Question

What is the main objective of a firm?

Answer 1

The main objective of a firm, according to traditional economic theory, is to maximise profit. This means producing the level of output where the difference between total revenue and total cost is the greatest. A firm is in equilibrium when it has no incentive to change output.

Although economists acknowledge that firms may also pursue other goals, like increasing sales, achieving growth, ensuring survival, or maintaining a quiet life, the profit-maximization assumption is widely used because:

1. Firms often behave like profit maximizers in real life, and
2. It helps economists accurately predict firm behaviour regarding output and pricing decisions.

Thus, profit maximisation remains the central and most useful assumption in economic analysis of firm behaviour.