Model essay (b): should firms always maximise profit?

What this lesson teaches

• I can explain profit as total revenue minus total cost and find the profit-maximising output where MR equals MC with MC rising.

  Syllabus 9570, 2.2.1(a). Objectives of Firms: Firms aim to maximise profits; Profit as the difference between total revenue and total cost; Profit-maximising output occurs at the point when marginal revenue (MR) equals marginal cost (MC) and where MC is rising

• I can describe other goals a firm may chase: more revenue, enough profit (satisficing) or a bigger market share.

  Syllabus 9570, 2.2.1(b). Objectives of Firms: Firms may choose to pursue alternative objectives such as revenue maximisation, profit satisficing and market share dominance

Make a guess

A new online grocer sells below cost for three years to win customers. Is it trying to make a profit?

1. No. It is a charity that wants to help shoppers.
2. Yes, in the long run, by building market share first.
3. No. Selling below cost shows it does not care about profit.

The answer to part (b)

Introduction

Economists usually assume firms aim to maximise profit, producing where MR equals MC. Firms may instead aim to maximise revenue or market share, to earn a satisfactory profit while meeting other goals, or to pursue social and environmental aims. This essay argues that firms must earn enough profit to survive, but should not always aim for the highest profit now. The judgement depends on the market structure, the time frame and who owns the firm.

Paragraph 2: the case for maximising profit

Profit rewards the owners who risk their money, and it funds investment. A firm with high profits can pay for new machines, research and training, which raise productivity and lead to better products later. Profit is also a signal. A market where firms earn high profits attracts resources, because consumers value its products highly. In competitive markets, firms may have little choice. Where many firms sell similar products, prices are driven down until firms earn only normal profit. A firm that does not keep costs down and price carefully makes a loss and is forced out.

Paragraph 3: market share now, profit later

However, a firm may gain by not maximising profit in the short run. In Figure 2, a firm that maximises revenue produces Qr, where MR equals zero, instead of Q*, so it charges less and sells more. It gives up some profit now, but it gains customers and market share. A larger scale brings economies of scale, which lower average cost. In markets with network effects, such as ride-hailing or online shopping, being the biggest makes the service more useful and keeps new rivals out. Many platforms charged low prices for years to grow. So aiming for market share can lead to higher profits in the long run.

Paragraph 4: satisficing and other aims

Firms also find it hard to maximise profit exactly. They do not know their MR and MC curves precisely, and demand and costs change all the time, so they often aim for a satisfactory profit instead. In large firms, managers may care about sales, size or their own pay, while owners want profit. So the firm satisfies several groups rather than maximising one goal. Some firms have social or environmental aims. A social enterprise may hire people who find it hard to get jobs. Many firms cut waste or emissions, because customers and staff prefer it and it protects their reputation.

Paragraph 5: profit maximisation can harm society

Profit maximisation is also not always good for society. A firm with market power maximises profit by producing less and charging a price above MC. Consumers pay more, and some trades that would benefit both sides do not happen: allocative inefficiency. A profit-maximising firm also ignores external costs, such as pollution. So, from society's point of view, firms with market power should not simply maximise profit; this is why governments regulate them.

Paragraph 6: evaluation

Whether a firm should always maximise profit depends first on its market structure. In highly competitive markets, a firm must stay close to profit maximisation simply to survive, so other aims are a luxury. Firms with market power earn supernormal profit, which gives them room to pursue market share, social goals or a quieter life. It depends second on the time frame. Many apparent alternatives, such as cutting prices to grow, are really ways to maximise profit over the long run. Ownership matters too. Shareholders of listed companies push for profit, while family firms and social enterprises may value other goals more.

Conclusion

Firms should not always aim to maximise profit in the short run. They must earn at least normal profit to survive, and in competitive markets this leaves little choice. But firms with market power and a long-term view often do better, for themselves and for society, by pursuing growth, a satisfactory profit or social goals. The best objective is long-run profit that the firm can sustain without harming its customers or society.

Margin notes: how each paragraph scores

Introduction

Names the standard assumption and the alternatives, gives a stand and three criteria. The word 'always' is addressed directly.

Paragraph 2

The case for profit: reward, investment, signalling and competitive pressure, each explained.

Paragraph 3

L3 analysis on Figure 2: revenue maximisation at MR = 0 against MR = MC. It then explains why this can pay off (economies of scale, network effects), with real examples.

Paragraph 4

Satisficing, the principal-agent problem and social aims, each with its reason. This breadth of objectives is what the syllabus expects.

Paragraph 5

A different angle: society's view, using allocative efficiency and externalities. It shows 'should' can be judged from more than the firm's side.

Paragraph 6

E3: two well-explained judgements (market structure, time frame), plus ownership. Each says when profit maximisation is right.

Conclusion

Answers 'always' with a clear condition and a reasoned final view.

Overall: L3 and E3, 13 to 15 marks

Two-sided with a diagram and several objectives explained. An answer that only listed other objectives would stay at L2.

Worked example: A 4-minute plan

Fix the stand and criteria, then sort the arguments.

1. Stand: firms must earn enough profit to survive, but 'always maximise' is not always best. Criteria: market structure, time frame, ownership.
2. For: funds investment, rewards owners, competition forces it.
3. Against: market share now for profit later (Figure 2); satisficing and limited information; social aims; profit max with market power harms consumers.
4. Judge: competitive markets leave little choice; firms with market power and long horizons can choose other aims.

Watch out for this

A firm that cuts prices to win market share is not trying to make a profit.

It may be giving up profit now to earn more later, through economies of scale, loyal customers or fewer rivals. That is a long-run profit strategy.

Check your understanding

In Figure 2, why does the revenue maximiser earn less profit than the profit maximiser?

1. Between Q* and Qr, each extra unit adds more to cost than to revenue.
2. The revenue maximiser has higher fixed costs than the profit maximiser.
3. The revenue maximiser sells fewer units, so it earns less in total.