Objectives of Firms (Cambridge (CIE) O Level Economics)

Objectives of Firms

• The objectives of a firm are a reason for their existence or the desired focus of their owners

  • These objectives typically include profit maximisation, growth, survival and social welfare 

1. Profit maximisation 

• Most firms have the rational objective of profit maximisation

• Profit = Total Revenue (TR) - Total Costs (TC)

• To maximise profits, firms can either increase their sales revenue or decrease their costs

  • Firms continuously analyse their costs to see if they can reduce them so that profit can be maximised

2. Growth

• Some firms have the business objective of growth

• In subtopic 3.5 we considered the different metrics that firms use to compare their size which include the number of employees, market share, size of profits and market capitalisation

• Firms with a growth objective often focus on increasing their sales revenue or market share

• Firms will also maximise revenue in order to increase output and benefit from economies of scale

• A growing firm is less likely to fail

3. Survival 

• In the short term, many new firms focus solely on business survival

• Generally, as much as 25% of new firms fail in their first year of business

• Once a firm is established, it may then begin to focus on profit maximisation as its new objective

4. Social welfare 

• More firms than ever are launching with a social welfare objective

  • These typically include a focus on climate action and addressing poverty or inequality

• They still require profit to survive, but will accept less than if they were profit maximising as long as they are meeting their social objective