Unit 3-Business Objectives

• What are the business objectives?

  • Sales maximasation
  • Revenue maximisation
  • Profit maximisation
  • Satisficing
• What is the rational business objective?

  Profit maximisation
• Profit maximisation rule

  Keeping production at MC = MR
• Why is it difficult to produce at a profit maximisation level?

  • They are unaware of their level due to difficulty in calculation
  • Forced to change due to the Competition Commission as high prices disadvantage consumers
• Profit maximisation in short vs long run

  Long-run: Prices will be adjusted to the exact level

  Short-run: No change as marginal costs change quite often
• Why do firms aim to achieve Revenue Maximisation?

  • Principal-agent problem: The commission managers receive comes from the money the firm makes, thus they are motivated to increase the money the firm makes to increase their commission
  • Increase output and benefit from economies of scale
  • Eliminate competition in the short-term as the prices are low
• How to achieve revenue maximisation?

  MR =0
• Principal-Agent problem

  When the agent makes decisions on behalf of the principal, often putting their priorities first
• Why do firms aim to achieve Sales Maximisation?

  Clear stock during a sale
• How is Sales maximisatiaon achieved?

  AC = AR
• What is satisficing?

  Opting for a satisfactory level of profit rather than profit maximisation; somewhere between sales maximisation and profit maximisation
• Solution to Principal-Agent Problem?

  Satisficing (profits somewhere between sales maximisation and profit maximisation, not revenue)
• Breakeven point

  AR = AC; Sales Maximisation
• Supernormal Profit definition

  Amount by which total revenue exceeds total costs
• Supernormal Profit Formula

  • (AR-AC) X Quantity