FIRMS OBJECTIVES: PROFIT MAXIMISATION

When MR=MC

The output which gives the maximum distance between TR and TC

The objective assumes that the owners control the management of the business

Also requires sufficient and accurate knowledge of cost and revenue conditions in the market so that the MR and MC can be found (Real world limitations + Hard to achieve)

QUESTIONING THE AIM IF PROFIT MAXIMISATION

Insufficient information on cost and demand
Short term objectives eg survival, VS long term objectives eg profit maximisation
Range of non-financial business objectives
Responses to changing market decisions eg a recession
Motivations of managers may differ from shareholders - want dividends based on profit

THE DIVORCE BETWEEN OWNERSHIP AND CONTROL

The majority of shareholders in a quoted company cant exercise day to day control over managers
Managers have different motivations than owners
There are some constraints on managerial behaviour as shareholders eventually expect to make returns on their investment
Managers may want to maximise their own utility from being in charge of a business

CONFLICTING OBJECTIVES?

Employees

High wages
Good working conditions
Job security
Career progression

Managers

High salaries
Company valuation
Power
Prestige/status
Perks

Shareholders

Good dividends - ie income from capital
Growth in share valuation - capital gain

Different stakeholders in the company want different things

HUGO SIMON - THE SATISFICING PRINCIPLE

	Created by samyajahangir over 11 years ago

A Level A2 Economics Note on Market Structures - Monopolistic Competition and Oligopoly, created by samyajahangir on 30/03/2015.

Market Structures - Monopolistic Competition and Oligopoly