3.2 Business Objectives

Question 1

What is profit maximisation and why would firms aim this

Answer 1

● Neo-classical economics assumes that the interests of owners or shareholders are the most important and therefore the goal of firms is to profit maximise

● This is at MC=MR

Question 2

What is revenue maximisation and why would firms do this

Answer 2

● Baumol suggested managers are most interested in their level of revenue since this is what their salary depended on.
● Revenue maximisation is at MR=0

Question 3

What is sales maximisation and why would firms do this

Answer 3

● Robin Marris suggested that managers aim to maximise the growth of their company above any other objective.
● Size is often linked to security
● Growth will also increase market share, and may push other firms out of business

• Sales maximisation is AC=AR

Question 4

What are the limitations of profit maximisation

Answer 4

In the real world it is not so easy to know exactly your marginal revenue and marginal cost of last goods sold.

Many firms may have to seek profit maximisation through trial and error.

It is difficult to isolate the effect of changing price on demand. Demand may change due to many other factors apart from price.

Firms may also have other objectives and considerations.