What are the aims of firms?

Answer 1

1) Profit maximisation.

The standard assumption made by economist is that firm will seek to maximise their profit that is maximise the gap between the firm's total revenue and total cost (including normal profit.) A firm making the minimum level of normal profit is said to be producing the break even output. Firms will want to make abnormal profit as a reward for managing the resources and taking business risks.

2) Sales revenue maximisation A firm may be prepared to accept a lower price and produce above the profit maximising output in order to increase its market share in a growing market. This is a penetration pricing policy.

A firm choose to maximise its sales revenue would raise output beyond MC=MR until MR had fallen to zero. Extra sales after this would contribute nothing to total revenue, therefore it is at maximum.