• Profit Maximisation: Profit is a fundamental objective for many firms. Traditional firm theory often assumes that firms seek to maximize profits. Profit represents the surplus between total revenue and total cost and serves as a reward for entrepreneurs who take risks. Firms reach a break-even point when total revenue (TR) equals total cost (TC).
• Profit Maximisation Point: To maximize profit, a firm aims to operate at a price and output level that generates the highest possible profit. This profit maximization point occurs when marginal cost (MC) equals marginal revenue (MR). In this situation, producing an extra unit results in neither additional loss nor extra revenue, indicating an optimal profit position.

Firms tend to maximize their profits by producing at a point where marginal revenue (MR) exceeds marginal cost (MC), resulting in an increase in profits. Conversely, when MC surpasses MR, profits decrease. Profit maximization offers several advantages:

• Increased Rewards: It allows for greater wages and dividends for entrepreneurs, which can be highly motivating.
• Low-Cost Financing: Retained profits provide a cost-effective source of financing, reducing the need to pay high interest rates on loans.
• Short-Term Focus: In the short run, the primary focus is on owners or shareholders who aim to maximize their gains from the company.
• Price Stability: Some firms may choose profit maximization in the long run to maintain price stability. Consumers often dislike rapid price changes in the short term, so a stable price and output can be preferred.
• Public Limited Companies (PLCs): PLCs, especially, are keen on profit maximization as they could risk losing shareholders if they don't receive substantial dividends. Short-term profit maximization is particularly important for PLCs as they need to keep their shareholders satisfied.

• Normal Profit: Normal profit represents the minimum reward necessary to encourage entrepreneurs to continue supplying their enterprise. It covers the opportunity cost of investing funds in the firm rather than elsewhere. Normal profit occurs when total revenue (TR) equals total costs (TC), denoted as TR = TC. Importantly, normal profit is treated as a cost and is factored into the overall costs of production.
• Supernormal Profit: Supernormal profit, also known as abnormal or economic profit, goes beyond normal profit. It signifies profit that exceeds the opportunity cost of investing funds in the firm. Supernormal profit occurs when total revenue (TR) surpasses total costs (TC), written as TR > TC.

These concepts are fundamental in understanding how firms assess their financial performance and the rewards they expect for their investments.

Sales Revenue Maximisation: Sales revenue maximisation is an alternative objective pursued by some firms. This objective is achieved when the marginal revenue (MR) equals zero (MR = 0). In simpler terms, it means that selling an additional unit of the product generates no additional revenue. Firms focused on sales revenue maximisation aim to maximize the total revenue generated from sales rather than maximizing profit. This objective can be particularly relevant when firms want to gain market share, compete aggressively, or achieve specific sales targets. Profit may not be the primary goal in such cases, as the emphasis is on generating substantial sales income.

• Growth Maximisation: Some firms prioritize growth as their primary objective. This involves expanding the size and scale of the business. Growth can be pursued for various reasons, including taking advantage of economies of scale, which can lead to lower average costs and increased profitability in the long run. Firms may achieve growth by expanding their product range, merging with or acquiring other companies, or entering new markets. Large firms are often better positioned to invest in research and development, which can enhance their competitiveness and efficiency.
• Increasing Market Share: Another objective for some firms is to increase their market share. This involves capturing a larger portion of the market by maximizing sales. For example, a company like Amazon aimed to dominate the e-reader market by aggressively selling Kindles, even if it meant short-term losses. This strategy helped build customer loyalty and establish Amazon as a leading e-reader producer.
• Utility Maximisation: While firms typically aim to maximize profits, consumers pursue utility maximization. Utility refers to the total satisfaction or benefit derived from consuming goods or services. Consumers seek to make choices that provide them with the highest level of satisfaction or utility. It's important to note that in economic models, individuals are often assumed to act in their own self-interest to maximize their utility. Some firms may have owners or stakeholders with philanthropic goals. These individuals seek to maximize the well-being or utility of others rather than strictly pursuing profits. They may engage in charitable activities, donate to social causes, or prioritize ethical and socially responsible business practices as part of their utility maximization.

Non-maximising Objectves:

Profit Satisficing: In addition to profit maximization, some firms pursue a strategy known as "profit satisficing." A firm is considered to be profit satisficing when it earns profits at a level that is sufficient to keep its shareholders content, without necessarily striving for the highest possible profits. Shareholders, who are the owners of the company, desire profits because they receive dividends from these profits. However, the managers of the firm, who run the day-to-day operations, may not be as motivated by maximizing profits. Their personal financial incentives from achieving higher profits might be relatively small compared to the dividends received by shareholders. Therefore, managers may opt to earn profits that meet the shareholders' expectations while still focusing on other objectives. Profit satisficing often occurs when there is a separation between ownership (shareholders) and control (managers) in a company.

Social Welfare and Corporate Social Responsibility (CSR): Certain firms choose to take responsibility for the environmental and social consequences of their operations and aim to maximize social welfare. This approach, known as Corporate Social Responsibility (CSR), reflects a commitment to ethical business practices and a consideration of the broader impact a company has on society and the environment. Firms engaged in CSR may implement various initiatives, such as reducing their environmental footprint, promoting fair labor practices, or contributing to community development. The motivation for such actions can stem from having philanthropic owners or a genuine desire to contribute positively to society, beyond simply pursuing profit maximization.

• Principal-Agent Problem: The principal-agent problem is closely associated with the concept of asymmetric information. In this scenario, the agent, typically a manager or executive, is entrusted to make decisions on behalf of the principal, often the shareholders or owners of a firm. However, the agent may have motivations or interests that conflict with those of the principal. For instance, shareholders and managers may have differing objectives, which can lead to tensions. Managers might prioritize their own financial gains, such as bonuses or higher salaries, over maximizing dividends for shareholders. When a firm's owner sells shares and loses some control over the business, this can create a misalignment of interests among various stakeholders within the firm. Balancing the manager's salary expectations with the shareholders' dividend expectations can be challenging due to limited funds. As a result, there may be competing interests and conflicts within the firm.

Additionally, as managers sell their shares and relinquish control, shareholders gain more influence over the firm's decisions. This shift in control may lead to "shareholder activism," where shareholders exert pressure on the management to align with their preferences, such as demanding higher dividends or influencing key decisions. An example of this shareholder activism is seen in the objection raised by Sainsbury's shareholders against the decision to award the chairman a £2.3 billion bonus in 2004.

• Kinked Demand Curve: The kinked demand curve is a graphical representation that helps illustrate a notable characteristic of price stability within an oligopoly, which is a market structure dominated by a small number of large firms. In such an industry, firms often exhibit interdependence, meaning their pricing and output decisions are influenced by the actions of their competitors. The kinked demand curve assumes that when one firm changes its price, other firms react asymmetrically.
  • Relatively Elastic Demand: In the first part of the diagram, the demand curve is relatively elastic. This means that a price increase by one firm results in a significant reduction in the quantity demanded, as consumers switch to alternative products due to the higher price. Likewise, a price decrease by one firm results in a substantial increase in the quantity demanded.
  • Relatively Inelastic Demand: In the second part of the diagram, the demand curve becomes relatively inelastic. Here, consumers are less responsive to price changes. A price increase by one firm does not lead to a proportionally significant decrease in quantity demanded, and a price decrease does not substantially boost the quantity demanded. This inelastic range reflects the idea that competitors are reluctant to follow price increases for fear of losing market share, and they are equally hesitant to lower prices for fear of sparking a price war.