Objectives of firms: survival, social welfare, profit maximisation and growth

Published by Patrick Mutisya · 14 days ago

Cambridge IGCSE Economics 0455 – Firms' Costs, Revenue and Objectives

Microeconomic Decision‑Makers: Firms’ Costs, Revenue and Objectives

1. Introduction

In a market economy, firms are the primary decision‑makers. Their decisions are guided by a set of objectives that influence how they produce, price and allocate resources. Understanding these objectives helps explain the behaviour of firms in different market structures.

2. Main Objectives of Firms

  • Survival

  • Social welfare

  • Profit maximisation

  • Growth

3. Survival

Survival is the most basic objective, especially for new or small firms. A firm that cannot cover its variable costs in the short run will shut down. In the long run, it must at least break even (total revenue = total cost) to remain in operation.

Mathematically, the break‑even condition is:

\$TR = TC\$

where \$TR\$ is total revenue and \$TC\$ is total cost. If \$TR < T \cdot C\$ (total variable cost) in the short run, the firm will cease production.

4. Social Welfare

Some firms, particularly public utilities, non‑profits or cooperatives, prioritize social welfare over profit. Their aim is to provide goods or services that improve the well‑being of the community, even if this means operating at a loss or receiving subsidies.

Key features of a socially‑oriented objective:

  1. Provision of essential services (e.g., water, electricity, healthcare).

  2. Price setting below market equilibrium to increase accessibility.

  3. Reinvestment of any surplus into community projects.

5. Profit Maximisation

Profit maximisation is the dominant objective for most private‑sector firms. The firm seeks the level of output where the difference between total revenue and total cost is greatest.

The condition for profit maximisation in the short run is:

\$MR = MC\$

where \$MR\$ is marginal revenue and \$MC\$ is marginal cost. At this point, any increase or decrease in output would reduce profit.

6. Growth

Growth refers to the desire to expand the firm’s size, market share, or product range. Growth can be pursued for several reasons:

  • Achieving economies of scale, which lower average costs.

  • Increasing market power and bargaining strength.

  • Diversifying risk across different products or markets.

Growth strategies include:

  1. Internal expansion (e.g., reinvestment of profits).

  2. Mergers and acquisitions.

  3. Entering new geographic markets.

7. Comparison of Objectives

ObjectivePrimary GoalKey MeasureTypical Industries
SurvivalContinue operatingBreak‑even point (TR = TC)Start‑ups, small retailers
Social WelfareImprove community well‑beingService coverage, affordabilityPublic utilities, NGOs, co‑ops
Profit MaximisationMaximise profitDifference between TR and TC; MR = MCMost private‑sector firms
GrowthExpand size/market shareRevenue growth, market share, economies of scaleMultinationals, fast‑growing tech firms

Suggested diagram: A graph showing the profit‑maximising point where MR intersects MC, with the break‑even point indicated where TR = TC.

8. Interplay Between Objectives

Firms often balance multiple objectives. For example, a firm may aim for profit maximisation in the short run to ensure survival, while simultaneously planning for long‑term growth. Publicly owned firms may combine social welfare with financial sustainability.

9. Summary

  • Survival is the minimum requirement for a firm to continue operating.

  • Social welfare focuses on community benefits, sometimes at the expense of profit.

  • Profit maximisation seeks the highest possible profit, using the MR = MC rule.

  • Growth aims to increase the firm’s scale and market influence, often through economies of scale.