What other objectives might firms have beside profit maximization? (20 marks)
An alternative objective to profit maximisation is wealth maximisation. Shareholders invest money into firms in the belief that their wealth will be maximised to its potential for the amount of capital they invest and the risk involved. The wealth maximised is by the increased value in ordinary shares. Shareholder wealth maximisation can be achieved through growth maximisation, this is theory introduced by R. Marris 1964. Growth maximisation is the growth a firms demand and capital balance (fixed assets, stocks and current assets). It can be attained through re investing profits into buying capital goods and research and design for diversification of products, which will in the long run help increase the firms demand for goods and service making the firm more profitable.
Product diversification is a common objective of companies. Firms in an oligopoly industry will choose product differentiation as a way alternative way to competing price. A firm increasing its range of goods and service can attract new demand from a new or existing market, it also sets their brand apart from the others .Some companies are able to create new markets them selves creating products people don’t necessarily need but through rigorous marketing they begin to believe themselves that they need it. For instance Denim jeans were initially worn by mine workers in WW2 and sailors in the 18th century for work purposes. Through the 1960’s it was marketed most notably by Levi as a garment by teens as a sign of non conformity. By the 70’s it was acceptable to wear jeans as casual wear, now the average American owns roughly seven pairs of jeans. www.en.wikipedia.org/wiki/jeans , http://inventors.about.com/od/sstartinventors/a/levi_strauss.htm
Not all firm objectives are for financial gains, some firms set objectives that are aimed at satisfying stake holders, for example. Reducing carbon imprint on the...