Cambridge Syllabus Notes

Microeconomic Decision‑Makers – Firms’ Objectives

Think of a firm as a garden 🌱. It must survive (water the plants), contribute to society (share beautiful flowers), make a profit (harvest the fruit), and grow (plant new seeds). These four objectives guide every decision a firm makes.

1. Survival

Survival means the firm can keep operating in the long run. It must cover its fixed and variable costs.
📌 Key point: If average total cost ATC is above average revenue AR, the firm will eventually shut down.

Analogy: A plant needs water (variable cost) and sunlight (fixed cost). If it doesn’t get enough, it wilts.
Mathematically: $$\text{Survival condition: } AR \ge ATC$$

2. Social Welfare

Firms can also aim to improve the overall well‑being of society. This includes providing essential goods, creating jobs, and reducing environmental harm.

Producing affordable medicines 💊.
Investing in renewable energy 🌞.
Offering fair wages and safe workplaces 🛠️.

Exam tip: Remember that social welfare objectives can coexist with profit maximisation. Look for phrases like “social responsibility” or “public goods” in questions.

3. Profit Maximisation

The classic goal: make the most money. Profit π is the difference between revenue R and total cost C.
$$\pi = R - C$$

Example: A bakery sells cupcakes at $3 each. If it costs $1.50 to make a cupcake, profit per cupcake is $1.50. To maximise profit, the bakery should produce where marginal cost (MC) equals marginal revenue (MR).

Calculate MC and MR.
Set MR = MC.
Check that price (P) > ATC to ensure long‑run profit.

Exam tip: If a question asks for the profit‑maximising quantity, look for the condition MR = MC. If it also asks whether the firm will make a profit, compare price with ATC.

4. Growth

Firms often want to expand: more output, new markets, or new products. Growth can be organic (internal) or acquisitive (buying another firm).

Analogy: A tree that spreads its roots to new soil. Growth is driven by investment in capital and innovation.

Exam tip: Growth objectives may appear in questions about market structure changes or long‑run supply curves. Look for terms like “scale economies” or “investment in R&D”.

Summary Table

Objective	Key Focus	Example
Survival	Cover costs (ATC ≤ AR)	A small café staying open during a slow season.
Social Welfare	Benefit to society (jobs, environment)	A solar‑panel company providing green jobs.
Profit Maximisation	Maximise π = R – C	A smartphone firm setting price where MR = MC.
Growth	Expand output or markets	A fast‑food chain opening new outlets overseas.

Final Exam Tip: • Identify the objective in the question. • Use the appropriate condition (e.g., MR = MC for profit maximisation). • Check long‑run viability (price > ATC). • Remember that firms can pursue more than one objective simultaneously.

Objectives of firms: survival, social welfare, profit maximisation and growth