Objectives of a Firm Other than Maximizing Profit

It is possible for firms to pursue perfect essays objectives apart from maximising profits. When companies concentrate on maximising their profits, this means they must have higher dividends for the shareholders, have higher salaries for their workers and use much of the resources in development and research.

Economists argue that firms are not only concerned with purely maximising their profits. Firms have alternative aims that they pursue apart from increasing retained earningd such as profit satisfaction. There is the need that firms keep track of the events happening in order to meet the changing taste and preference of consumers. In most firms, there is always a separate control and ownership that is involved in the running of the business.

This may happen where owners of a firm want maximum profits, but the managers lack incentives or rewards that motivate them compared to the managers who have a higher share. In other cases, managers may opt to keep their profits level low in order to please shareholders. This problem can be overcome by increasing the share of the managers and payment depending on their performance.

Firms may decide to increase their market share even when it calls for less profit. A higher market share builds the monopoly power of the firm and it may put up prices, enabling the business to make higher profits in the future. A manager may prefer working for a bigger firm for higher salaries and more prestige. When a firm increases its market share, it forces the competitors out of the business and this is an advantage to the firm. An example of monopolization is the situation where after entry of a large supermarket in an area, the small shops in the area may be forced to close down.

Growth maximization objective may be a driving factor that may make many firms be willing to reduce their profit levels to gain even more market share and increase in size. In this case, firms may opt for merging and takeover in order to maximise growth. Long run maximisation of profit may drive a firm to forego the short term profits and concentrate on the long-term profits that are in the future. An example is when a firm invests in new facilities that are to be used in the future.

In addition, social and environmental concerns may force a firm to choose those activities and products that have value and importance for the community and environment. Some firms engage in charitable activities that benefit the local community. A cooperative is usually established by the stakeholders. It may have other objectives other than maximising profits, since its main goal is to increase the welfare of its stakeholders. Hence the profit that is generated is shared amongst the members.

These strategies have been adopted by many firms and they have been successful in encouraging firms to consider other objectives apart from maximising their profit levels. Pricing strategies in a firm should be an objective where a firm is required to pursue more than one objective while pricing its products or services. While deciding on the pricing strategy, a firm needs to also maintain good relations with the consumers and workers. It is also required to comply with the legal requirements that are imposed by the government in relation to pricing.

A firm may not consider maximisation of profit to be its financial objective. The profitability of firm is stated in terms of return on the investment. The objective of maximizing profit usually suffers from drawbacks that render it ineffective, since it is not always clear in what sense that the term profit is used. Profit in the long-run may not be the same as in the short-run.

A firm may maximize its short-term profit by ignoring its current expenditure such as the repair of machines. Owing to this neglect of not maintaining the machines, the firm may not be able to operate effectively in the future, hence profits may suffer in the long-run. It is thus clear that the long-term profitability consideration cannot be ignored in the favour of the short-term profits.

The other shortcoming of maximization of profits is that it overlooks the risk factors. The earnings of a project in the future are usually related to varying degrees of risks. An example is the case when there is a firm that has fluctuating earnings; such a business is considered risky. Also, a project that is financed by debts is considered risky as compared to the one that financed through share capital. It is clear that firms have other considerations and objectives if a firm intends to maximise its profits, it will be forced to increase its prices and this will encourage entrance of more competitors. This situation thus leads to reducing the market share of the firm. Thus, a firm may decide to reduce its profits in pursuit of high market shares.

Summary

It is true that firms seek to maximise profits but many firms have other objectives apart from mere profit maximisation. A firm may seek to engage in sales maximisation where it may intend to increase its production and the amount of output that is sold. When sales increase, it implies more revenue but not necessarily increase in profits. Personal welfare is something else that a firm may engage in by motivating in order to increase personal welfare of the employees and the owner. In this process, profits are usually sacrificed.

Firms are inclined to engage in those activities that improve the well-being of the society and these tend to reduce the profit levels of the firm. Price limit is a predatory pricing policy that is usually used by firms when they want to maintain monopoly. The firms tend to lower prices to levels that force new entrants to operate at a loss.