ECO 142 – CLASS HANDOUT

Market Structure & Market Failure

The Goals of the firm:

Neo Classical Economics posits the view that the main goal of a firm is profit maximization.
However, Behavioural Economic theories, taking into account the aims of different stakeholders,
put forward the view that firms have many objectives and some objectives other than profit
maximization will take precedence depending on the situation at the firm and its environment.

Goals of the firm:

1. Profit Maximisation – firms aim to make as much profits as possible

Profit = Total Revenue -Total Cost or Marginal Revenue = Marginal Cost
π=TR−TC MR = MC

2. Satisficing – this refers to the practice of the minimum acceptable level of achievement.
Firms may aim to achieve only satisfaction rather than maximum results. It refers to a
decision-making strategy towards adequacy rather than optimality.

3. Sales Revenue Maximisation (proposed by Baumol in 1959) – firms that are controlled
by managers rather than owners or shareholders. Where annual sales revenue and perks
are closely related to total sales revenue, management tend to focus on that objective and
not profit Maximisation.

4. Growth – this refers to increasing the size of the firm through increasing products and
markets. This may be done through mergers, acquisitions takeovers, etc. Growth allows
firms to achieve economies of scale.

5. Survival – some business may be short of cash and unable to compete with larger firms
or facing an economic recession for which they are unprepared. In these circumstances
the primary aim of the firm may be survival. One way of doing that may be through
friendly takeover.
6. Market Dominance - some businesses aim to be the number one firm in an industry by
controlling the largest market share in the industry e.g.: Coco Cola in the Beverage
Industry and Mc Donald’s in Fast Foods.