Objectives &
policies of firms
Maame Yaa Arthur
• General goals firms want to reach or achieve are the firms’ objectives.
• Which are:
• Profit maximization
• Surviving the market
• Satisficing principle
• Revenue maximization
• Sale maximization
• Increasing market share and etc.
Profit maximization
• This is the most important objective that firms seek to achieve,to
maximize their profit both in the long and short run. For this to
happen firms will have to make the difference between the average
cost and average revenue high.
• When cost are met with the revenue, then profit margin has fallen to
zero profit will be at it’s greatest.
• Profit maximization can be reached where output is increased or
decreasing costs.
• Where marginal cost is equal to marginal revenue.
Surviving market
• Every firms does not aim on running only in the short run but staying
till the long run
• Businesses like to maximize profit, or gain normal profit to cover cost.
• They survive in the market by meeting the consumer’s demand for
goods and services
• By cutting costs and are able to cover the costs.
Profit satisficing
• Where owners of a business set a minimum acceptable level of profit
to satisfy share holders to keep them happy and confident in the
business.
• Sometimes firms sacrifice short term profit to satisfy the expectations
made.
Revenue maximization
• Maximizing revenue- to increase sales
• Where marginal revenue does not fall to the negative number. It’s
easier to maximize revenue than to maximize profit .
• Revenue can also be maximized when costs are decreased or price of
the firms can be increased.
Sale maximization
• Maximizing the quantity of sales rather than the revenue from sales.
• Outputs are increase just for a break even output to occur total
revenue and total cost are equal. But if a higher output is made this, it
suggests a loss-making behavior. Cross-subsidization is where profit
from one part of the firm is used to offset loses made somewhere
else in the business.
Increasing market share
• Firms want to increase the number of consumers they have, to
increase demand and revenue they gain.
• To gain more revenue or profit
Price Discrimination
• When firms increase their profit by reducing consumer surplus and
converting it into producer surplus. Perfect competition cannot do
this because they do not manipulate price.
• There are three types of price discrimination:
• First degree: charging different consumers with prices that they are
willing to pay. For example: An estate agent will give a consumer the
price they can pay
• Second degree: consumers will only purchase more of the product
when prices decreases.
• Third degree: different prices for different groups of consumers. For
example: in a cinema there are different prices for teenagers, adults
and children.
• Limit pricing- is a pricing policy used by old firms to discourage new
firms from entering the market. Old firms lower short-run price and,
at this point old firms no longer maximizes profit in the short-run. The
old firms increase output to gain revenue but the new firm would not
be able to make profit.
• Predatory pricing-when a firm feels threatened by a firm coming to
the market. And the old firm sets a price very low forcing the new
firm to match it. New firms will be unable to make normal profit so
would leave the market.
• Price leadership- Firms in the market accept the price that is set by
the leading firm, either the firm with the largest market share or
brand leader .
Kinked demand curve of oligopoly
• A kinked demand curve is used in an oligopoly market.
• When the price increases above P, there is a large decrease in
revenue and sales.
• Below P it’s inelastic and there is a small increase in revenue and
sales.