Business objectives

• Profit maximisation


  Firms aim to maximise profits, which is the difference between total revenue and total costs
• Firms break even when TR = TC
• Profit maximisation


  1. Marginal cost (MC) = marginal revenue (MR)

  2. Profits increase when MR > MC

  3. Profits decrease when MC > MR
• Profit maximisation


  • Provides greater wages and dividends for entrepreneurs
  • Retained profits are a cheap source of finance
  • Interests of owners/shareholders are most important in short run
  • Provides stable price and output in long run
• PLCs are particularly keen to profit maximise to keep shareholders happy
• Normal profit


  Minimum reward required to keep entrepreneurs supplying their enterprise, covers opportunity cost
• Supernormal profit


  Profit above normal profit, exceeds opportunity cost
• Sales revenue maximisation


  Occurs when MR = 0, each extra unit sold generates no extra revenue
• Sales volume maximisation


  Firm aims to sell as much as possible without making a loss, where AC = AR
• Sales volume maximisation


  • Amazon's Kindle launch, selling as many as possible to gain market share
• Growth maximisation


  Firms aim to increase size to take advantage of economies of scale, expand product range, merge/takeover
• Increasing market share


  Helps increase chance of survival, can be achieved by sales maximisation
• Utility maximisation


  Consumers aim to generate greatest utility, firms aim to generate highest profits
• Profit satisficing


  Firm earns just enough profits to keep shareholders happy, not necessarily maximum profits
• Social welfare and Corporate Social Responsibility (CSR)

  Firms take responsibility for consequences on environment and aim to maximise social welfare
• Principal-agent problem


  Agents (managers) make decisions for principals (shareholders) but act in their own interests
• Kinked demand curve model


  • Illustrates price stability in oligopoly, firms have asymmetric reaction to price changes
  • If price increases, firm loses significant market share
  • If price decreases, firm only gains small increase in market share
• Game theory and Prisoner's Dilemma

  Illustrates interdependence and uncertainty in oligopoly, dominant strategy is to confess but Nash equilibrium is to deny
• Nash equilibrium is the optimal strategy for all players, taking into account opponents' choices
• Profit maximisation


  Firms aim to maximise profits, which is the difference between total revenue and total costs
• Firms break even when TR = TC
• Profit maximisation


  1. Marginal cost (MC) = marginal revenue (MR)

  2. Profits increase when MR > MC

  3. Profits decrease when MC > MR
• Profit maximisation


  • Provides greater wages and dividends for entrepreneurs
  • Retained profits are a cheap source of finance
  • In the short run, the interests of the owners or shareholders are most important
  • Provides a stable price and output in the long run
• Normal profit


  Minimum reward required to keep entrepreneurs supplying their enterprise, covers the opportunity cost of investing funds
• Supernormal profit


  Profit above normal profit, exceeds the value of opportunity cost of investing funds
• Sales revenue maximisation


  Occurs when MR = 0, each extra unit sold generates no extra revenue
• Sales volume maximisation


  Firm aims to sell as much of their goods and services as possible without making a loss, where AC = AR
• Growth maximisation


  Firms aim to increase the size of their firm to take advantage of economies of scale and be more competitive
• Utility maximisation


  Consumers aim to generate the greatest utility possible, firms aim to generate the highest profits possible
• Profit satisficing


  Firm earns just enough profits to keep its shareholders happy
• Social welfare and Corporate Social Responsibility (CSR)


  Firms take responsibility for consequences on the environment and aim to maximise social welfare
• Principal agent problem


  Managers make decisions for shareholders but are inclined to act in their own interests rather than those of the shareholders
• Kinked demand curve model


  • Illustrates price stability in an oligopoly, firms have asymmetric reaction to price changes by other firms
• Game theory


  Used to predict the outcome of a decision made by one firm, when it has incomplete information about the other firm
• Prisoner's Dilemma


  Model based around two prisoners who have the choice to either confess or deny a crime, the consequences depend on what the other prisoner chooses
• Nash equilibrium


  Concept in game theory which describes the optimal strategy for all players, whilst taking into account what opponents have chosen