of different business objectives
An increasing number of companies are refocusing their priorities towards the welfare of their suppliers, employees and the planet.
- Profit maximisation (occurs where marginal revenue = marginal cost)
- Revenue maximisation (occurs where marginal revenue = zero)
- Increasing and protecting their market share
- Breaking into a new market / sector and making sufficient profit in the long run
- Surviving a recession / persistent economic downturn
- Pursuing ethical business objectives (e.g. by promoting corporate social responsibility)
- Providing a public service or achieving other social aims
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
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