3.2 Business Objectives

• profit maximisation

  profits are maximised at an output where MC=MR
• revenue maximisation

  revenues maximised at an output where MR=0
• sales maximisation

  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

  achieved where AR=AC