The aims of firms( THE PRINCIPLE OF PROFIT MAX AS A GOAL)Most firms want to make a profit, however, this is not the primary aim of all firms. The aim of firms are as follows:

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The private firm as producer and employer


Most firms want to make a profit, however, this is not the primary aim of all firms. The aim of firms are as follows:

1.Profit maximization

Selling goods and services earns revenue for a firm. Profit is what is left from revenue after all costs have been deducted. A firm that is unable to cover its costs with enough sales revenue will make a loss and could be forced to close down if losses continue. A firm may make a loss if it fails to make a product consumers want, at the price or quality they want, or provides a poor customer service. A firm may also make a loss if it is unable to produce products at the same or a cheaper cost than rival firms. It is therefore important for firms to be efficient and continually try to reduce their costs of production.

2. Providing a public service ( Nationalised industries)

Public sector and government run

3. Providing a charity

Rely on donations and endowments.

4. Non-profit making organizations: building societies ( better interest rates)

5. Managerial theories: Aims are set by managers, big offices, better working hours.

6.Behavioural theories: theories about behaviour for the different groups working in firms, people who run the firm.

7.Co-operative theories:

1) workers

2) consumers

  Long and Short Run Profit

Short Run profit maximization:

All firms wanting to make a profit need to cover their total costs. Some firms want to make as much profit as they can now in the short run. Other firms may be prepared to not make a profit in the short run, so long as they are still covering their average costs, in this case they are not making any profit at all.

Long Run profit maximization:

In this case, firms work out what money they need to make in the long run ( 1 to 5 yrs) if they are to make a profit. They then divide this by the period of time to get a price they need to change if they are to make a profit over 5 years. The price may not be high enough in the short run for them to make a profit, but it will give them a profit over the long term. They are more interested in having people buy their goods in the short run than profit as that will help them make more profit later.

Production and Law of Diminishing Returns

All firms or producers have to organize the factors of production if they are to produce. In the short run some factors are fixed and other are variable. Usually labour is variable and capital is fixed. So if producers want to produce more they try to increase the output by increasing inputs; in the short run they can only increase variable inputs e.g. labour.

This increase in inputs may cause a rise in outputs to start with but with time may cause a FALL in total production. This concept is called the Law of Diminishing Returns.

The Law of Diminishing Returns states that if one factor of production is fixed in supply ( that is land and/or capital in the short run) and extra units of another factor ( that is labour) are added to it, then extra output or returns gained from the employment of each extra unit of this factor must, after a time, go down or diminish.

Average Output= average product= the total produced/ number of units of labour

                                                      = output of each indicidual

Total Output= Total Product= the entire output produced by all units of the factor

Marginal Output= change in total product/ change in number of workers

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                          = the additional output of additional workers.


Fixed costs: costs that do not vary with output ( rent, insurance, basic wages- managers wages are fixed)

Variable costs: Those costs that vary directly with output ( e.g. labour, overtime, energy, resources, depreciation)

Total Costs: total fixed costs + total variable costs

                    TC= TFC + TVC

                    TC= A(verage)TC x OUTPUT

Total fixed costs= ...

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