3.2 Business Objectives

Question 1

What is profit maximisation ?

Answer 1

• occurs when MR=MC ➡️ want to generate the max amount of profit as possible

Question 2

What is revenue maximisation ?

Answer 2

• firm wants to generate the max amount of revenue possible
• when MR = zero

Question 3

What is sales maximisation ?

Answer 3

• when a business maximises output w/o making a loss
• when AR = AC ➡️ normal profits are made (breakeven)

Question 4

What is meant by satisficing behaviour ?

Answer 4

• involves the owner of a business setting minimum acceptable levels of achievement in terms of revenue or profits
• ‘good enough’ mentality

Question 5

What are the reasons for different objectives ?

Answer 5

1. managerial objectives: revenue/sales growth often preferred instead of profit maximisation
2. info constraints/gaps: lack of accurate info on MC and MR in their markets, cost plus pricing (AC + variable profit) is a common tactic
3. small businesses: start ups often target rapid growth rather than profit ie. sales maximisation
4. state-owned corporations: likely to have a range of different economic and political objectives

Question 6

✅ of aiming to maximise profits ?

Answer 6

• shareholders likely to benefit from higher dividends (share of profits)
• employees may gain if their pay is linked to the profitability of the business
• may lead to increased capital investment spending (will benefit other businesses in industries eg. engineering & construction)
• may reinvest profits into R&D ➡️ dynamic efficiency + improved products/processes
• provides a safety net for businesses eg. reccession

Question 7

❌ of aiming to maximise profits ?

Answer 7

• higher prices for final consumers ➡️ reduces their real incomes/purchasing power (lower level of consumer surplus)
• higher profits may act as an incentive for new firms to enter the market ➡️ in the LR might reduce the returns to shareholders as competition intensifies
• may become overly focused on maximising profits ➡️ lose sight of the social/ethical/ environmental aspect of businesses (to the detriment of local communities)
• if profits are increased by pushing costs lower then this could impact on quality

Question 8

How should losses be minimised ?

Answer 8

• firms making a loss should produce at an output where MR = MC (same output as profit maximisation)

Question 9

Who developed the objective of maximising revenue rather than profits ?

Answer 9

• William Baumol ➡️ focused on the decisions of manager controlled businesses
• he found that salaries + rewards for managers were closely linked to sales revenue rather than profits

Question 10

Why may businesses aim to maximise revenue rather than profits ?

Answer 10

• ✅ the business may wish to deter the profitable entry of new firms/rivals into an industry ➡️ maintain more market power + share
• ❌ consequence of revenue maximising is there can be a reduction in the price of the firm’s share (since operating profit is likely to be lower)

Question 11

What is satisficing ?

Answer 11

• a decision making strategy that aims for adequate results rather than the optimal solution
• focuses on pragmatic effort when confronted with tasks ➡️ aiming for the optimal solution may necessitate a needless expenditure of time, energy & resources thus saves on costs/expenditure
• satisficers examine only a limited set of alternatives + choose the best option between them ➡️ scope of options narrowed
• satisficing is generally concerned with ‘keeping a range of stakeholders happy’ + ensuring that the business is earning ‘enough’ profit to do so
• satisficers might be the managers of a business who are more concerned with increasing sales revenue and/or their market share instead of seeking pure profit maximisation

Question 12

When does satisficing occur ?

Answer 12

• no unique profit satisficing output, it can occur at any output between profit maximisation & sales maximisation ➡️ the firm is sacrificing some total profit but perhaps gains in other objectives eg. revenue and/or an increase in market share

Question 13

When do firms have market share as an objective ?

Answer 13

• many businesses aim to increase or protect their market share ➡️ particularly true in oligopolistic markets (a market dominated by a handful of large businesses)

Question 14

Why do organisations adopt a satisfying strategy ?

Answer 14

• may seek to meet the minimal expectations for revenue and profit set by the board of directors and other shareholder
• by aspiring to more attainable targets, the effort put forth may be equitable with the final results