supplying the largest possible output consistent with earning at least normal profits where AR=AC
satisficing behaviour
involves the owners of a business setting minimum acceptable levels of achievement of either revenue or operating profits
profit maximisation: marginal profit and profit maximisation
if MR>MC, firm could increase profits by increasing output - occurs at output levels less that Q1 e.g. at Q3
if MR<MC, marginal profit is negative, firm would be better off to decrease output, occurs at output levels more than Q1 e.g. at Q2
benefits from aiming to maximise profits
shareholders are likely to benefit from an increase in dividends
employees may gain if some part of their pay is linked to profits
high profits may lead to an increase in capital spending which could benefit other businesses in industries such as engineering and construction
businesses may be able to plough profits back into research and development which may lead to increased efficiency and improved products and/or processes
provides a safety net for businesses in tough times or recession
drawbacks of aiming to maximise profits
higher prices for final consumers which reduces their real incomes/purchasing power and means a lower level of consumer surplus
high profits might act as an incentive for more firms to enter the market, depending on how contestable it is, which in the long term might reduce profits and shareholder returns
focusing solely on profits can mean that a firm loses sight of social, ethical and environmental aspects of businesses to the detriment of local communities
if profits are increased by pushing costs lower, then this could impact quality
loss minimisation
losses are minimised at the same output as profit maximisation - the same condition applies, so firms making a loss should produce at an output where marginal revenue=marginal cost, MR=MC
revenue maximisation
the objective of maximising revenue rather than profits - developed by economist William Baumol whose work focused on the decisions of manager-controlled businesses
found that salaries and rewards for managers were closely linked to sales revenue rather than profits
a firm might aim to max sales revenue to deter new entrants to the market and so maintain market power
consequences might be a reduction in share prices as the operating profit is likely to be lower
revenue is at max when MR=0, also the point where PED is unitary
sales (volume) maximisation
when a business maximises output without making a loss
at an output where AR=AC
at this output, normal profits are made i.e. just enough profit to keep a firm in the market place in the long run
satisficing behaviour by firms
maximisers try to make the best possible choice from all available alternatives (rational choice) whereas satisficers examine a more limited set of alternatives and choose the best option between them
satisficing is generally trying to keep a range of stakeholders happy and ensuring that the business is earning enough profit to do so
satisficers might be managers who are concerned with increasing sales revenue or increasing market share
there isn't a unique profit satisficing output, it can occur anywhere between profit maximisation and sales maximisation
market share as a business objective
many businesses aim to increase or protect their market share
particularly true in oligopolistic markets which is a market dominated by a handful of large businesses
profit maximising
MC=MR
revenue maximising
firms may attempt to maximise revenue, perhaps to increase sales and hence build brand loyalty or to force competitors out of business
possible a more long-term objective than short term profit maximisation
MR=0
sales maximising
firms may attempt to maximise sales for the purpose of rapidly gaining sales (market penetration) - subject to ensuring they earn normal profits