THE ECONOMIC OBJECTIVES OF INDIVIDUALS, FIRMS & GOVERNMENTS

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THE ECONOMIC OBJECTIVES OF INDIVIDUALS In economics we assume that people act rationally, that is they do what is best for themselves. Another way of saying this is that we assume people are welfare maximisers, they try to maximise their welfare. However different groups of individuals have differing objectives: CONSUMERS - economists assume that you consumers will spend their income in a way in which the satisfaction (utility) gained from spending it would be the greatest. Therefore consumers will likely spread around their spending in a way that gives them the greatest amount of satisfaction. It is assumed in economics that the behaviour of consumers can be explained by their attempts to increase their utility or level of satisfaction.

UTILITY

In economics, utility is a measure of relative satisfaction gain from the consumption of goods and services.

WORKERS - On the whole in economics we make the assumption that workers are interested in maximising the wages that they earn. In reality this may be a simplistic approach and it is recognised that workers will be interested not just in the pay, but also the working conditions, the fringe benefits (perks), holidays and the nature of the job itself. We do however in economics assume that workers will try to maximize the rewards they get, and balance this against the time and effort spent working. RESOURCE OWNERS – As with workers and the labour element of the factors of production, we also assume that individuals that own any of the other three factors of production will also try and maximise the return that they get from them. In other words owners of land will try and maximise their rent, owners of capital will try and maximise the interest or return that they get from their investment and entrepreneurs will try and maximise the profit that they receive. THE ECONOMIC OBJECTIVES OF FIRMS In economics we assume that the simple objective of firms is to maximise their profit. This is also sometimes called maximising shareholder wealth, in other words the returns that the owners of the business get from their investment in the firm. However in reality it may be a little simplistic to assume that all firms try to maximise profit. There mat be a number of other objectives that they may try to adopt: SATISFICING - Satisficing behaviour involves the owners setting a minimum acceptable level of achievement in terms of profit. This is often because in reality it is almost impossible to determine what the maximum profit of a firm is likely to be. SALES REVENUE MAXIMISATION – This theory argues that because the annual salaries and other perks of a businesses management might be more closely linked with total sales revenue rather than profits that the management may try to maximise sales rather than profit. MANAGERIAL SATISFACTION – Another theory states that management may try to maximise their satisfaction rather than profit by setting managerial satisfaction objectives. For

THE ECONOMIC OBJECTIVES OF INDIVIDUALS, FIRMS & GOVERNMENTS

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example managers may find it more satisfying to strive to help the business grow or strive to achieve greater sales levels even if it meant that profit were not maximised. THE ECONOMIC OBJECTIVES OF FIRMS In economics it is normally accepted that governments have 4 basic economic objectives: There are 4 major objectives and they are:

1. Low Unemployment 2. Price Stability 3. Sustainable Growth 4. Balance of Payment Equilibrium