3.2.1 Business objectives

• Objectives of businesses

  1. Profit maximisation (MC=MR)

  2. Revenue maximisation (MR=0)

  3. Sales maximisation (AR=AC)

  3. Profit satisficing
• Profit maximisation:

  Producing the quantity of output that results in maximum profits (this occurs where MC=MR).

  Profit maximisation is also where the difference between TR and TC (or AR and AC) is the greatest.
• Why do some firms have profit max as an objective?

  -Benefits shareholders of a business as profits can be paid to shareholders in the form of dividends.

  -Therefore profit max is more likely if there's no divorce of ownership and control (e.g. in a small business).
• Revenue maximisation:

  Producing the quantity of output that results in maximum revenue (this occurs when MR=0).

  -Firms may pursue this objective if managers' pay is linked to rev targets

  -Revenue max means lower prices & profits compared to profit max -> less likely to attract attention of competition authorities
• Sales maximisation:

  Producing the quantity of output that maximises sales without making a loss (this occurs where AR=AC).

  -Managers may have sales targets, can maximise their own incomes if the business is run to maximise sales.

  -Sales max also involves selling at a lower price than either profit max or rev max -> deter new entrants from joining market
• Profit satisficing:

  Making sufficient profit to satisfy shareholders.

  -Managers may compromise by producing an output between profit max and sales max (profit satisficing); occurs due to divorce of ownership from control (if owners had control then profit max would have been the likely objective).
• What does a firms' objectives depend on?

  -Who has control - E.g. small firms -> no divorce of ownership from control -> profit max is more likely

  -Public vs private sector - Public sector unlikely to max profits

  -Degree of contestability - E.g. monopolies may not wish to profit maximise if they're in a highly contestable market.