3.2 Business Objectives

• Short run profit maximisation

  1. Firms produce where MC=MR

  2. Producing more increases profit if MR is higher than MC

  3. Producing less than MC=MR means they should produce more to increase profit

  4. Producing more than MC=MR leads to a loss on goods produced above the profit maximising point
• A firm’s motives are often determined by who controls it
• Firms produce at P1Q1 where MC=MR and the price is determined by the AR curve
• Companies likely to profit maximise

  • Apple
  • Pharmaceutical companies
• Short-run profit maximising helps firms generate funds for investment and survive a slowdown during a recession
• Revenue maximisation

  1. Firms produce where MR=0

  2. Producing more increases revenue when MR is above 0

  3. Revenue maximising produces at Q2P2, while profit maximisation produces at Q1P1

  4. Prices are lower when revenue maximising since more is produced
• Amazon aims to dominate the market by revenue maximisation
• Revenue maximisation

  • Managers are most interested in their level of revenue since their salary depends on it
  • Growth in revenue increases prestige and justifies managerial rewards to shareholders
  • A fall in revenue could lead to negative consequences like staff reduction and financial institutions being less willing to lend money
  • Many firms aim to revenue maximise as long as they provide some profit for the owners
• People who could have control of a firm

  • Owners or shareholders
  • Directors and managers
  • Workers (through a trade union)
  • The state (through regulation, taxes/subsidies and direct control)
  • Consumers (through their consumer sovereignty)
  • Pressure groups
• Profit maximisation

  • Neo-classical economics assumes that the interests of owners or shareholders are the most important
  • Goal of firms is to profit maximise in the short run to maximise owners’ returns
  • Firms profit maximisation is assumed for all market structures
• Company following revenue maximisation

  • Amazon
• Netflix and Spotify follow the objective of sales maximisation, as they are attempting to increase the size of their businesses
• This tends to be a short term strategy, and in the long term firms are more likely to profit maximise
• Prices would be lower than when profit maximising since they are producing more
• Profit maximisation would produce at Q1P1
• Sales maximisation

  The firm will want to get the highest level of sales possible without making a loss. They will want to ensure sufficient returns to keep the owners happy, so will aim for normal profits. As a result, they produce where AC=AR at P2Q2. Prices are lower and output is higher than they would be under profit maximisation
• It is often easier for people to judge the level of growth achieved rather than the level of profit. This will increase the prestige of the business
• Robin Marris: 'Managers aim to maximise the growth of their company above any other objective. This is because their salary may be linked to the size of the company'
• Producing more would increase revenue
• The problem with both sales maximisation and revenue maximisation is that it necessitates a fall in price, which other firms may copy and so there may be no or little increase in revenue or sales: this is important in oligopoly. They also bring lower profits
• Growth will also increase market share and may push other firms out of business. It will enable a firm to have more market power and more power over prices
• Size is often linked to security as it is believed large firms can survive rough periods much easier and are less likely to get into financial trouble overnight
• Satisficing

  Managers are likely to follow the objective of profit satisficing: they will make enough profit to keep owners happy whilst following other objectives and not profit maximising. These other objectives are likely to be their own benefits, for example they may increase their own salaries which increases costs and therefore decreases profit. The amount of profit needed will change year on year and will depend on the level of profit made by other firms: if everyone else is making a loss, and the firm only manages normal profit then this will be good enough for shareholders but if other firms are making huge profits, shareholders too will expect huge profits