AQA A-Level Economics · Revision notes

4.1.5.2 The Objectives of Firms

Traditional theory assumes firms aim to maximise profit. In practice, firms may pursue other objectives, and each objective implies a different level of output and price. This topic covers profit maximisation, how the divorce of ownership from control affects what firms aim for, the main alternative objectives including satisficing, and how to identify them using revenue and cost curves.

Profit maximisation

Condition: MC = MR

Profit is maximised where marginal cost equals marginal revenue, with MC cutting MR from below.

• If MR is greater than MC, producing one more unit adds more to revenue than to cost, so profit rises by expanding output.
• If MC is greater than MR, the last unit added more to cost than to revenue, so profit rises by cutting output.
• Only where MC = MR is there no further gain from changing output.

Reasons for pursuing it

• Shareholders, as owners, want the highest possible return.
• Profit provides funds for investment and expansion.
• In competitive markets, firms that do not maximise profit may not survive.

The divorce of ownership from control

In a small business, the owner is usually the manager.

Key idea: In a large public limited company, ownership is spread across thousands of shareholders while day-to-day decisions are taken by salaried directors. That separation is the divorce of ownership from control, and it creates the principal-agent problem: the agents (managers) may pursue aims that differ from those of the principals (shareholders).

Why ownership and control separate As firms grow, they need more capital than a few owners can provide, so they sell shares to many investors. Most shareholders hold only a small stake and have neither the time nor the expertise to run the business, so they appoint professional managers.

Shareholders generally want profit, and particularly dividends and a rising share price. Managers may prefer:

• Revenue or sales maximisation, since salary and status often track the size of the firm.
• Growth, for the same reason.
• Satisficing — doing well enough to keep shareholders quiet while pursuing a quieter life.

The problem is rooted in asymmetric information: managers know far more about the firm's day-to-day position than shareholders do. Firms try to close the gap by paying directors partly in shares or share options, tying their reward to the share price, though this can encourage short-term decisions that flatter the price at the expense of long-term investment.

Revenue maximisation

Condition: MR = 0

Total revenue is maximised where marginal revenue is zero. Selling one more unit would reduce total revenue. On a straight-line demand curve, this is at the midpoint, where price elasticity of demand is unitary.

Revenue maximisation means producing more output at a lower price than profit maximisation.

Reasons for pursuing it

• Managers' pay, bonuses and status may be linked to sales revenue rather than profit.
• A larger revenue may increase market share and the firm's standing.

Sales maximisation

Condition: AC = AR

Sales maximisation means selling the largest possible volume of output without making a loss. The firm expands output until average revenue equals average cost, where it makes only normal profit.

This is a higher output and lower price than either profit or revenue maximisation.

Reasons for pursuing it

• To gain market share and economies of scale.
• To deter entry by keeping prices low, so potential entrants see little profit to be made.
• To drive rivals out of the market.

Satisficing

Satisficing means aiming for a satisfactory level of profit rather than the maximum, while meeting the objectives of other stakeholders.

There is no single condition for satisficing, because it means accepting outcomes below the maximum. A satisficing firm will usually produce somewhere between the profit-maximising output and the output where it would just make normal profit.

Reasons for pursuing it

• Firms have many stakeholders — workers, managers, customers, suppliers and the local community — whose interests conflict. Satisficing keeps each group reasonably content.
• Managers may prefer a quieter life, with a satisfactory profit and less risk.
• Maximising profit may require information about MC and MR that firms do not have.

Other objectives

Firms can also pursue a range of other objectives.

• Survival. A new firm, or one facing a recession or a price war, may simply aim to cover its costs and stay in business.
• Growth. Managers may aim to increase the size of the firm, since their pay and status often rise with it.
• Market share. A larger share of the market can bring economies of scale and more power over price.
• Quality. Some firms aim to build a reputation for quality, which can support higher prices in the long run.

Illustrating the objectives on one diagram

The three objectives can be shown on a diagram with a downward-sloping AR (demand) curve, its MR curve, and U-shaped MC and AC curves.

Key idea: Moving from profit maximisation to revenue maximisation to sales maximisation, output rises and price falls. Profit falls from its maximum to normal profit at Qsmax.

The order of revenue and profit maximisation depends on where MC meets MR.

Watch out: Profit-maximising output is always below revenue-maximising output, because MR must still be positive at Qpmax.

Key terms

Common mistakes

• Mixing up revenue and sales maximisation. Revenue maximisation is MR = 0; sales maximisation is AC = AR.
• Placing profit maximisation where AR exceeds AC by the most per unit. The condition is MC = MR, not the largest gap per unit.
• Getting the order of outputs wrong. Profit-maximising output is lowest and sales-maximising output is highest.
• Treating satisficing as a fixed point. It is a range of outcomes below maximum profit.
• Giving the condition without the reason. Each objective needs a motive, such as managers' pay or deterring entry.
• Confusing the principal-agent problem with poor management. It is a structural conflict of interest, not incompetence, and it exists even when managers are highly capable.

How this has been examined

In the AQA papers indexed on this site, this topic has appeared in three formats:

• 25-mark "Discuss" essay — asked twice across 2 series (2019 to 2021)
• 25-mark "Assess" essay — asked once (2025)
• 1-mark multiple choice — asked twice across 2 series (2023 to 2025)

Where this goes next

The revenue concepts behind each condition are in 4.1.4.6 Marginal, average and total revenue, and the meaning of normal and abnormal profit in 4.1.4.7 Profit. These objectives are applied to different market structures in 4.1.5.3 Perfect competition, 4.1.5.5 Oligopoly and 4.1.5.6 Monopoly and monopoly power.