Profit Maximisation

2105 Words Nov 1st, 2007 9 Pages
Is Profit Maximisation always the major objective of a firm?

The production of goods and services in our economy today takes place within organisations, whether in the centrally planned economy or free market economy. Any firm within these societies all have the same tendencies to acquire a successful business. Attaining this succession through mission statements, goals and objectives is simultaneous through all businesses. Changes in these objectives can have forcible effects on the decisions that firms take day-to-day regarding pricing, output levels, the market and capital investment. Depending on the size of the corporation, objectives will evolve to meet changing economic conditions. The standard neo-classical assumption is
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It is assumed that each wants to maximize his or her profit but that each is subject to constraints. In this case, shareholders are the principals who employ the managers to maximize profits on their behalf. The concept of principal-agent can explore in greater detail the barriers imposed for each party involved. Recited from Worthington, Britton and Rees (Pg 41, 2001), "firstly there is an imbalance in power between the principal and the agent; secondly there is likely to be a divergence of interests between the principal and the agent and the possibility of opportunism exists." One problem in assuming that businesses set price and output to maximize profits is the decision-taking; where the divorce between ownership and control, can be difficult to monitor. The shareholders may not always be aware that managers making the key day-to-day decisions are operating to maximize shareholder value. Hornby et al. indicates that different problems also associated with the P – A theory include ‘moral hazards ' and ‘adverse selections '. Both factors coincide with information deficiencies for both the shareholders and the managers. Another proposition by Hornby et al. signifies
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