business objectives

• Profit maximization


  The objective of a firm to maximize its profits
• Reasons for profit maximization


  • Reinvestment into the business (new capital, upgraded capital, new technology, R&D)
  • Paying higher dividends to shareholders
  • Allowing for lower costs to be passed on to consumers
  • Rewarding entrepreneurship and risk-taking
• Profit maximization occurs at


  Marginal cost equals marginal revenue
• Any quantity to the right of MC=MR

  Cannot be maximizing profit because cost is always higher than revenue, generating a loss
• Any quantity to the left of MC=MR


  Can increase profit by producing more as each extra unit generates more revenue than cost
• Firms may not profit maximize due to:
• Profit satisficing


  A firm sacrifices profit to satisfy as many key stakeholders as possible
• Key stakeholders that could be harmed by profit maximization

  • Shareholders
  • Managers
  • Consumers
  • Workers and trade unions
  • Government
  • Environmental groups
• Harming key stakeholders


  Can lead to reputational damage, worker strikes, government investigations, environmental protests
• Revenue maximization


  Occurs where marginal revenue equals zero
• Revenue maximization


  Leads to a higher quantity but lower price compared to profit maximization
• Reasons for revenue maximization


  • Economies of scale benefits
  • Predatory pricing to drive out competitors
  • Principal-agent problem - managers using revenue max to justify perks
• Sales/growth maximization


  A firm wants to become as large as possible without making a loss, occurring at break-even (AC=AR)
• Reasons for sales/growth maximization

  • Economies of scale
  • Limit price strategy to deter new entrants
  • Principal-agent problem - managers using growth to justify perks
  • Flooding the market to build brand awareness and loyalty
• Survival


  A short-term objective for firms entering hyper-competitive markets to build brand awareness and loyalty before shifting to profit
• Public sector objectives


  Maximize societal welfare by pricing and producing where demand equals supply (allocative efficiency)
• Corporate social responsibility


  Firms pursuing ethical, sustainable, and socially responsible practices beyond profit