Profit maximisation as the assumed objective

Traditional economic theory assumes that firms primarily aim to maximise profit. However, firms often pursue a mix of goals to balance the interests of owners, managers, and other stakeholders. In reality, objectives can vary depending on who controls the firm, and compromises are common to satisfy different groups.

Alternative objectives like revenue and sales maximisation

While profit maximisation is the standard assumption, firms may prioritise other goals that can sometimes conflict with short-term profits. These alternatives often focus on growth or market position.

Common alternative objectives:

• Revenue maximisation - Firms aim to achieve the highest possible total income from sales.
• Sales maximisation - Firms focus on selling the maximum number of units possible.

Pursuing these objectives typically leads to higher output levels than profit maximisation, but it reduces profits in the short term.

How objectives affect output levels

Different objectives lead firms to choose specific output levels based on cost and revenue curves.

Output levels for different objectives:

• Profit maximisation - Occurs where marginal cost equals marginal revenue (MC = MR), at output level Q.
• Revenue maximisation - Happens where marginal revenue is zero (MR = 0), at output level Q₁ (higher than Q). Firms keep expanding output as long as it adds to total revenue.
• Sales maximisation - Takes place where average revenue equals average cost (AR = AC), at output level Q₂ (higher than Q and Q₁). This is the maximum sustainable output without making a loss; producing more would result in losses.

Firms choosing revenue or sales maximisation produce more than profit-maximising firms, accepting reduced short-term profits to achieve other benefits like greater market presence.

Long-run versus short-run objectives

Firms often prioritise long-run profit maximisation, which may involve accepting lower profits or even losses in the short run to build a stronger position over time.

Strategies for long-run profit through short-run sacrifices:

• Building market share - Firms might maximise sales or revenue short-term to gain a larger portion of the market, leading to monopoly power and supernormal profits later.
• Accessing finance - High sales volumes can make it easier to secure loans or investments for future growth.
• Expecting future gains - Some firms operate at a loss initially, anticipating higher revenue from increased brand awareness or lower costs from economies of scale as production ramps up.
• Survival focus - In the short run, the goal might be to achieve just normal profit to stay in the market, shifting to profit maximisation once established.

These approaches show that short-run objectives are often stepping stones to long-term financial success.

Other objectives including corporate social responsibility

Beyond profit, revenue, or sales, some firms pursue goals that emphasise quality, ethics, or societal benefits, usually while ensuring at least normal profit to remain viable.

Examples of alternative objectives:

• Not-for-profit organisations - These focus on providing public benefits or 'doing good' rather than distributing profits to owners, such as charities delivering services without aiming for supernormal gains.
• Quality emphasis - Firms may prioritise producing superior products to build customer loyalty, sacrificing short-term profits for long-term reputation and repeat business.

Corporate social responsibility (CSR)

Many firms integrate CSR into their operations, aiming to benefit society alongside making supernormal profits. This differs from not-for-profit models by combining ethical actions with financial goals.

Examples of CSR practices:

• Environmental protection - Using sustainable resources to minimise ecological impact.
• Community support - Sourcing from local suppliers to boost regional economies.
• Employee welfare - Paying wages above market rates to improve worker satisfaction and retention.

CSR can enhance profits by attracting customers who prefer ethical brands, improving the firm's image and sales in the long run.