In economic theory it is usually assumed that firms always maximise profits. Although many firms do have other objectives, profit is necessary for survival and is also likely to be a consequence of pursuing these other objectives. So the assumption can still give useful predictions. In practice:
• Many firms look for long-term profit and may not maximise profits in the short run. Sales maximisation may be their main objective in the short run and this may bring with it increased market power
• Other firms may take quite the opposite view, neglecting long-term planning in order to maximise profit in the short run. This is sometimes called short-termism
• Another possible strategy is satisficing – earning enough profit to stay comfortably in business. Small businesses sometimes ignore opportunities to expand because they are comfortable with their existing scale of production.
The theoretical profit-maximising output for any firm will be at the point where marginal cost is equal to marginal revenue. Under perfect competition, marginal revenue will be equal to price (diagram A). Under imperfect competition, marginal revenue will tend to fall as output and sales increase, because prices will fall (diagram B).
In both cases, at point A on the diagram, profits are less than they could be if output was increased, because the extra output would cost less than the revenue brought in. At point B profits are less than they could be (and losses may be made) because output above the profit-maximising level costs more to produce than it gains in revenue.