Evaluate Whether Profit Maximisation Is Always The Most Important Objective Of Firms. (25 Marks)

971 words - 4 pages

Profit maximisation is when firms maximise their profits through sales and increasing the price of products. Profit maximisation occurs when total sale revenue is furthest above total cost which is when MR= MC. Firms are usually controlled by the managers, in order for managers to keep its position its must gain enough or maximise the firms’ profits, so it can satisfy the shareholders. However managers may want to take a different approach rather than maximising the firms’ profits. Managers may want to maximise managerial objectives such as maximising its sales rather than profits. However although they are taking a different approach, they still must gain enough profits to satisfy the ...view middle of the document...

However the manager must gain some profits for the company because a low level of profits would cause the firm’s share price to fall, this makes the company vulnerable to take over on the stock exchange by new owners who believe that the company can be managed better and more profitably. Even if the company is not taken over, the fear of takeover may prevent its co-operate board and managers from straying too far from profit maximising.
In addition, firms may want to profit maximise and gain supernormal profits because it would attract potential competitors to join their market. This is because companies such as apple, gain too much supernormal profit, it attracts other firms, such as Samsung and Orange, to join their market and share their supernormal profits. So companies may want to sacrifice their profits in the short run to prevent unwanted competitors in joining their market in order to gain supernormal profits in the long run. However this only occurs in imperfect competition because most firms only make supernormal profits in the short run and normal profits in the long run. Also a non- maximising behaviour by a firm is usually disciplined by competition in the capital market rather by competition in the goods or products market. In the capital market, if the shareholders aren’t happy with the firm’s behaviour of non profit maximising, they would sell their shares and, if a firm’s level of profits is too low, the owners may sell their business to a new owner. This would then mean managers may want to gain enough profits to keep the shareholders as well as gaining not enough profits to attract other businesses to join the market or other people to buy the ownership of the firm.
Managers, who possess a monopoly of technical knowledge about actually running a firm, may want to focus on managerial objectives such as maximising their sales. Companies that maximise their...

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