Discuss the goals of the firm and explain how firms can achieve internal and external economies of scale in production.
The objectives of the firm can be viewed as the motives of the entrepreneur/s who own and run the firm. There a number of goals that firm can pursue in its day to day operations - it may try to maximise profits, sales or growth, meeting shareholder expectations, or increasing market share.
Maximising profits - making the biggest possible profit, or the smallest possible loss - is recognised as the main objective of most firms. Profit is the difference between the firm's total revenue (output sold multiplied by price) and its total cost of production. While it is generally recognised that profit maximisation is the main objective of most businesses, we mustn't overlook the fact that firms may have other objectives. Another one of those objectives could be to try and meet shareholder expectations. Company directors, who make decision for a firm, try to do as best they can to serve the interests of the shareholders. However, Shareholders are often interested in maximising short term returns on their investment and hence, it will sometimes create conflict between actions that maximise the share price and dividends but are likely to reduce the firm's value in the longer term. Another motive of management may be to maximise the rate of growth of the firm's assets. In the long-run, a larger asset base should allow a business to achieve higher profits. It can also bring management other rewards, such as higher salaries and prestige.
Another objective a firm may have is to engage itself in economies of scales. Economies of scale may be described as the increase in efficiency of production as the number of goods being produced increases. Typically, a firm that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. Economies of scale can be classified as internal and external. Internal economies of scale relates to the cost saving advantages within a firm and external
Maximising profits - making the biggest possible profit, or the smallest possible loss - is recognised as the main objective of most firms. Profit is the difference between the firm's total revenue (output sold multiplied by price) and its total cost of production. While it is generally recognised that profit maximisation is the main objective of most businesses, we mustn't overlook the fact that firms may have other objectives. Another one of those objectives could be to try and meet shareholder expectations. Company directors, who make decision for a firm, try to do as best they can to serve the interests of the shareholders. However, Shareholders are often interested in maximising short term returns on their investment and hence, it will sometimes create conflict between actions that maximise the share price and dividends but are likely to reduce the firm's value in the longer term. Another motive of management may be to maximise the rate of growth of the firm's assets. In the long-run, a larger asset base should allow a business to achieve higher profits. It can also bring management other rewards, such as higher salaries and prestige.
Another objective a firm may have is to engage itself in economies of scales. Economies of scale may be described as the increase in efficiency of production as the number of goods being produced increases. Typically, a firm that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. Economies of scale can be classified as internal and external. Internal economies of scale relates to the cost saving advantages within a firm and external