Goals of Firms
Economists generally make two key assumptions about firm behaviour.
First, firms are assumed to be profit-maximizers, seeking to make as much
profit for their owners as possible. Second, each firm is assumed to be a
single, consistent decision-making unit.
Recall from Chapter 2 that assumptions are used to simplify a theory so
that economists can focus on the essential aspects of the issue. These two
key assumptions about firms allow economists to ignore details related to
how firms are organized and focus on deriving straightforward
predictions about their market behaviour—predictions that can be
subjected to empirical testing.
Is maximizing profit the only thing firms care about? In recent years there
has been much public discussion of the need for firms to be “socially
responsible” in addition to being motivated by the pursuit of profits.
Some people argue that every firm has a responsibility to society that
goes well beyond the responsibility to its shareholders. Others disagree
and argue that by maximizing profits, firms are providing a valuable
service to society. For a discussion of both sides of this interesting debate,
see Applying Economic Concepts 7-1.
Applying Economic Concepts 7-1