Motives of a Firm

Who are the main participants in a firm’s daily decision-making process?

a) Directors and Managers: Shareholders in a PLC will elect directors to look after their interests in the company for them. Directors in turn appoint managers to manage and run the company. The only way owners can influence decisions is through the AGM.
b) The workers: don’t have the power to run the company, but collectively may be able to influence decisions. Trade Unions may exert influence over wages (and therefore costs), job losses and health and safety.
c) The consumers: can influence the work of businesses through their demand patterns. If a firm fails to provide goods that consumers demand they will eventually cease trading as in the case of Rover Cars in 2005.

Motives of a firm

  • Short-run profit maximisation
  • The most important reason why a firm is set up is to make profit. However, sometimes the firm may have to choose between making a lot of profit in the short-run and forgoing profit maximisation in the short-run so that it can make more profit in the long-run. Shareholders will be motivated by maximising their profits from the company, in other words — dividends. To make the shareholders happy, the firm may choose short-run profit maximisation. However, not all the firms make profit, they sometimes make loss.

  • Long-run profit maximisation
  • Keynesian economists believe that firms will seek to maximise their long run rather than their shortrun profits. This is based upon the belief that firms will use cost plus pricing. In other words, the price of the product is worked out by calculating the average cost, when the firm is operating at full capacity and adding a mark-up. Short-run profit maximisation suggests that firms adjust price and output in response to changes in market conditions. However, most economists agree that rapid price changes may affect a firm’s position in the market. Consumers dislike rapid price adjustments, and often view price cuts as signs of desperation and distress. This theory suggests that a firm might continue to operate in the short run even if it were making a loss. The management would hope to be able to turn the business around and make profits in the long run.

  • Managerial theories
  • Sometimes a firm’s motive may depend on certain managerial approach. A firm may try to maximise sales rather than profit. More sales potentially could give more profit. However, if the price is lowered to generate more sales, the firm may not be able to maximise profit, but it could maximise sales. Sales maximisation maybe the motive of the firm if it is trying to increase their market share.

    Keynesian economists believe that firms will seek to maximise their long run rather than their shortrun profits. This is based upon the belief that firms will use cost plus pricing. In other words, the price of the product is worked out by calculating the average cost, when the firm is operating at full capacity and adding a mark-up.
    Short-run profit maximisation suggests that firms adjust price and output in response to changes in market conditions. However, most economists agree that rapid price changes may affect a firm’s position in the market. Consumers dislike rapid price adjustments, and often view price cuts as signs of desperation and distress. This theory suggests that a firm might continue to operate in the short run even if it were making a loss. The management would hope to be able to turn the business around and make profits in the long run.

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