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Economics objectives of firms

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Economics objectives of firms
12-Sep-13

Objectives of firms

1. Profit Maximisation
In neo-classical economics it is assumed that the interest of owners or shareholders are the most important.
Just as consumers attempt to maximise utility, shareholders main motivation is to maximise their gain firm the company.

Therefore, one of the main objectives of firms is to maximise profit. Profit is the reward for the risk-bearing function of the entrepreneur. The firm is in equilibrium, and is maximising profit, when it is producing the level of output for which MC=MR and the MC curve cuts the MR curve from below.
MC = MR
2

By Jean-François Tuyau

Theory of Production

By Mr. Jean-François Tuyau

1

12-Sep-13

1. Profit Maximisation
Long Run Profit Maximisation.
In some cases, firms may sacrifice profits in the short term to increase profits in the long run. For example, by investing heavily in new capacity, firms may make a loss in the short run, but enable higher profits in the future.

3

Theory of Production

By Mr. Jean-François Tuyau

2. Minimise Cost
Another objective of the firm can be to minimise cost.
The firm is said to be minimising cost of production when:
i.
It produces at the optimum level of output
It is therefore achieving productive efficiency
• It uses a mimimum amount of resources to produce a given level of output, or
• It produces the maximum output possible with a given amount of resources

Cost
AC

qopt
4

By Jean-François Tuyau

Theory of Production

Qty

By Mr. Jean-François Tuyau

2

12-Sep-13

2. Minimise Cost ii. When it uses the least-cost combination of factor of production: The Marginal Physical Product
MPPF3
MPPF1
MPPF2
=
=
PriceF3
PriceF1
PriceF2

5

Theory of Production

By Mr. Jean-François Tuyau

3. Maximise Sales Revenue
Sales Revenue can be maximised when the firm produces the level of output for which Marginal Revenue is equal to zero.

TR

MR=0 ; TR is at max
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