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OBJECTIVES OF A FIRMMEANING OF FIRMFirm includes all those enterpriseswhich are related with the productionnot only of goods but also of services.

It may be an individual proprietor, partnership or joint stock company.

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OBJECTIVES OF A FIRM

Profit Maximisation Revenue or Sales Maximisation Maximisation of Satisfaction Security profits Growth Maximisation

Maximisation of Managerial utility orDiscretion

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Satisficing Theory Cyert and Marchs Behavioural

Theory

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Profit Maximisation Profit maximisation as the only

objective of the firm. It is regardedas the most reasonable and the most

productive business objective.

Profit is calculated by deductingtotal cost from total revenue.

P = TR - TC

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PROFIT Economic Profit = TR-TC Accounting Profit = TR-Explicit costs

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Arguments in favour ofProfit Maximization Goal

Strongest Motive Essential for the survival of firm

Accurate prediction Empirical Efficiency of the firm

Proper explanation of the behaviourof group of firms

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Arguments against ProfitMaximisation

Uncertainty The goal of joint stock companies

may be different Impractical Liquidity of firm Government interventions

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Revenue or Sales

MaximisationSales maximisation means that

managers of firms seek tomaximise their sales subject tothe constraint of earning a

satisfactory profits.

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Argument in favour

More realistic More practical More availability of loans Strong position in market More advantageous to the managers

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Arguments against Profit Constraint Limited scope Unrealistic assumptions

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Maximisation of Satisfaction

An entrepreneur wants to maximisesatisfaction even at the cost of

profits. It is due to the fact thatafter certain level of profits, thepsychology of the entrepreneur willbe to give more preference to leisurein comparison to profits.

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Security profits

The firm is not by profit maximisationbut by the objective of security

profit. The struggle for position andto the setting of a reasonable pricewhich may provide secure profits.

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Growth Maximisation

The growth of a firm implies increasein its size, production and sales .

Demand and cost do not remainconstant and firms do want to growso as to motivate them to maximise

sales.

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Maximisation of Managerialutility or Discretion

Managerial utility function maximises the utilityof the managers rather than profits of the firm.

(Here, U = managerial utility; S = additionalexpenditure on staff; M = managerialemoluments & ID = discretionary investment)

U = f (S, M, I D)

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Satisficing Theory

Satisficing means satisfactoryoverall performance.

To attain a satisfactory level ofproduction To attain a satisfactory share of

market. To earn a satisfactory level of profit.

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Cyert and MarchsBehavioural Theory

Behavioural theory of the firm alsoregards satisficing as the main goal

of the firm.

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Conclusion The objective of the firm can be many.

The survival of the firm depends on theprofit.

Whatever the objective of the firm Sales revenue maximisation Maximization of firm growth

Long run survival It has to be a profitable organization.

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