The Objectives of Firms
In one line. The standard assumption is that firms maximise profit at MC equals MR, but firms may instead profit satisfice, maximise revenue, maximise sales or growth, or pursue managerial and behavioural goals, often because of the principal agent problem when ownership is separated from control. H2 only.
Exam relevance: a core H2 microeconomics theme, firms and market structures recur across essay and case study almost every year, on ETG analysis. Taught the way an economics tutor who wrote the answer keys teaches it.
01The standard assumption
Economic analysis usually starts by assuming firms maximise profit, but that is a starting point, not the whole story.
H2 only. This whole topic, costs, economies of scale and market structures, is H2 content. H1 students do not study it, so if you are taking H1 Economics you can skip this page.
The conventional assumption is that a firm aims to maximise profit, producing where marginal cost equals marginal revenue. Real firms may instead pursue other objectives, which change the price and output they choose.
Knowing the alternatives matters because they shift the firm away from the profit maximising price and output, which is exactly what the higher mark objectives questions probe.
02Profit maximisation at MC equals MR
The profit maximising firm produces where marginal cost equals marginal revenue, and it pays to justify why, not just assert it.
Profit is maximised where MC = MR with MC rising. Below this output MR is above MC, so producing more adds profit; above it MC is above MR, so the last unit cuts profit. Read the price off AR at that output.
This is the benchmark objective. Every alternative below is understood as a departure from it, which is why a clean grasp of the MC equals MR rule is the foundation for the rest of the page.
03Profit satisficing
A firm may aim not for maximum profit but for a satisfactory level of it, which gives a range of price and output rather than a single point.
Under profit satisficing, managers earn enough profit to keep owners content, then pursue other goals. The firm can sit anywhere between the profit maximising point and the point where only normal profit is earned, so the outcome is a range. Where in that range the firm sits depends on the competitive pressure it faces, which is the point an evaluation turns on.
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04Revenue and sales maximisation
Some firms aim to maximise revenue or sales rather than profit, which leads them to produce more and price lower.
- Revenue maximisation. The firm produces where marginal revenue is zero, so total revenue is highest. This is a larger output and a lower price than the profit maximising choice.
- Sales maximisation. The firm pushes output to the largest level consistent with at least normal profit, often to build market share or deter entry.
05Growth and managerial objectives
Firms may chase size and managerial goals, especially where the people running the firm are not the people who own it.
Growth maximisation pursues a larger firm through expansion, diversification and mergers, which can bring economies of scale, market power and reduced risk. Managerial objectives reflect what managers want, larger budgets, status or a quieter life, rather than what owners want. Behavioural objectives recognise that firms operate with limited information and may aim for workable rules of thumb instead of a precise optimum.
06The principal agent problem
Many of these alternative objectives trace back to one structural feature: the separation of ownership from control.
The principal agent problem arises when owners (the principals) are separate from managers (the agents) who run the firm day to day. Because managers have their own goals and better information about the firm, they may not act purely in the owners' interest of maximising profit. This is the underlying reason a firm may satisfice, chase growth or pursue managerial objectives rather than profit maximise.
07Common misconceptions
Profit satisficing gives a range of price and output, not a single new point; tie where the firm sits in that range to the competitive pressure it faces. And do not treat profit maximisation as the only objective; the marks come from explaining when and why a firm departs from it.
08Test yourself
- Justify, ruling out the alternatives, why profit is maximised where MC equals MR.
- Explain why profit satisficing yields a range of price and output rather than one point.
- Explain how the principal agent problem can lead a firm away from profit maximisation.
09Questions students ask
The standard assumption is that a firm maximises profit, producing where marginal cost equals marginal revenue with MC rising. But firms may pursue other objectives, profit satisficing, revenue maximisation, sales or growth maximisation, and managerial or behavioural goals, especially where ownership and control are separated. This is H2 content.
Because at any output below it marginal revenue exceeds marginal cost, so producing more adds to profit, and at any output above it marginal cost exceeds marginal revenue, so the last unit reduces profit. Profit is therefore highest where MC equals MR with MC rising. The price is then read off the average revenue curve at that output.
The principal agent problem arises when the owners of a firm, the principals, are separate from the managers who run it, the agents. Managers may pursue their own objectives, such as larger budgets, prestige or an easier life, rather than maximising the owners' profit. This separation of ownership and control is a key reason firms may not profit maximise.