The maximisation objectives

Every "how much will this firm produce?" question turns on what it is trying to maximise.

• Profit maximisation → produce where MC = MR. This is the default assumption of the theory of the firm, and the reason is simple: while MR > MC, the next unit adds more to revenue than to cost, so making it raises profit. While MC > MR, the last unit loses money, so cutting output raises profit. Profit therefore peaks exactly where MC = MR (with MC cutting MR from below).
• Revenue maximisation (Baumol) → produce where MR = 0. Total revenue peaks when the last unit adds nothing to it. Why do it? Managers' pay and status are often tied to size and turnover, not profit; and larger scale may bring economies of scale and market power later.
• Sales (volume) maximisation → produce the largest output consistent with survival, i.e. where AC = AR (normal profit only — the firm breaks even in economic terms). Used to grab market share, exploit economies of scale, or drive rivals out.
• Growth maximisation → expand the firm (often by merger) to reduce risk, gain market power and raise managerial rewards.
• Utility maximisation (Williamson) → managers maximise their own utility: salary, perks, staff numbers, an impressive office.

Your turn — the profit-maximising output

Why MC = MR?

Revenue maximisation and the PED link

Total revenue is maximised where MR = 0. This connects directly to elasticity: on a straight-line demand curve, MR = 0 occurs at the midpoint, exactly where PED = −1 (unit elastic).

• Above that point (higher prices) demand is elastic, MR is positive, and cutting price raises TR.
• Below it, demand is inelastic, MR is negative, and cutting price reduces TR.

So a revenue-maximising firm always produces more, and charges less, than a profit-maximising one. A firm will never knowingly operate on the inelastic portion of its demand curve, because it could cut output, raise price, raise revenue and save on costs simultaneously.

Your turn — marginal revenue

Revenue maximisation and elasticity

Satisficing, CSR and the principal-agent problem

In any firm larger than a corner shop there is a divorce of ownership from control: shareholders own it but salaried managers run it. Their objectives are not the same.

This is the principal-agent problem. The principal (shareholder) hires the agent (manager) to act on their behalf, but:

• There is asymmetric information — the manager knows far more about the firm's real opportunities than the owner does, and the owner cannot fully monitor effort.
• Their incentives differ — the shareholder wants profit and share price; the manager may want a bigger empire, a higher salary, a quiet life, or a low-risk strategy that protects their job.

The classic consequence is profit satisficing (Herbert Simon): managers earn just enough profit to keep shareholders from revolting, and pursue their own objectives with the slack. It is a direct application of bounded rationality — agents settle for "good enough" rather than optimising.

Other non-maximising objectives OCR names: social welfare (a state-owned or mutual firm may price at MC to maximise welfare rather than profit) and corporate social responsibility (CSR) — accepting lower short-run profit for ethical, environmental or community goals.

Evaluate CSR sharply. Is it genuine altruism, or long-run profit maximisation in disguise? Ethical sourcing builds brand value, attracts staff, forestalls regulation and reduces the risk of a boycott. If CSR raises long-run profit, it is not really a departure from the neoclassical model at all — and where it is pure marketing, it is greenwashing.

Aligning the agent: firms pay managers in share options and performance bonuses, appoint non-executive directors, and publish audited accounts. But this creates its own problem: share-price-linked pay can encourage short-termism and excessive risk-taking — a major explanation of the 2008 financial crisis.

The principal-agent problem

What determines a firm's objective?

The specification asks you to evaluate the factors influencing the choice of objective. Objectives are not fixed — they shift with circumstance:

• Ownership structure. A listed plc with dispersed shareholders is exposed to the principal-agent problem; a family firm, partnership, mutual or cooperative may weight long-run survival, reputation or member benefit far above profit. A state-owned firm may target social welfare.
• Market structure. A monopolist with high barriers can indulge non-profit goals (and X-inefficiency) because supernormal profit is protected. A firm in perfect competition must profit-maximise — anything else means losses and exit. Competition disciplines objectives.
• Stage of the business life-cycle. A tech start-up burning cash to build market share is sales-maximising; the same firm at maturity switches to profit maximisation and dividends. (Amazon ran at near-zero profit for years by design.)
• The state of the economy. In a deep recession every objective collapses into one: survival. Firms will price down to average variable cost to stay alive.
• Stakeholder pressure. Consumers, employees, regulators, NGOs and investors (ESG funds) can make CSR profitable.

Your turn — profit

Objectives and market structure

Sales maximisation

Growth maximisation and how firms grow

Growth maximisation is the objective of expanding the firm's size — and it is the one that produces the mergers and takeovers on the front page.

• Internal (organic) growth — reinvesting profit: new outlets, new products, new markets. Slower, but lower risk and easier to manage.
• External growth — merger or takeover. Horizontal (two firms at the same stage: two supermarkets) buys market share and economies of scale. Vertical integration — backward towards suppliers (a brewer buying a hop farm, securing inputs) or forward towards the customer (a brewer buying pubs, securing distribution). Conglomerate (unrelated markets) spreads risk.

Why managers like growth: pay, status and job security rise with firm size; a larger firm is harder to take over. Why owners may not: the empirical record on mergers is poor — a large share destroy shareholder value through culture clashes, diseconomies of scale and overpayment for the target. That divergence is the principal-agent problem in its most expensive form.

Constraints on any objective: the firm cannot ignore competition, regulators (the CMA can block a merger), the threat of takeover if the share price sags, consumer and pressure-group scrutiny, or its own finances. Objectives are chosen inside those walls.

Survival, and putting the objectives together

The specification also expects survival as an objective — and for a new start-up, or any firm in a deep recession, it dominates everything else. A firm fighting for survival will price down to average variable cost, cut investment, and accept losses that no profit-maximiser would tolerate, simply to stay alive until conditions improve.

Put the whole topic together on a single downward-sloping demand curve:

• Move to MC = MR → highest price, lowest output, maximum profit.
• Move right to MR = 0 → lower price, higher output, maximum revenue, less profit.
• Move right again to AC = AR → lowest price, highest output, normal profit only.

So the consumer is best served by a firm that is not maximising profit — which is exactly why competition policy tries to force firms out towards the right by lowering barriers to entry and preventing collusion.

Evaluation you can bank: whether a firm actually profit-maximises depends on whether it can (does it know its own MC and MR curves? Most firms do not) and whether it must (how competitive and contestable is the market?). In perfect competition profit maximisation is not an assumption but a survival condition.

Which objective?

Tap a card, then tap the objective it belongs to.

Match the concept to its meaning

Tap an item on the left, then its partner on the right.

The big ideas to know

You've now covered business objectives from the OCR A-level Economics (H460) specification. Press Finish to see your score.