Different Many firms see profit maximization, which is

Different economic theories
have claimed that firms will do as much as possible to maximize their profit
according to Duflo & Karlan, 2012. In 2013, Nekipeloy stated that the
“maximisation of economics profit is a driving motive of firm’s activity
according to the neoclassical theory”, resulting to profit maximisation
becoming one of the objectives of a firm. Many firms see profit maximization,
which is described by Black, Hashimzade and Myles (2017) as an “act of making
as much profit as possible for a business”, as a way of improving and growing
their firm. Various firms believe that a
maximisation of profits would “lead to an economically efficient or welfare
maximising outcome” (Hussain, 2012), and give them an “incentive and a reward”
(Northrop 2013). This increase in profit could resulting to an increase in the
wealth of managers and shareholders of the business, and also be used to
improve the quality of products, through ways such as research and development,
which can ultimately increase their customers.

Although firms want to
maximise profit, the owner and the managers may not always have the same
ambition, this is known as the principal-agent problem which, according to The
Economist (2012), is defined as “the tendency of managers to run companies to
suit their own interests rather than the interests of their owners or
customers”, due to this, profit maximisation may no longer be the main
objective of a firm, which is discussed by Black, Hashimzade and Myles, 2017.
Though owners may want to maximise profit, managers may want to focus more on improving
the motivation of the employees. In 2008, Delmar and Wiklund stated that a “managers
growth motivation has a unique influence on firms outcome measured as growth in
sales”, which would be beneficial for the business, in the short and long term.
However, the principal agent problem could affect a firm in many ways, one
being that it can show a lack of communication between the managers and the
owners, and result to a falling the amount of information being passed across
the firm. This could then reflect negatively on the business and eventually result
in the firm being managed poorly and their reputation diminishing.
However, this problem can be solved with the help of corporate governance and….

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According to Saha (2014) firm
objectives “need not be limited to profit maximisation only”, so they should
focus on other objectives as well such as the objective of a monopolistic
market structure. A monopoly, which Doyle (2016) describes as “a
non-competitive market situation in which there is only on seller” not only
want to make supernormal profit in both short and long run, but also want to
increase their market share so that they can gain monopoly power and act as
price makers and influence the price of the products in their particular
market. A downside of increasing market share is that the firm may have lots of
pressure to produce the best products

There is also some managerial
objectives, such as “utility maximization” (Fort, 2015) which could result in
them increasing thing like their prestige and status. However, managers
shouldn’t always assume that maximising their preference satisfaction will also
maximise the chances of their firms’ chances of survival, reported by Cohen,
2013, as it could result in…..

Behavioural economics challenges
the assumption that of utility maximisation and believes its not relaistic

Firms have many
responsibilities and goals other that maximising their profit, such as
performing in an ethical way and having a corporate social responsibility,
which is said to be “a crucial element to the survival and development of a
business” by Martí-Borbolla & Ortiz-Arango (2016). In 2014 the ACCAPR stated that
behaving ethically, and having corporate social responsibility can benefit
firms in many ways,  one of them being
that it makes employees want to stay with the business, resulting to a
reduction in labour turnover and therefore an increase in productivity overtime
and could lead to an increase in the number of customers. Another advantage from
the ACCAPR (2014) is that when a firm is ethical, it can attract investors and
keep their share prices high, thereby protecting the business from any
takeovers, which could result to them being able to grow into a strong business.

Firms shouldn’t always be set
on maximising their products, as it could resolve in many problems for the
firm. One of them being that maximising profit may not always help with the
growth of a business, as it could lead to a business facing a loss due to the
fact that the prices of their products may increase. If a firms products are
price elastic “a good that is affected by the change in
price”, then it could result in a reduction in the number of new and loyalty
customers that a firm will have, especially in the future. This is because
customers will start going to a business that sells the same product at a
cheaper price.

 

Figure 1 The Importance of Price Elasticity of Demand (Doyle, 2016)

 

 

 

 

Figure 1 shows that if prices increase from P2 to P0, then
the Quantity demanded would decrease from Q2 to Q0, which suggests that even a
small change in the price of an elastic product, would dramatically decrease
the level of the demand. This concept links to another responsibility of a
firm, apart from making profit, firms are responsible of meeting the needs of
both their internal and external stakeholders. Stakeholders are defined as “a
person who has a legitimate or vested interest in the activities of an
organisation” (Heery & Noon 2017). In this case, the customers are the
firms’ external stakeholders, so the firm needs to make sure that their
products are what the customers would want, and at a price that they are
willing to pay.

Overall,
profit maximisation isn’t always the only objective of the firm, though maximising
profits can be rewarding to firms, like…. it can also be damaging. There are
also many other objectives that firms have to think about,

 

 

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