the objectives of firms

• profit maximisation: is when MARGINAL COST = MARGINAL REVENUE
• marginal revenue: change in total revenue from selling another unit
• marginal cost: change in total costs from selling another unit
• if revenue is > costs; there will be profit
• if costs are >revenue; there will be a loss
• revenues are maximised where MR = 0
• sales growth maximisation: is when AVERAGE COST = AVERAGE REVENUE
• sales maximisation is selling the greatest possible output consistent with earning at least normal profit
• sales growth maximisation often takes advantage of economies of scale
• profit maximisation diagram: where MR=MC, but we take the price reading from the AR curve. The supernormal profits is the difference between the AR and the AC curve. The AR curve is equal to the demand curve.

  
• break - even point on a profit max. graph is where AC intersects AR
• sales growth maximisation: this is where the AR intersects the AC

  
• profit maximisation allows companies to re-invest money or give greater dividends to shareholders
• profit max. may be unreliable as values of MC and MR are unknown/ inaccurate
• Profit satisficing: this is when a firm will sacrifice profit in order to satisfy stakeholders
• profit sat. may lead to consumers having higher costs and wage cutting for employees and may lead to environmental damage
• revenue maximisation: is done when the firm uses predatory pricing to drive out competitors or use the principals agent problem (managers find it easier to revenue maximise)
• sales growth max. is done in an attempt to limit competitors by flooding the market in an attempt to develop loyalty and grow the firm
• other objectives: survival, environmental and social obligations and public interests (where MC = P)
• profit max. sits at the top of the graph - revenue max. sits in the middle of the graph - sales max. sits at the bottom of the graph

  
• sales max. is the highest level of output the firm can sustain in the LR
• maximising sales and revenue in the SR may help a business increase their market share or their monopoly power - allowing a business to make supernormal profits in the LR
• firms may make a loss in the SR, as brand recognition takes a longer period of time and can earn a company supernormal profits in the LR
• a firm may make a loss in the SR, as they expect to reduce costs and maximise economies of scale once they have a larger market share and output increases
• a firms objective may to be survive in the SR and only make normal profits
• some firms have Corporate Social Responsibility (CRS) and operate in a way to bring benefit to society, whilst trying to make supernormal profit
• principal agent problem is where the shareholders of a company and individual managers have conflicting objectives
• the principal agent problem is where managers and employees act in self interest, rather than further increasing the value of the firm
• in perfect comp. firms are allocatively efficient and as P=MC
• in the SR, a perfect comp. firm isn't productive, however, in the LR, when supply increases due to the incentive of supernormal profits , firms begin to operate productively

  
• in perfect comp. firms have X-inefficieny in the SR
• in perfect comp. firms aren't dynamically efficient in the LR as they only make normal profits
• allocative efficiencies - maximise societal surplus and net social benefit as resources perfectly follow consumer demand
• allocative efficiency - characteristics

  efficient allocation of resources, many buyers and sellers, perfect information, no barriers to entry or exit, profit and utility maximisers
• allocative efficiency occurs when P=MC
• allocative efficiency - consumer analysis

  resources follow consumer demand, high choice and quality, low prices and high consumer surplus
• allocative efficiency - producer analysis

  retain and increase market share, stay ahead of rivals, increase profit in SR
• productive efficiency is when firms will maximise output at the lowest possible average costs, due to full exploitation of economies of scale
• productive efficiency is at the minimum point on the AC=MC curve
• productive efficiency - consumer analysis

  if low costs are passed on, there will be lower prices and a greater consumer output