Evaluate Whether Profit Maximisation Is Always the Most Important Objective of Firms. (25 Marks)

940 Words Mar 21st, 2014 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 firms’ shareholders in order to avoid losing their …show more content…
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