Do firms only want to make as much profit as possible, or do they pursue other goals too?
Explain the goals firms may pursue, including profit, survival, growth, market share and social aims
A clear O-Level answer on the goals of firms. Why profit maximisation is the usual assumption, the other goals firms may have such as survival, growth, market share and social responsibility, and why goals can conflict.
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What this dot point is asking
The syllabus wants you to explain the goals that firms may pursue, why economists usually assume profit maximisation, and what other goals exist, such as survival, growth, market share and social aims. The big idea is that while profit is the main motive for most firms, it is not the only one, and different firms in different situations pursue different goals.
The answer
The usual assumption: profit maximisation
Economists usually assume that firms aim to maximise profit, that is, to make the largest possible gap between total revenue and total cost. Profit is the reward to the entrepreneur for taking risk, and it provides the funds to invest and grow. This assumption is a useful starting point because it predicts firm behaviour well in many cases.
Other goals firms may pursue
In practice, firms may pursue other goals, especially when owners and managers are different people:
- Survival. A new or struggling firm may simply aim to stay in business, covering its costs, rather than chase maximum profit.
- Growth. A firm may aim to grow larger, to gain economies of scale, greater security, or higher status for its managers.
- Market share. A firm may aim for a larger share of the market to gain market power and influence over price, and to weaken rivals.
- Social responsibility. A firm may aim to behave ethically, for example by reducing pollution, treating workers well, or supporting the community, even if this lowers profit.
- Satisficing. Managers may aim for a satisfactory level of profit that keeps owners happy, rather than the absolute maximum, especially when maximising would mean too much effort or risk.
Why goals can differ from profit maximisation
Goals often differ from pure profit maximisation for two main reasons:
- Owners and managers are different people. In large firms, salaried managers run the business but do not own it. They may prefer goals such as growth or an easy life that suit them, rather than maximum profit for the owners. This is called the divorce of ownership and control.
- The situation changes. A young firm may aim to survive; an established one may aim for profit; a confident one may aim for growth and market share. Goals evolve over time.
Why goals can conflict
Goals can pull against each other. Cutting prices to win market share may lower profit in the short run. Spending on cleaner technology to be socially responsible raises costs. A firm must often trade off one goal against another, and which it chooses depends on its owners, managers and circumstances.
Examples in context
Example 1. A new food delivery firm in Singapore. A new delivery firm may set prices very low, even at a loss, to win market share quickly and lock in customers before rivals do. This shows the goal of market share taking priority over short-run profit, in the hope of higher profit once it dominates.
Example 2. A firm pursuing social responsibility. A company that invests in cleaner production or fair wages, beyond what the law requires, is pursuing social responsibility. This may lower profit in the short run but can build customer loyalty and a good reputation, showing that profit is not always the only goal.
Try this
Cue. State the goal economists usually assume firms pursue, and what it means. Profit maximisation, meaning the firm aims for the largest possible gap between total revenue and total cost.
Cue. Explain why a new firm might aim for survival rather than maximum profit. A new firm faces uncertainty, strong competition and limited finance, so it may first aim simply to cover its costs and stay in business before chasing maximum profit.
Cue. Explain how the divorce of ownership and control can lead to goals other than profit maximisation. In large firms, salaried managers run the business but do not own it, so they may pursue goals that suit them, such as growth or an easy life, rather than maximum profit for the owners.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original6 marksExplain why, apart from maximising profit, a firm might pursue growth and a larger market share as goals.Show worked answer →
A 6 mark question rewards two goals explained, with the reasoning behind each.
- Growth
- A firm may aim to grow because a larger firm can gain economies of scale, lowering its average cost. Growth can also bring greater security and higher salaries and status for managers, who often run the firm day to day.
- Market share
- A firm may aim for a larger share of the market to gain market power, which lets it influence price and weaken rivals. A dominant firm can also deter new competitors from entering.
- Link
- Both goals may eventually support profit, since lower costs and market power can raise future profit, but in the short run a firm may sacrifice some profit to grow or to win market share.
Markers reward each goal explained with a clear reason, and ideally the point that these goals may trade off against short-run profit.
Original5 marksExplain why a new small firm might aim for survival rather than maximum profit, and how its goals might change over time.Show worked answer →
A 5 mark question rewards the survival motive and a sense of how goals evolve.
- Survival
- A new firm faces uncertainty, strong competition and limited finance. In its early period it may simply aim to survive: to cover its costs and avoid going out of business, rather than chase maximum profit.
- Changing goals
- Once established and more secure, the firm can shift its goal toward making profit, then perhaps toward growth and a larger market share as it gains confidence and finance.
- Conclusion
- Goals are not fixed: a firm's main goal depends on its situation, moving from survival when young and fragile toward profit and growth as it matures.
Markers reward the survival goal linked to the risks facing a new firm, and the idea that goals change as the firm becomes more established.
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