3.2 Business objectives

• What are the possible definitions of profit maximisation?

  • The output at which the difference between the total revenue and the total cost is greatest
  • The output at which price minus cost per unit, multiplied by one more unit is greatest
  • The point at which the revenue gained from selling one more unit (marginal revenue) is equal to the cost of producing one more unit (marginal cost)
• What is the equation for total revenue?

  Total Revenue = Price X Quantity sold
• What is the total cost?

  Cost at producing a given level of output
• What is the equation for total costs?

  Total Costs = Total Fixed Costs + Total Variable Costs
• What is the marginal revenue?

  Change in the total revenue from selling one more unit of output
• The marginal revenue is the gradient of what curve?

  Total revenue
• What is the marginal cost?

  The extra cost of making one more unit of output
• What are characteristics for marginal costs?

  • Always positive
  • It is the gradient of the total costs curve
• What is marginal profit?

  Extra profit gained from selling one more unit
• What does it mean when the marginal profit is 0?

  The firm is maximising profit
• What is the equation for marginal profit?

  Marginal Profit = Marginal Revenue - Marginal Costs
• What is revenue maximisation?

  • The output at which total revenue is at a maximum
  • The output at which the marginal revenue gained from selling one more unit is 0
• What is sales maximisation?

  • The output at which total cost is equal to total revenue
  • The output at which average revenue is equal to average costs
• When does sales maximisation occur?

  When a firm sells as much as possible subject to the constraint that is at least makes normal profit
• What are reasons to follow the sales maximisation strategy?

  • To increase its market share and eliminate competitors cutting its price
  • To avoid the attention of the competition authorities
  • To deter new firms from entering the market
• What is profit satisficing?

  Making enough profit to keep shareholders happy, after which manager can pursue other objectives
• What are characteristics of profit satisficing?

  • This objective abandons the idea of maximisation
  • A satisficing firm is not attempting to maximise anything
  • Satisficing implies setting an acceptable level for each goal of the business to be achieved simultaneously
  • Satisficing occurs when businesses attempt to pursue several goals at the same time