3.2- business objectives

Question 1

What is profit maximisation?

Answer 1

Profits are maximised at an output level where marginal costs= marginal revenue- MC=MR.

Question 2

What is revenue maximisation?

Answer 2

Revenues are maximised at an output where marginal revenue= 0 - MR=0

Question 3

What is sales maximisation?

Answer 3

Supplying the largest output possible with earning at least normal profits where AR=AC

Question 4

What is satisficing behaviour?

Answer 4

Involves the owner of a business setting minimum acceptable levels of achievement of either revenue or operating profits.

Question 5

What objectives are often preferred by managers?

Answer 5

• Revenue or sales growth is often preferred instead of profit maximisation
• achieve a satisfactory profit/return for shareholders to reward them for risk taking.

Question 6

What are the benefits of aiming to maximise profits?

Answer 6

• Shareholders are likely to benefit from higher dividends
• employees may gain if some part of their pay is linked to the profitability of the business.
• Higher profits may lead to increased capital investment spending which will benefit other businesses in industries such as engineering and construction
• businesses may choose to ‘plough back’ profits into R+D, leading to dynamic efficiency and improved products/ processes
• Provides a safety net for businesses in tough times or recession.

Question 7

What are the drawbacks from aiming to maximise profits?

Answer 7

• Higher prices for final consumers which reduces their real incomes/ purchasing power and means lower levels of consumer surplus.
• High profits act as an incentive for new firms to enter the market- might reduce the returns to shareholders as competition intensifies.
• Companies become overly focused on maximising profits and lose sight of the social/ ethical and environmental aspect of businesses to the detriment of local communities.
• if the profits are increase by pushing costs lower, it could impact on quality.

Question 8

Why may a company chose to maximise revenue rather than profit?

Answer 8

A business may wish to deter the profitable entry of new firms/ rivals into an industry and therefore maintain market power
However the price of the firm’s shares will reduce as operating profit is likely to be lower.