3.2 Business Objectives

• Profit Maximisation


  Firms aim to maximise profits to maximise owners' returns and can generate funds for investment and help firms survive a recession. Profits are maximised where MC=MR as all additional revenue is accounted for.

  
• Marginal Costs


  The cost for each additional unit of output
• Marginal Revenue


  The additional revenue from each unit of output
• Average Revenue

  The revenue per unit of ouput = TR/Q
• Average Costs


  The cost per unit of output = TC/Q
• Revenue Maximisation


  Managers revenue maximise for prestige and to get more rewards or a raise. Revenues are maximised at MR=0 the firm is still profiting, but is producing more so it can dominate the market.
• Sales Maximisation


  Aims to increase growth, market share, security as the firm is less likely to fail overnight and salaries may be linked to the company's size. Sales are maximised at AC=AR where the firm makes a normal profit.
• Normal Profit

  Breaking-even where costs = revenue
• Supernormal Profit


  Where revenue is greater than costs
• Satisficing


  Due to the principal-agent problem, managers will make enough profit to keep owners happy whilst satisfying their objectives e.g. increasing their salary, increases costs which does not maximise the firm's profits
• Managerial Utility Maximisation


  Managers making decisions to maximise their satisfaction
• Marginal Cost Pricing


  Aims to maximise social welfare by producing where the value society places on the good is equal to the extra cost of producing that good where MC=AR is the point where price = social cost as that is the social optimum