business objectives

• Profit maximisation


  Most firms have the rational business objective of profit maximisation
• Profit maximisation


  • Profits benefit shareholders as they receive dividends & also increase the underlying share price
  • An increase in the underlying share price increases the wealth of the shareholder
• Profit maximisation rule


  When marginal cost (MC) = marginal revenue
• Profit maximisation rule


  When marginal cost (MC) = marginal revenue (MR) then no additional profit can be extracted by producing another unit of output
• When MC < MR additional profit can still be extracted by producing an additional unit of output
• When MC > MR the firm has gone beyond the profit maximisation level of output and is making a marginal loss on each unit produced beyond the point where MC = MR
• In reality, firms may find it difficult to produce at the profit maximisation level of output as they may not know where this level is
• In the short term firms may not adjust their prices if the marginal cost changes as regular price changes would be disruptive to customers
• In the long-term firms will seek to adjust prices to the profit maximisation level of output
• Firms may be forced to change prices by the Competition Commission
• The profit maximisation level of output often results in high prices for consumers
• Revenue maximisation


  Some firms have the business objective of revenue maximisation
• Principal-agent problem


  This often occurs due to the principal-agent problem where sales managers receive commission on sales as part of their wages and this incentivises them to maximise sales rather than profit maximisation for shareholders
• Firms will also maximise revenue in order to increase output and benefit from economies of scale
• In the short-term firms may use revenue maximisation to eliminate the competition as the price is lower than when focussing on profit maximisation
• Revenue maximisation rule


  To achieve revenue maximisation firms produce up to the level of output where MR = 0
• When MR > 0, producing another unit of output will increase total revenue
• The revenue maximisation level of output results in a lower supernormal profit than the profit maximisation level of output
• Sales maximisation


  Some firms have the business objective of sales maximisation
• The sales maximisation level of output occurs at the level where AC = AR (normal profit/breakeven)
• In the short-term firms may use sales maximisation to clear stock during a sale, selling remaining stock without making a loss per unit
• Satisficing


  Some firms have the business objective of satisficing, where managers settle for a level of output somewhere between profit and sales maximisation in order to increase their wages and reduce potential conflict with shareholders
• Rationally, managers know shareholders want to profit maximise, but rationally managers want to maximise sales or revenue so as to increase their wages
• Firm's motives

  Determined by who controls it
• People who could have control

  • 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


  (in neo-classical economics) The goal of firms is to profit maximise in the short run, in order to maximise owners' returns
• Firms profit maximise


  To generate funds for investment and to help them survive a slowdown during a recession
• Firms likely to profit maximise

  • Apple
  • Pharmaceutical companies
• To short run profit maximise


  Firms produce where MC=MR
• Profit maximisation


  • Firms produce at P1Q1: the output is determined by where MC=MR and the price at this output is determined by the AR curve
• Revenue maximisation


  Managers are most interested in their level of revenue since this is what their salary depended on
• Managers aim to revenue maximise

  As long as they provide some profit for the owners
• Firms following revenue maximisation

  • Amazon
• To revenue maximise


  Firms produce where MR=0
• Revenue maximisation vs profit maximisation

  Prices would be lower than when they are profit maximising since they are producing more
• Sales maximisation


  Managers aim to maximise the growth of their company above any other objective
• Reasons for sales maximisation

  • Salary may be linked to the size of the company
  • Easier for people to judge the level of growth achieved rather than the level of profit
  • Size is often linked to security
  • Growth will increase market share and market power
• Firms following sales maximisation

  • Netflix
  • Spotify
• To sales maximise


  Firms produce where AC=AR at P2Q2
• 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