AQA Specification focus:
‘Firms have a variety of other possible objectives. The satisficing principle. Students should recognise that firms have a range of possible objectives including survival, growth, quality, maximising their sales revenue and increasing their market share.’
Introduction
In A-Level Economics, firms are often assumed to maximise profit. However, in reality, many pursue alternative objectives guided by the satisficing principle, reflecting complex motivations.
The Traditional Assumption: Profit Maximisation
Most economic models assume firms aim for profit maximisation, where marginal revenue (MR) = marginal cost (MC). This objective provides the foundation of traditional firm theory, but it does not always match observed business behaviour.
Alternative Objectives of Firms
Firms often deviate from strict profit maximisation. Instead, they may prioritise objectives shaped by internal goals, stakeholder pressures, or market conditions. Common objectives include:
Survival: Especially important for new firms or during recessions, where covering costs and maintaining operations takes precedence.
Growth: Expanding market share, output, or geographical presence may be prioritised over short-term profit.
Sales Revenue Maximisation: Managers may seek to boost turnover to increase prestige, market influence, or bonuses tied to revenue.
Quality and Innovation: Firms may prioritise product development and service standards to secure long-term brand loyalty.
Market Share: Increasing dominance can strengthen pricing power, reduce competition, and improve economies of scale.
Satisficing Principle: A situation where firms aim for a satisfactory or acceptable level of performance rather than maximising a single objective, often due to competing interests.
This principle recognises that decision-making within firms is not always directed towards one clear goal but is shaped by compromises between stakeholders.
The Satisficing Principle Explained
The satisficing principle reflects the reality that firms face multiple stakeholders—owners, managers, workers, and consumers—who each value different outcomes. Instead of pushing one objective to its maximum, firms balance aims to achieve broadly acceptable results.
Key Drivers of Satisficing
Separation of Ownership and Control: In many firms, shareholders own the company but managers control day-to-day decisions. This can lead managers to pursue personal goals rather than strict profit maximisation.
Information Constraints: Firms rarely have perfect knowledge, making maximisation difficult. Satisficing provides a practical alternative.
Risk Aversion: Managers may prefer stable outcomes over maximising profit if maximisation requires taking significant risks.
Long-Term vs Short-Term Goals: Sacrificing short-term profit to achieve sustainable growth or survival often reflects satisficing behaviour.
Stakeholder Influence on Firm Objectives
Different groups influence the objectives that firms prioritise:
Shareholders
Usually prioritise profit and dividends, seeking maximum return on investment.
Managers
May value sales revenue, growth, or market share, as these can enhance personal status, job security, or performance-linked pay.
Employees
Often prioritise wages, job security, and working conditions.
Consumers
Influence objectives indirectly by demanding quality, innovation, and fair pricing.
Government and Regulators
Shape firm objectives through policies, competition laws, and public interest concerns.
Examples of Alternative Objectives
Firms may explicitly pursue non-profit goals:
Survival in Competitive Industries: Supermarkets often engage in aggressive price competition to maintain market share, even at reduced margins.
Quality Leadership: Premium car manufacturers may focus on innovation and brand image over pure profit margins.
Sales Maximisation: Tech start-ups often prioritise rapid user growth over immediate profits to attract investment.
Sales Revenue Maximisation: A firm objective where managers focus on increasing total revenue, even if it reduces overall profit.
Such objectives demonstrate how the satisficing principle allows diverse strategies in competitive markets.
Behavioural Economics and Firm Objectives
The satisficing principle draws heavily from behavioural economics, recognising that firms are not always perfectly rational. Instead, they work within bounded rationality—making decisions with limited information, time, and resources.
Bounded Rationality: The idea that decision-making is restricted by cognitive limits, incomplete information, and time constraints, preventing fully rational choices.
This means satisficing is often a practical and realistic strategy for firms navigating uncertainty.
Evaluation of Alternative Objectives
While profit remains central in the long run, recognising alternative objectives provides a more accurate model of real-world firm behaviour.
Advantages
Reflects realistic business practices.
Recognises stakeholder diversity.
Explains why firms pursue growth or innovation over short-term profit.
Limitations
Harder to model formally compared with profit maximisation.
May reduce efficiency if objectives conflict or lack clear direction.
Creates difficulties in predicting firm behaviour accurately.
FAQ
Profit maximisation involves choosing output where marginal revenue equals marginal cost, aiming for the highest possible profit.
Satisficing, by contrast, means settling for an acceptable level of profit or performance that satisfies key stakeholders. This reflects real-world constraints such as imperfect information, managerial goals, or risk aversion.
Behavioural economics suggests decision-makers operate under bounded rationality, meaning limited time, knowledge, and cognitive ability.
Satisficing reflects this because firms often cannot calculate the exact point of maximisation. Instead, managers make “good enough” decisions that balance competing demands without exhaustive optimisation.
Managers may benefit directly from higher sales if bonuses or career prospects are tied to revenue growth.
Greater sales also increase the size and visibility of a firm, enhancing managerial prestige. Growth can also reduce vulnerability to competitors and improve long-term survival prospects, even if profits are lower in the short run.
Satisficing is more common in imperfectly competitive markets where firms face:
Product differentiation
High levels of uncertainty
Complex competition strategies beyond price
In perfectly competitive markets, survival itself often becomes the key satisficing objective, as profit maximisation is harder to achieve consistently.
Satisficing may reduce allocative or productive efficiency, as firms are not fully minimising costs or aligning price with marginal cost.
However, it can encourage dynamic efficiency. For example, prioritising quality or growth can lead to innovation, improved customer service, and long-term competitiveness, even if short-term profit is lower.
Practice Questions
Define the satisficing principle in the context of firm objectives. (2 marks)
1 mark for recognising that satisficing means achieving a satisfactory rather than maximum outcome.
1 mark for linking this to firms balancing multiple objectives or stakeholders (e.g., managers settling for acceptable profits rather than maximising them).
Explain why firms may pursue alternative objectives, other than profit maximisation. (6 marks)
Up to 2 marks for identifying alternative objectives (e.g., survival, growth, sales revenue maximisation, market share, quality/innovation).
Up to 2 marks for explaining why firms might prioritise these (e.g., survival in a competitive market, managers aiming for status or bonuses linked to sales, long-term growth).
Up to 2 marks for analysis that shows awareness of stakeholder influence or separation of ownership and control.
(Max 6 marks. Candidates must show both knowledge and explanation to reach full marks.)
