AQA A-Level Economics – Objectives of
Firms (25 Mark Essays)
1. Low Profits and Inefficient Management (2018)
Profit is defined as total revenue minus total cost. While low profits may suggest
inefficiency, this is not always the case.
Firstly, firms may pursue alternative objectives such as revenue maximisation rather than
profit maximisation. Producing where MR = 0 increases output and market share, often at
lower prices. For example, Amazon prioritised growth over profit in its early years. This
strategy may lead to economies of scale and higher profits in the long run. However, if
demand is inelastic, lowering prices may reduce profits unnecessarily, and excessive
expansion may lead to diseconomies of scale, as seen with WeWork.
Secondly, market structure plays a key role. In perfectly competitive markets, firms only
earn normal profit in the long run due to low barriers to entry. This does not indicate
inefficiency, as firms are both productively and allocatively efficient. However, in
monopolies, firms are expected to earn supernormal profits. Failure to do so may indicate
inefficiency, such as high costs or poor management.
Finally, external factors can reduce profits regardless of management quality. For example,
during COVID-19, demand fell sharply, reducing revenues even for efficient firms. However,
strong management may adapt quickly to changing conditions.
Overall, low profits do not necessarily imply inefficient management, as they may reflect
strategic decisions, market structure, or external shocks.
2. Profit Maximisation as the Main Objective
Profit maximisation occurs where MC = MR and is traditionally assumed to be the main
objective of firms.
Firstly, profit maximisation ensures survival and growth. Higher profits allow reinvestment,
innovation, and dynamic efficiency. Shareholders expect returns, particularly in public
companies. For example, Apple maximises profits through premium pricing and efficient
supply chains. However, excessive focus on profit can lead to ethical concerns, such as poor
working conditions, damaging long-term reputation.
Secondly, firms may pursue alternative objectives such as revenue maximisation, market
share growth, or corporate social responsibility (CSR). For example, firms may use
predatory pricing to gain market share or invest in ethical sourcing. However, these
strategies must eventually lead to profit to remain sustainable.
Firms (25 Mark Essays)
1. Low Profits and Inefficient Management (2018)
Profit is defined as total revenue minus total cost. While low profits may suggest
inefficiency, this is not always the case.
Firstly, firms may pursue alternative objectives such as revenue maximisation rather than
profit maximisation. Producing where MR = 0 increases output and market share, often at
lower prices. For example, Amazon prioritised growth over profit in its early years. This
strategy may lead to economies of scale and higher profits in the long run. However, if
demand is inelastic, lowering prices may reduce profits unnecessarily, and excessive
expansion may lead to diseconomies of scale, as seen with WeWork.
Secondly, market structure plays a key role. In perfectly competitive markets, firms only
earn normal profit in the long run due to low barriers to entry. This does not indicate
inefficiency, as firms are both productively and allocatively efficient. However, in
monopolies, firms are expected to earn supernormal profits. Failure to do so may indicate
inefficiency, such as high costs or poor management.
Finally, external factors can reduce profits regardless of management quality. For example,
during COVID-19, demand fell sharply, reducing revenues even for efficient firms. However,
strong management may adapt quickly to changing conditions.
Overall, low profits do not necessarily imply inefficient management, as they may reflect
strategic decisions, market structure, or external shocks.
2. Profit Maximisation as the Main Objective
Profit maximisation occurs where MC = MR and is traditionally assumed to be the main
objective of firms.
Firstly, profit maximisation ensures survival and growth. Higher profits allow reinvestment,
innovation, and dynamic efficiency. Shareholders expect returns, particularly in public
companies. For example, Apple maximises profits through premium pricing and efficient
supply chains. However, excessive focus on profit can lead to ethical concerns, such as poor
working conditions, damaging long-term reputation.
Secondly, firms may pursue alternative objectives such as revenue maximisation, market
share growth, or corporate social responsibility (CSR). For example, firms may use
predatory pricing to gain market share or invest in ethical sourcing. However, these
strategies must eventually lead to profit to remain sustainable.
