Discuss whether the objective of profit maximisation becomes less important than other
possible objectives as a firm grows in size. (25)
The definition of profit is the money earnt when total costs are subtracted from total revenue. Profit is maximised at the point where MC=MR, many firms will try to achieve this in order to maximise profit. However firms may change their objectives to things such as maximising managerial objectives.
One of the main reasons that firms initially strive to maximise profits is so that they can use the profits to reinvest into the company so they can develop and grow. Small firms may not have many sources of investment from external places. As a result the only source of investment must come from within, this …show more content…
This can be to ensure that a firm has a large a market share as possible which decreases competition and can become a larger player within the total market. This objective is an interesting one, as sometimes for firms to maximise their sales revenues that may actually experience diseconomies of scale, as the firm produces too great an amount of output and as a result sees some of their average costs increase due to inefficiencies within the production chain. A good example of this, can be seen with the Windows Phones being produced by Microsoft. In order to try to gain traction within the smartphone market, Microsoft and associated firms attempted to maximise sales revenue by aggressively selling and marketing their phones, as a result the firms saw diseconomies of scale due to the sheer number being produced. However, as of 2016 production of Windows Phone operating systems and phones production were stopped due to an inability to gain a market share and compete with the smartphone giants of Apple and the like. This shows that actually whilst some firms objectives may appear beneficial, producing at lower profit levels can have poor results, as it means that if the intended effect of increased market share does not occur in the short run the impacts of the long term effects may be beyond the point of recovery. This is whilst firms who strive to profit maximise, such as Apple have large reserves of cash in order to reinvest into R&D, so their products stay ‘ahead of the game’ and can produce developments within the industry that consumers
possible objectives as a firm grows in size. (25)
The definition of profit is the money earnt when total costs are subtracted from total revenue. Profit is maximised at the point where MC=MR, many firms will try to achieve this in order to maximise profit. However firms may change their objectives to things such as maximising managerial objectives.
One of the main reasons that firms initially strive to maximise profits is so that they can use the profits to reinvest into the company so they can develop and grow. Small firms may not have many sources of investment from external places. As a result the only source of investment must come from within, this …show more content…
This can be to ensure that a firm has a large a market share as possible which decreases competition and can become a larger player within the total market. This objective is an interesting one, as sometimes for firms to maximise their sales revenues that may actually experience diseconomies of scale, as the firm produces too great an amount of output and as a result sees some of their average costs increase due to inefficiencies within the production chain. A good example of this, can be seen with the Windows Phones being produced by Microsoft. In order to try to gain traction within the smartphone market, Microsoft and associated firms attempted to maximise sales revenue by aggressively selling and marketing their phones, as a result the firms saw diseconomies of scale due to the sheer number being produced. However, as of 2016 production of Windows Phone operating systems and phones production were stopped due to an inability to gain a market share and compete with the smartphone giants of Apple and the like. This shows that actually whilst some firms objectives may appear beneficial, producing at lower profit levels can have poor results, as it means that if the intended effect of increased market share does not occur in the short run the impacts of the long term effects may be beyond the point of recovery. This is whilst firms who strive to profit maximise, such as Apple have large reserves of cash in order to reinvest into R&D, so their products stay ‘ahead of the game’ and can produce developments within the industry that consumers